Ask Me A Question
There is probably a number of people out there with questions concerning this blog or real estate investment and development in general. Pressing the “Ask Me A Question” button brings you to this post. Ask me a question in the comment fields below after pushing the button and I will do my best to get you a truthful answer.
What do you think is the most important financial metric when evaluating a real estate investment?
I currently have 22 properties held as an individual. I am concerned about my liability. How should I set this up as an entity to protect myself and to allow me to begin gifting these properties to my kids. Do I need to create 22 LLC’s or can I batch these properties into one LLC or Corporation? What are the advantages and disadvantaes?
John,
There are a number of financial performance measurements to use. The book, “The Complete Guide to Real Estate Finance for Investment Properties…” recommended on the left actually walks through 14 different performance measurements. The two that I am most interested in keep coming back to are the Cash Return on Investment or “Cash on Cash Return” and the “Internal Rate of Return”.
The Cash on Cash Return measures the cash returns on the cash invested. The Internal Rate of Return or IRR measures the yield or rate of return on an investment over the life of an investment. The reason I am interested in both is you could have an investment that produces negative cashflow over a number of years and still have an acceptable IRR when sold. I also want to know what my cash requirements will be over the life of an investment.
I would suggest that you understand what your “hurdle rates” or minimum acceptable returns are prior to investing in real estate. This is a personal decision and also depends on the risk of the investment. A NNN property with an investment grade tenant will produce lower returns (and effort required) than a rescue mission type of project.
Terry
Joe,
Congratulations on the ability to acquire so many properties. Having them all held in your individual name exposes you and all your properties and assets to risk unless you have significant insurance. That is the primary reason for putting the properties into an LLC to start with.
With a situation as complicated as you describe, I urge you to consult both an attorney and accountant. The cost will be minimal compared to the potential cost down the road. Are you trying to shield your personal assets from potential exposure? Is the primary purpose to gift the properties. Have they appreciated significantly since they were first purchased? What is the timeframe you plan on holding them prior to disposition? All these questions will have a bearing on how you proceed. If your main purpose is to gift the properties, a trust may be more appropriate. Good luck.
Here is a link to an article by a real estate attorney that may help: http://www.thinkglink.com/Transfer_Property_to_LLC.htm
Terry
Great information on the blog. Waiting to see how your various investments actually turn out. Curious as to why you are actually writing this blog. What is in it for you?
Tim,
My various investments all have a number of interesting twists that I will be writing about. One thing about real estate investing - you never stop learning or being surprised. I am writing this blog for a number of reasons. First, I am documenting my investing exploits because some day my children may be interesting in reading what their Dad did. My memory is going like everyone else’s my age and I need to get this down in writing soon! Second, I figure if the posts are interesting to enough people, there may be some money in this somehow. Third, it’s my way of giving back for the help I received when starting out.
It doesn’t look like your planning process was very accurate for this first development. Did it turn out successful? What did you learn from it and how have your financial plans and other plans changed? Good writing. Keep it going.
Stan,
Our planning process wasn’t accurate for the first developent. We have gotten a lot better with our follow on projects. The key is to:
1) Identify all the potential costs for a project.
2) Test your assumptions on those costs prior to committing significant dollars.
You are going to have to continue to follow the blog to see how this development turned out, but we did ok.
I don’t have much money to invest. How do I get started in commercial real estate?
Frankly, it is near impossible to “get started” in commercial real estate with very little money. See this post for some investing truths: Truths
If you had significant experience with commercial real estate development, you may be able to find a number of investors willing to front you. However, you mention getting started which implies no experience. With no cash and no experience, you are not bringing enough to the table other than your desire and ambition. Unfortunately, that is not enough for most investors.