Please ensure Javascript is enabled for purposes of website accessibility

Tag: real estate investment

How to Reduce Real Estate Investment Risks: 12 Expert Tips

Risk is part of any investment. Nowhere is that more apparent than in real estate. When you purchase a property, there’s no guarantee you’ll see a profit. Renters may stop paying rent, the economy might suddenly crash or the real estate market may shift. Here are 12 tips to reduce real estate investment risks.

READ: 4 Biggest Risks of Real Estate Investing in 2023 and How to Minimize Them

1. Diversify your portfolio

The golden rule of real estate investing is to diversify your portfolio. This means purchasing different types of properties so you won’t suffer too much financially if one investment collapses. 

For example, central retail locations, such as malls, have suffered a severe downturn as commerce moves online. Real estate investors who own other types of real estate, such as rehabbed houses or vacation rentals, will likely see better returns than those whose portfolios are stacked with brick-and-mortar shops.

2. Expand to other locations

Diversifying your portfolio is about more than just what you buy. It’s also about where you buy. This means owning property in urban, suburban, and rural areas and expanding property ownership to other states. Consider working with long-term tenants who are looking to move to another location. It’s a win-win if a landlord and a tenant can find a great new location together.

READ: Identifying Emerging Real Estate Markets: Key Indicators for Lucrative Investments

3. Monitor industry trends

Paying attention to industry trends can help you make better choices regarding new investments. Heed important industry data, such as:

  • Where people are moving and where they are leaving
  • Micro-markets, such as areas close to schools, transportation, amenities, and greenspaces
  • Cultural trends

Trends can be tracked through investing apps or by subscribing to major industry publications.

4. Make sure you’re insured

You’ll need comprehensive insurance for any properties you own. This is an industry standard and protects against vandalism, fire and other natural disasters.

If you are concerned about tenants defaulting or not paying rent, rent guarantee insurance is also an option.

5. Take care of your investment

It can be tempting to neglect maintenance and upkeep when money is tight, but resist this urge. Not only does proper care and maintenance protect the value of your property, but it also makes it more attractive to prospective tenants. Additionally, regular maintenance means you’ll catch small problems before they become big ones.

6. Rent carefully

Background checks that screen for criminal history and financial problems are important. These help you find the most reliable tenants for your property.

READ: Tenant Scams — How Landlords Can Spot and Avoid Them

7. Manage costs

Hidden costs can potentially increase real estate investment risks. On top of your mortgage payment, you should also expect to pay real estate agent commission, closing costs, taxes, insurance and maintenance expenses. 

If money is tight and the economy is uncertain, keeping track of every penny is important. Check regular bills — such as insurance, utilities and taxes — to ensure rates are competitive and you get whatever discounts you qualify for.

8. Find unique opportunities

Experienced and novice investors alike tend to stick with what they know: commercial, residential, medical and retail spaces. But they should also consider unique real estate investments, such as parking spaces and garages. Consider the number of times you’ve driven around a building looking for a parking spot, and you’ll immediately understand the value of these unusual investments.

READ: The Ultimate Guide to Commercial Real Estate Investing for Business Owners

9. Maintain a financial cushion

No matter how carefully you plan, predicting every twist and turn you might experience is impossible. For this reason, it’s important to maintain a financial cushion that you can spend in emergencies, which may include: 

  • Unexpected vacancies
  • Market downturns that lower demand
  • Unforeseen repairs

Every situation is unique, and there’s no specific rule dictating how much of a financial buffer you’ll need. Some investors might be comfortable with a few thousand dollars in the bank. Others advise against keeping too much cash on hand and recommend reinvesting every penny into a new property instead. If you’d feel more comfortable with an emergency stash, set up a high-interest savings account so your money is making money while it’s in reserve.

10. Follow the rules

Nothing torpedoes your profits faster than fines and legal fees accrued when you don’t follow the rules. Before purchasing or selling a property, make sure you have legal counsel specializing in real estate to review all contracts. You’ll also need to ensure the zoning is correct for your intended purposes. Changes in zoning can be time consuming and expensive if modifications are needed.

11. Make sure your timeline matches your goals

Some real estate investment risks are a long game. Do you have time for that, or are you interested in more immediate results? Few investments will be profitable overnight, but some will be more productive sooner. Commercial real estate has had historically high returns, while residential properties have had lower returns. However, a well-placed rental can produce consistent income. The property that’s right for you will depend upon your objectives.

12. Assemble a solid team

Teamwork makes the dream work. From your real estate agent to your property manager, assemble a solid team committed to you and your portfolio. Your team can help protect your investments, even in a challenging market.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times and more.

What Real Estate Investors Need to Know to Reduce Litigation Risk in Transactions 

When done correctly, investing in real estate can be a wise decision. It offers the potential for steady cash flow, tax advantages, diversification, a hedge against inflation, and the opportunity to generate passive income. But real estate investing also comes with its share of risks, including some that can lead to costly litigation. 

The point of investing is to make money, so spending money in court battles is not what any investor wants to do. Investors must know some risks to watch out for when entering a deal. 

Title Issues That Can Affect a Real Estate Investment

Title work may seem like a routine part of a transaction, but this seemingly mundane step can reveal a range of issues that can derail a deal and jeopardize the value of an investment. Title-related risks include the possibility that someone else:  

  • Owns an interest in the property  
  • Has rights affecting title arising from leases, contracts, or options 
  • Claims a right to the property through forgery or impersonation 
  • Has an easement on the land 
  • Has a recorded right to limit the ways the property is used 
  • Has a recorded lien or encumbrance on the title 
  • Tried to enforce a discriminatory covenant, condition, or restriction based on things like race, religion, ethnicity, or other unlawful grounds

These defects and others may require legal steps, such as filing a quiet title action in the court where the property is located. A quiet title action is a lawsuit to clarify who owns the property. However, even if the suit is uncontested (meaning the other party doesn’t defend their side of the case), it can still cost thousands of dollars to resolve.  

It only gets more costly if a defendant actively opposes the investor’s ownership claim, turning what should be a money-making opportunity into a sizable money-consuming battle. 

Risks Related to Zoning, Building Permits, and Improvements 

Investment properties also carry risks related to zoning and permitting. Therefore, before investing, it is a good idea to do some digging to discover these potential liabilities with the help of a qualified real estate lawyer.  

The land or building may violate a zoning law or subdivision regulation affecting the property’s use. For example, the violation could make obtaining a building permit to modify or improve the property challenging or cost-prohibitive or cost-prohibitive to obtain a building permit to modify or improve the property. For example, the investor could be required to spend money to correct or remove the violation or bring the property up to new code requirements.  

In some cases, buyers have even been required to remove or alter structures because they violated existing zoning laws or were built without permits.  

Sorting out issues like these can require appearances before local zoning boards, municipal authorities, and possible lawsuits. This takes time and money, which the investor would rather spend in other ways.  

Risks Stemming From Lien Claims 

Existing liens may encumber properties. They can be legitimate liens or spurious claims that don’t hold water. Either way, they cost money to resolve, eating away at returns on investment. Some examples of liens that may exist on a property are: 

  • Mortgages: It is common for a seller to have an outstanding mortgage on a property. Typically (but not always), there is little risk associated with these because the mortgage can be paid off as part of the sale. 
  • Contractor liens: A previous owner may have failed to pay a contractor who placed a lien on the property (mechanic’s lien), requiring payment before the property can be sold. 
  • Tax liens: A purchaser may become liable for unpaid property taxes. Additionally, if the previous owner owed federal income taxes, the IRS may have placed a lien on the property in an attempt to collect. 
  • Judgment liens: A seller may have a court order requiring payments to satisfy a judgment to someone which, when recorded in the county, has to be satisfied or addressed as a part of selling the property. For instance, a judgment lien could be placed because the owner owes alimony or child support. Or, the owner could have lost a lawsuit, resulting in a lien on the property.

Consider Protecting Your Investment By Retaining an Attorney 

Investors purchasing property in Colorado should consider working with a qualified real estate attorney during the purchase process. Yes, hiring a lawyer upfront is an expense. But, it pales in comparison to the cost of litigation.   

Ideally, involving a lawyer early on can go a long way toward avoiding those large litigation bills, allowing you to reap the benefits of your investment sooner. 

For more information about avoiding real estate litigation in Colorado, contact Hackstaff Snow Atkinson & Griess, LLC, at 303-534-4317 or visit our website. 

 

John T Snow
John Snow
Aaron
Aaron Atkinson

Aaron Atkinson and John Snow of Hackstaff Snow Atkinson & Griess, LLC, are top Denver business attorneys and litigators with expertise spanning various industries. Specializing in business law, litigation, intellectual property, tax law, and dispute resolution, John Snow and Aaron Atkinson offer an in-depth understanding and knowledge of general real estate and litigation rules and regulations and are a trusted resource for business owners throughout Colorado.  

Tips for using a 1031 exchange

Real,estate,agent,with,house,model,and,keys

It’s a seller’s market in Denver. A high demand for houses and a lower inventory of available homes has sent housing prices skyrocketing nationwide during the past year. But there may be some relief for buyers in the Denver area.  

While the local real estate market remains hot, it shows signs of cooling this summer. With many buyers giving up on purchasing a home for now, more houses are staying on the market longer than they have in the past year.  

This market change could spell good news if you’re interested in building your wealth through real estate investments. By using a 1031 exchange, you can make the most of your real estate profits during the still-hot market by investing in one of the hottest real estate markets in Colorado. 

Before jumping into real estate investment, find out how a 1031 exchange can benefit you. 

What is a 1031 exchange? 

IRS Section 1031 allows investors to defer capital gains taxes from the sale of one investment property by rolling over the profits into the purchase of a like-kind property within 180 days of the sale.  

There is some room for interpretation on what constitutes a like-kind exchange. For example, if you sold an individual-family home, you could roll over the profits by purchasing a townhouse, condo, or even a parcel of land for development. 

How does a 1031 exchange benefit investors? 

Savvy investors have been able to build wealth over time by deferring tax payments through 1031 exchanges. 

For example, if an investor bought a single-family home for $612,395 in May 2020, which was the average sale price in Denver County according to the Colorado Association of Realtors, in May 2021, they sold that home for the average price of $820,412. Through a 1031 exchange, the investor can defer the taxes on the $208,017 profit by investing that amount in a new property.   

The code also covers investment-related expenses, such as paying commission fees for real estate agents or making improvements on the property. 

At present, there is no limit to how many times or how often you can use a 1031 exchange. You can keep deferring indefinitely until you eventually sell the property for cash. At that point, you would only pay one tax instead of taxes on a lifetime of investments. 

How can you use a 1031 exchange? 

Real estate investments are one of the best and surest ways to grow your wealth over time. If you’re interested in using 1031 exchanges to meet your real estate investment goals, it is important to understand how the tax code can and can’t work for you.   

First, it’s important to know if now is the right time to make a 1031 exchange on your property. An ideal candidate is one that is near maximum appreciation. With the Denver market hot, but starting to cool, some properties are reaching this point.  

Not all properties are created equal. If your property has depreciated in value, or if your mortgage rate will give you a low return on investment, you may want to wait and hold onto that property. 

If you would like to test the waters on using a 1031 exchange to build your investments with lower stakes, you might consider a Delaware Statutory Trust. A DST allows an unlimited number of investors to jointly own real estate. A company, known as the sponsor, collects the investment money and handles the day-to-day of property sales and rents. DST investment periods typically run for five to 10 years. 

As an investor in a DST, you will regularly receive payments for your investment without having to manage the details. To learn more about DSTs that might be right for you, find a qualified broker-dealer who can manage a 1031 exchange DST on your behalf. 

What are special considerations for a 1031 exchange? 

A 1031 exchange does come with some exceptions and stipulations. You are required to pay taxes on any amount of profit that is not invested into the new property. For example, if you made a $200,000 profit on your sale but purchased a like-kind property for $150,000, you would need to pay taxes on the $50,000 difference. 

You must also follow set procedures if you decide to turn a home purchased through 1031 exchange into your primary residence or vacation home. The safe harbor rule states that in each of the two 12-month periods following the exchange, you must rent the property to another person at a fair market rate for 14 days or more, and your personal use of the property cannot exceed 14 days or 10% of the days the unit was rented during that 12-month period.  

As with any tax code, it is important to work with accountants or experts who fully understand how 1031 exchanges work to avoid having your investment become a pain point. There are companies that specialize in stewarding 1031 exchanges, including ones that operate in the Denver area. 

Kristen Herhold is the PR editor at Clever, a real estate data firm. In her free time, she enjoys reading, traveling, and cheering on the Denver Broncos and Missouri Tigers. Connect with Kristen on LinkedIn, or reach out to her at [email protected].