By Utah Eviction Law
This article was originally published on www.utahevictionlaw.com
You may have heard from the Governor’s press conference today that April rents have been deferred and evictions have been halted until May 15, 2020. We have received multiple emails and calls about this announcement, so let me clarify what was ordered and give some practical advice for the next few weeks.
First – Some Practical (and Critical) Advice
The last three weeks have been absolutely crazy, and it won’t stop (or even slow down) for a while. It’s easier said than done, but do everything you can to be patient and understanding in this unprecedented time. This situation has made EVERYONE nervous. Communicate with your tenants. Make sure they’re okay, safe, and taken care of. Buy them a case of toilet paper (if you can find some). If they can’t pay April rent, work with them on a deferment plan and forgive late fees.
What’s shocking to me is the indirect impact this has had on everyone. There are over 3,000,000 Utahans, and only about 1,000 have tested positive for COVID-19 (about 0.03%). But, everyone has been impacted by COVID-19 – You, your renters, your co-workers, friends, neighbors, etc. Some more than others, but it has impacted EVERYONE.
The Federal Government passed another stimulus package last week (the CARES Act) which will give average families with children thousands of dollars to help with expenses. The CARES Act also increased unemployment benefits (by $600/week) and lengthened unemployment as well (up to six months). Help is on the way for your tenants, but there’s a gap. It won’t be here quick enough to pay April rent on time and in full.
I think most tenants will pay April rent, but some have been hit so hard that it will be impossible. There’s a gap between (1) April rent that's due today and (2) when people receive the federal stimulus money and unemployment benefits. If you have a tenant who was otherwise a good tenant until they were impacted by COVID-19, it’s better to work with them than run the risk of trying to find another tenant who (1) may turn out to not be as good at taking care of the property and (2) who may also have been impacted by COVID-19 anyway. Be creative and flexible as you look for solutions.
Second – The Governor’s Executive Order
I’ll go through the Governor’s order next, but I want to make sure you didn’t skip Section One above. Before you continue, I’d encourage you to take a break, take a deep breath, and then read the above section a second time. Maybe even a third time. What I’ve already written is already much more important than what the Governor said today or what is in his order.
Now that you’ve read Section One again, let’s get into the Order.
Across the country, the coronavirus (COVID-19) pandemic is changing the way we live and work by the day, and many property managers and community managers are looking for advice on how to best manage their teams, maintain business continuity, and continue to deliver high levels of service to their residents and owners.
In times of crisis, education and preparedness are key when it comes to taking the right actions for your company. Here’s a list of top industry resources and timely articles that we will update weekly to help you navigate through these uncertain times:
If you are buying, selling or looking for a home, you are not alone in having questions right now. Or in being a little shaken up.
Restrictions to movement, a plunging financial market and uncertainty about future income, all because of the coronavirus pandemic, have upended plans to buy and sell homes overnight. Real estate activity has slowed considerably as buyers, sellers and agents try to figure out the path forward.
Properties are still going into contract, but few new listings are coming on to the market, said Katerina Wilkerson, a real estate agent at Keeton and Company in Richmond, Virginia.
"People are nervous," said Wilkerson. "They don't want to put offers in. What do these rate cuts mean? People who were going to sell are wondering whether they should."
Buyers she's working with were set to close on a home this week, but the house they are selling is not scheduled to close until next week. "They are asking, what if we can't close next week?" she said. "They need that money. They can't be stuck with two mortgages."
Find an Agent that Understands Investment Properties
Finding a real estate agent that is familiar with investment properties is not as simple as finding a realtor to buy or sell a residential home. Real estate investing works under a different set of standards than buying or selling a home to live in, and it requires particular knowledge and a set of skills that not every Realtor possesses. If you are considering real estate investing, you need to find the right agent and the right area to begin your investment search.
Often, a successful investor's agent is also a successful investor themselves. They understand the drive behind investing and will understand your incentives. An investor-oriented real estate agent should be able to provide in-depth knowledge and tips to help you succeed in making a profit, such as being able to predict shifts in the market and guide you in the right direction.
Can They Help You Achieve Your Investment Goals?
When buying an investment property, outline your criteria. For instance, are you interested in older properties to fix up and hold/flip in class B/C neighborhood? Or are you looking for something new in class A/B neighborhood? Testing an agent’s knowledge on these types of investments is another way of knowing if they are right for you. Ask the agent what types of properties they have worked with in the past and what they are most comfortable handling.
Related: How to Identify A, B & C-Class Areas (& How to Know Which You Should Invest in!)
Related: Class A, B, C & D Real Estate: How to Know Where YOU Should Invest
A great investor's agent knows where to find deals that are not open to public, and how to get them. They know how crucial it is for an investor to have a team of experts on their side to make it happen. Look for an agent who has strong connections with reliable local experts, such as builders and developers, lenders who specialize in investment financing programs, CPAs, escrow companies, 1031 Exchange Intermediators, eviction law specialists, and so on. A great investor's agent can also make the course of investing much less complicated and frustrating.
How to Choose an Expert for Your Needs
As an investor, you need an agent by your side that you are comfortable with and is able to cater to your specific needs. Since making a profit on investment properties often requires making lower offers, an agent must be comfortable with serious negotiating. A great investor's agent also knows the market trends, demand and supply well enough to be able to make an appropriate offer so that you are not chasing the seller away unnecessarily. Also, make sure to choose an agent who has a good communication skill. Choosing the right investor's agent is vital to achieve a successful investment. Their job is to basically become the team leader of your investment plans, and that includes looking over every aspect of your real estate investments, not just the purchase/sale transaction process, and to make sure that you are making the right move, every step of the way.
Find an Agent that Understands "Cap Rate" & "Cash Flow"
An agent that understands investment properties will be able to calculate and find you the cap rate of properties. Getting a return on your investment is your sole purpose; your agent needs to assure you that you are spending your money wisely. Make sure the agent is capable of calculating cash flow. If you are planning on renovating your investment property or flipping the property, the agent should understand after repair values and have comparable comps in the same neighborhoods.
Related: What is Capitalization Rate?
Related: What is Cash Flow?
Find an Agent that Understands the Local Market
It is extremely important to choose an agent who knows your local investing market. No matter how well they know about Cap Rates and Cash Flow, it means nothing if they don't understand the uniqueness of the specific market you are after. They should understand the shifts in the real estate market you’re in and how that will influence the value of your investment property. A real estate agent that is comfortable with investment properties needs to understand the micro-markets, especially in a unique market like Utah. Understanding which neighborhoods work best for the purpose of investing is also critical.
What is the Cost of Working with An Investor's Agent?
When you are buying an investment property, the answer to that is ZERO. What it means is that investor's agents typically work as a buyer's agent, and their commission is paid by the seller of the property. Typically the commission the seller pays is 5-6% of the purchase price, and is split between the listing (seller's) agent and the buyer's (investor's) agent. So as long as you are the buyer, it costs you nothing to be working with an investor's agent. If you are selling a property, then you will be responsible for whatever the commission amount you and your agent agree on.
One of the advantages of hiring an agent who specializes in investment properties to sell your porperty is that they could market your property to an entirely different market than the home-buyer market; An investor-oriented agent is more likely to have other investor clients that are actively looking for investment properties to buy. They may also have a wide network of other investor-friendly agents with active buyers.
How To Find The Right Agent?
When looking for the right agent, the best method is by word of mouth. Ask fellow investors if they know local agents that have experience with investment properties. Check your local business agency to find real estate agent offices and search their ratings. Do not be afraid to ask the agent for names of their investor clients that they have worked with. If they have been successful with investment properties in the past, they should be willing to share positive references!
Utah’s population crossed the 3.0 million mark as it became the nation’s fastest-growing state over the last year. Its population increased 2.0 percent to 3.1 million from July 1, 2015, to July 1, 2016, according to U.S. Census Bureau national and state population estimates released today.
“States in the South and West continued to lead in population growth,” said Ben Bolender, Chief of the Population Estimates Branch. “In 2016, 37.9 percent of the nation’s population lived in the South and 23.7 percent lived in the West.”
Following Utah, Nevada (2.0 percent), Idaho (1.8 percent), Florida (1.8 percent) and Washington (1.8 percent) saw the largest percentage increases in population.
In December 2016, we bought a small brand new fourplex in Provo for $550K. Our straight line depreciation amount would have been $700. After using a combination of powerful tax saving techniques, we were able to bump it up to $98,000, with a very little cost. Here's how we did it.
Read the previous article - Part 1: Bonus Depreciation
#2 - Cost Segregation
Whether you own a fourplex, an apartment building or a hotel, there are substantial tax savings that are hidden beneath your feet, within the walls and even in the landscaping and paving outside your building. By doing a cost segregation study, you can:
We invited our trusted cost segregation expert Brett Hansen from Cost Segregation Authority who have been a tremendous help to us and our clients to explain exactly what cost segregation is, and how the process works and how it could benefit you.
WHAT IS COST SEGREGATION?
Cost segregation is a highly beneficial and widely accepted tax planning strategy utilized by commercial real estate owners and tenants to accelerate depreciation deductions, defer tax, and improve cash flow. Once used only by big-4 type accounting firms and the nation’s largest real estate owners, this practice has now become routine for commercial property owners of almost every size.
A Cost Segregation Study (CSS) is based on a detailed engineering-based analysis that is used to support the acceleration of depreciation deductions by identifying costs that can be allocated to shorter recovery periods; primarily 5, 7, and 15-year, as opposed to 27.5 (residential) or 39-year (commercial).
A quality study provides the documentation needed to defer substantial tax payments and greatly improve cash flow. It is important to note that a cost segregation study does not create new deductions, but increases deductions in the early years of ownership. This front-loading of depreciation allows the taxpayer to take advantage of the time value of money.
Cost Segregation is applicable to ANY income property, including leaseholds and can be applied retroactively to any building purchase or construction back to about 1987.
By increasing your depreciation deduction, you reduce your taxable income resulting in lower tax payments. Smart developers and investors use this savings to reinvest in more properties. See apartment example below:
For property that is constructed (original use) and has an asset life of less than 20 years, a congressional stimulus inducement known as Bonus Depreciation will apply allowing you to take 50% (thru 2017) additional depreciation in Year 1. See example above. This is being phased out through 2019 so now is the time to take advantage.
By having your building costs segregated, an investor can now allocate the sales price of the asset to the land and structure (appreciable components) and reduce the recapture on personal property (i.e. carpet) that was not sold at a gain.
Cost Segregation and 1031 Exchanges work hand in hand to further defer the payment of taxes.
The chart below shows the industry average reclassification of total capitalized costs based on asset type.
Each study is priced according to its cost, size, complexity, location and other internal factors. These prices range anywhere from $2,000 to $200,000 or more depending on the investor/developer’s portfolio.
On average, a single, 4-story building study with moderate complexity will run about $15,000. The IRS prohibits pricing based on tax savings, but we do like to see at least an 8-10x return on the cost of the study whenever possible.
We will always run a benefit analysis on the property at no cost to determine if the cost segregation study is appropriate and provides enough benefit. About 95% of the time it does.
Cost Segregation Authority
A real-life example: a brand new fourplex built & placed in service in December 2016