Let’s assume that you’ve decided to start assembling groups of investors to buy investment real estate. If you followed my Roadmap of a successful syndication in my previous articles (Part 1 and Part 2), then you know that the first step is to research a neighborhood and pick a property to buy. You’ll first want to focus on the type of commercial real estate to purchase for your syndications.
So what is the best kind of investment real estate? In the process of putting together your groups, you’ll come to realize that not all types of real estate are “created equal” from an investment perspective. Here is a breakdown of property types and their attractiveness as syndication investments:
LAND: Including Remote (currently unusable), agricultural, and “pre-builder” land.
1. “Remote” land is held for a long period of time with the expectation that growth will increase its value. Unfortunately, it’s highly risky and provides no current income for investors. The biggest down side is that investors would have to make periodic contributions of capital to cover expenses for taxes, insurance, and possibly loan payments.
2. Agricultural land is used to create crops for sale. It is essentially unimproved land used in a business and its value is derived from the ongoing operations of that business.
3. “Pre-builder” land is subdivided and sold off to various builders who complete the end product, whether housing or commercial. The land is effectively inventory and its value is created in the subdivision process.
CONSTRUCTION: Including new commercial and sub-division projects, beyond the pre-builder stage.
EXISTING: Operating residential and commercial income producing property.
If we go by the list above, we’ll soon realize that as syndicators, we’ll want to focus our efforts on only one of the major categories. This would be income producing rental property. There are several reasons for this, some obvious, and others that can get you into a heap of trouble if you don’t spend some serious time with your attorney. You’ll want to be clear on the benefits both you and your co-investors will derive from your real estate investment efforts, as well. This will help not only in focusing your efforts, but in promoting your properties to prospective investors. Here they are:
- Agricultural land, pre-builder land, and new construction projects derive their value from the efforts of others beyond the investment in the property itself. This creates a “corporate securities risk” for the money investors and puts the syndicator under the jurisdiction of both state and Federal securities laws. Ultimately, it means that you could be severely liable to your investors if things don’t go as planned. Do not operate in these types of investments without both significant previous experience and excellent legal help.
- Remote land will most likely require “capital calls” to existing investors to pay real estate taxes, insurance, and debt service as you wait for its value to increase. There is nothing an investor hates more than a call from his managing partner to ask for more money. Even if it’s disclosed up front and anticipated, it’s not good psychologically.
With existing properties:
1. Investors’ capital is contributed without the expectation of future contributions, in most cases.
2. There is minimal involvement of the capital contributors beyond providing the investment funds.
3. The owners can expect to receive spend-able income on a periodic basis.
4. The owners can expect an increase in equity through the amortization of any loan used to assist in the acquisition.
5. There is also a realistic expectation of an increase in value of the asset from both monetary inflation and appreciation.
6. There will also be tax benefits from depreciation of the improvements (not the land) and utilizing a 1031 Exchange reinvestment strategy at the property’s sale.
So as we go forward on this topic, we will focus on existing, operating, commercial rental income properties. This greatly reduces the syndicator’s exposure to regulatory requirements and provides investors with regular checks, making them very happy to get your phone calls!
WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ’Craig Higdon, “The Investment Property Insider,” works as a commercial mortgage broker. He publishes the weekly “Investment Property Insider” e-zine and blog, www.InvestmentPropertyInsider.com. Visit the blog and get a complimentary report on commercial financing techniques.’
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New waterfront development on lake Livingston texas
Cedar Point Changes Hands
Majority control of Cedar Point subdivision changed hands this week when local company Waterfront Development purchased the Dallas-based lender EIC who had foreclosed on the property.
Immediately after completing the purchase, Waterfront Development paid off over $60,000 in back taxes and donated 114 lots to the Property Owners Association; giving them needed Green Belts, parks and several key maintenance areas in the subdivision.
In a separate action, the Property Owners association filed a lawsuit in Polk County Monday 4 December against the former developer, seeking to transfer ownership of the Common Areas from Concord Capital Group as Trustee, directly to the Property Owners Association. The former Developer plagued, by legal problems including criminal indictments, filled bankruptcy on Monday 4 December in a Dallas Court.
Over the weekend, well over half of the property owners in Cedar Point worked together and voted to change their deed restrictions in an effort to protect their common areas and clean up the old and abandoned homes, mobile homes and travel trailers scattered around the community.
Many of our residents were trying to make the subdivision a great place to live however, we needed the help of deed restrictions to eliminate the small percentage of those who are hurting our community, says POA President Bettie Dugan, a long time Cedar Point resident. Our community is working so hard to make life great here, just look at the incredible Christmas lights on the homes and at the entrance. These new deed restrictions will prevent additional mobile homes from being moved into the community while allowing the existing ones which are in good condition to stay in place.
Waterfront Development, through its subsidiary Vacation Home Builders in cooperation with The Von Schmidt Design Group already have two upscale homes under construction in the subdivision, and will begin redevelopment of Cedar Point with the help of the community after the start of the New Year with 12 new homes slated for the first half of 2007.
A separate community Know as the Villages of Cedar Point for “over 55” residents is planned with cottages ranging form 900-1400 square feet. Exterior maintenance will be provided allowing people to visit family and travel without worrying about their yards. The undeveloped peninsula, which may represent the largest remaining undeveloped shoreline on the southern half of the lake, is slated to become 55 waterfront lots. Each lot will be over 100 feet wide. This project is slated for February 2007.
Waterfront Development, who will be investing over 7 Million dollars in this project, estimates that new construction over the next three years will add over 32 million dollars to the Polk County tax appraisal rolls, while providing needed new housing to attract affluent Houston buyers as well as Baby Boomer retirees.
“Cedar Point is a breathtaking piece of property which we have been interested in for over two years”, said Charles Von Schmidt, the company’s President. “We feel the market is right for a project of this nature and, with the help of local realtors, we will be able to provide jobs, needed tax revenues and additional business for local merchants”.
“After many years of mismanagement, the combined positive actions and forward thinking of all involved are making the future a lot brighter for Cedar Point”.
For more information http://www.vacationhomebuilders.com
