Episode Transcript

00:02

Welcome to Episode 7 of Season 5 of the Growing Empire Show. Today we’re going to talk about what to do with all that money once you sell your investment property, so stay tuned.

00:12

Welcome to Growing Empires — hosted by real estate entrepreneur and trusted investment advisor Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments. For those who want to build and manage a more profitable real estate portfolio.

00:32

You’re about to approach closing on your first investment property, and now you need to think about what you’re going to do with that money. Leading up to closing day, there’s a couple of things that I want you to keep in mind — kind of normal business practices, or I should call them best business practices. Couple of things that you should do are make sure that you turn off all your utilities. In advance of the closing, make sure that they’re scheduled for the day of closing or the day after. You’re going to want to make sure that you also remember things like cable internet, security systems, insurance policies are commonly ones that people forget. So make sure you have them all set up to be shut off the day or the day after closing. You’re gonna want to make sure that you send a letter to your tenants — if for no other reason that we want to make sure that they don’t bother you after closing, because once you close on your investment property, you’re going to want to close that door so that you can open a new door. Also leading up to closing, you really should think about what you’re going to do with your money once you settle on your property.

01:30

If you haven’t already identified whether or not you want to defer your capital gains, now’s the time to think of that. And leading up to the property sale is when you need to make that decision. If you’re at the closing table, it’s already too late. So do you want to defer the capital gains? Or do you want to take that money out and invested in other options? It’s really a personal choice — you can defer capital gains from one sale to another sale to another sale, pretty much consistently. What you have to do though, is you’ve got to buy like kind properties. And to have a successful 1031 exchange, you need to make sure that you hire a Qualified Intermediary to hold the money between the two settlements. So from the time that you’re relinquishing a property to the time that you’re purchasing your new property, the Qualified Intermediary is going to hold your proceeds or your profit. If you want to defer 100% of your capital gains, you’re going to need to invest 100% of your profits in your next purchase. And you’re going to want to invest in like-kind properties; like-kind does not necessarily mean that if I sell a commercial property, I need to buy another commercial property — it just means that you need to buy real estate and land — that essentially is what is making up the 1031 exchange requirements.

2:46

Another thing that you can do if you don’t want to actually own the investment properties, as you would in a 1031 exchange, is you can think about another exchange option called a Delaware Statutory Trust. And this is not something that’s new. But current tax laws have made them a fairly preferred investment vehicle for people that want to have truly passive investment options. When you own investment properties, you know that even if you have a good management company, you still have somewhat of involvement in your investment. You’re going to watch the numbers, you’re going to maybe answer questions for your management company, but you’re likely going to have some type of involvement in the actual management and operation of the property. In addition, you have to deal with things like roofs and boilers and leaks and emergencies and stuff like that at the property. A Delaware Statutory Trust, on the other hand, is essentially a pooling of money. So, Delaware Statutory Trust investors benefit from professionally managed, potentially institutional quality property. And it could be a variety of things. It could be a 500 unit apartment building, or 100,000 square foot, medical office or industrial property, or a shopping center. Most DST investors are involved in assets that they couldn’t afford otherwise. However, because they pulled the money together with other investors, they can acquire this type of asset. In a DST, you’re strictly a passive investor. There definitely are some pros and cons to this method. But it’s just another way for you to be able to take advantage of the 1031 exchange tax deferment options and reinvest 100% of your profit into a different type of real estate platform that allows you to be a passive investor.

04:36

Now, if you decide that deferring your capital gains tax is not the right move for you, and you really don’t want to have your money tied up in either of these types of things. The first thing that I’m going to encourage you to do is make sure that you do set aside money for taxes because when tax time comes in your accountant is filling out your tax forms, you’re going to want to make sure that you have the cash to pay down that capital gains tax.

05:06

The episode will continue in just a moment To make the most out of your investment property sale, you will need a team that understands the market fluctuations and how to capitalize on that demand. Knowing the market trends and forecasting economic changes is critical to your success. Having an expert by your side to help you buy low and sell high is the only way to create true wealth. When you need help analyzing your portfolio to maximize your return on investment, there’s only one person you need to call and that’s me. I will help you analyze your portfolio and increase your profitability year over year. And that’s my guarantee schedule call with me today at growingempires.com, that’s g-r-o-w-i-n-g-e-m-p-i-r-e-s.com. And I’ll help you create the life that you desire with passive real estate investing.

05:53

Some of the other things that you can think about investing in are municipal bonds — certainly not as aggressive as real estate is usually but municipal bonds do turn a fairly consistent return. You can invest in stocks. Sometimes stocks are more volatile than the real estate market. And sometimes they’re less volatile. And it just really depends on what you’re investing in as far as the riskiness of the stock market, but you can invest in stocks. You might want to consider enhancing your life policies, your whole life policies, and other life insurance policies that you may have. You may want to start life insurance policies if you don’t already have them. You can consider paying down debt. If you have a lot of debt — not necessarily mortgage debt, but like credit card debt and things with high interest rates, you may want to consider paying down some of that debt when you sell your investment properties. Freeing up more cash and equity for future purchases should you decide to go back to real estate investing, you can also look at some other types of real estate alternatives to owning the real estate. A popular option right now is for people to get involved in co-working spaces. This is where you’re leasing out an office space to a multitude of tenants. And in a co working space, the goal is to have a networking opportunity for small businesses; the type of people that rent co working spaces are usually small businesses just starting out. They can’t afford their brick and mortar location. Or you can also find this to be a common option for businesses that are expanding into new markets that just need, again, kind of like a satellite location or a small office for their employee base. Co-working spaces are a collaborative office arrangement. And usually in Co-working spaces, you’re going to be asked to provide the furniture, the internet, the printers, the paper — it’s really like a plug and play. For co-working spaces to be super attractive, you’re going to want to make sure that your system is a plug and play. Literally somebody can come in with their laptop hooked up to the internet, do their work, and then go home for the day. And it’s a really common option now for people that are trying to run their businesses a little bit more economically. We’re seeing a downsize of the big office spaces and the big, you know, private office suites. And we’re watching small businesses really enjoy the collaboration options of working with other small businesses to network and grow their businesses together. So co-working spaces are a great alternative for real estate investing.

08:25

You can consider raw land; land is in very high demand right now. But if you can find a parcel of land, and you can get the proper permitting and approvals and you can do the site improvements, you don’t even have to build structures on the land to make the land super valuable. You may also want to just hold on to land because land increases in value year over year. So you may just want to hold land and not have to worry about any utilities or improvement to the land and that will allow you to have your investment money and another opportunity, real estate-related, that doesn’t require you to do much of anything other than maybe care for the land. You may want to look into mobile home parks or RV parks. This is another common investment option. That is really low key as far as maintenance and requirements are concerned; in mobile home parks or RV parks essentially what people are doing is they’re renting your land. You will have utilities to the land but on mobile home parks people are — they have a leasehold improvement — so they have their mobile home that they come and they park on your land and they pay lot rents for your land for the amount of time that they’re there. RV parks are similar in a sense that people bring their RVs they plug in, they stay there for a weekend. It’s like a vacation spot and then they go, and those are two really great ways to invest in real estate without having a whole lot of hassles. And you certainly don’t have to deal with tenants or anything like that. You can look into real estate syndications. You can also look into private notes; this something that not a lot of people know about. But in general, a private note just means that you’re the lender instead of the owner of the real estate property. Like other parts of real estate investing, there’s many different niches. There’s many different approaches to private note investing. But private notes provide you a steady and consistent interest income, it’s definitely more passive than owning the real estate, you have much greater control over your investment. And there’s really two types of private note investing: one is private money lending, and then the other one would be discounted notes. Private money lenders are typically used for investors for flip projects, but discount notes give you extra risk protection and an increase in the returns. Lastly, you could look into a college savings plan or a 529 plan. And a 529 plan is a college saving plan that offers tax and financial aid benefits. Usually, there are several investment options to choose from and the performance is based on those investment options, so you could choose to do a little bit of extra college savings with your money if you weren’t sure what else to do with it.

10:56

So just to quickly review the two different types of options if you’re going to defer your capital gains: 1031 exchange or a Delaware Statutory Trust. You’re going to want to make sure you’re first set aside some money for taxes, but you’re going to look into municipal bonds, stocks, life insurance policies, crowdfunding, potentially paying down debt, other real estate alternatives like co-working space, raw land, mobile, home or RV parks, real estate syndications or private notes. And last but not least, a college savings plan or a 529 plan is another great investment option. I hope you’ve got a lot of today’s show and until next time, take care.

11:34

For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit growingempires.com