Many want to invest in real estate because of the industry's stability and potential. But not everyone has the time or capital to do so. If you've been considering getting into the game, you should know a few things that may help you do well.The real estate business has been on the rise in recent years. Many investors are taking advantage of the opportunity. But finding the right investment opportunities and then coming up with the capital to make those deals happen can be challenging. Several investment strategies work in today's real estate market. But it's essential to learn all the different approaches, including those with the best chance of success.
What to Note About Real Estate Investing
Real estate investment is a big deal. This investment often demands time, research, and money. However, not everyone has the knowledge or resources to invest well. There's more to it than just purchasing a house to rent it out. This guide will help you make intelligent decisions about real estate.
The most crucial element for real estate investing is location. Residential property valuations heavily depend on the status of the community, green space, scenic vistas, and proximity to amenities. When valuing commercial real estate, accessibility to markets, warehouses, transportation hubs, freeways, and tax-exempt regions is crucial.A crucial factor in choosing a site for a property is to take a medium- to long-term view of how the neighborhood's projection to change during the investment period. You can get in touch with government organizations in charge of zoning and urban planning to learn more about the prospects for the area around the property you are contemplating. Doing this will help you decide whether the long-term planning in the region is fit for your investment strategy.
— Potential Real Estate Purchases
Consider this: how long does it take to locate the ideal investment property? After that, become familiar with evaluation methods to decide whether a property is a good fit for your portfolio of investments. Usually, potential investors look at the properties in person, examine the surrounding areas, and carefully review the information in Comparative Market Analysis (CMA).
— Be Careful with Leverage
Even real estate specialists face difficulties from overleveraging. Real estate ventures might fail due to a lack of cash and significant debt commitments.Although loans are helpful, they could be costly. You make a long-term financial commitment in exchange for service now at the cost of interest. Make sure you are familiar with handling these kinds of loans and that you avoid high debt levels. Take into account the following:Select the mortgage product that most closely matches your circumstances. You should carefully research different types of mortgages because each has a unique risk profile.Look around to find good deals with cheaper interest rates. Know the terms, conditions, and additional fees the mortgage lender may impose.— Pay Attention to Mortgage
Understanding the several types of mortgages available, including the associated risks and benefits, is critical to your success in real estate investing. To be eligible for an investor mortgage, you must have 20% of the property's purchase price. Compare mortgages to identify competitive interest rates and exercise caution when considering investment mortgages that require no down payment, adjustable rates, or balloon payments.
— Your Credit Score
Your lender's terms depend on your credit score, which also influences your ability to qualify for a mortgage. You can access better terms if your credit score is higher, which might result in significant savings over time.The finest mortgages are available to you if you have a credit score of over 800. If necessary, find out how to improve your credit score.
Real Estate Strategies Every Investor Needs to Know
Investing in the real estate market is one of the surest ways to build long-term wealth and generate income. But it's a competitive field, and you need to know what you're doing to get ahead. First, housing values are significantly less erratic than the stock market and have a minor association with real estate. Multiple tax incentives are also available to property owners, which increases the return on investment. With that in mind, here are different investment strategies in real estate.
Finding affordable investment properties is the business of wholesaling, after which you rapidly sell them for a modest profit. The key to this firm is finding good bargains by using your skills in marketing and negotiation.Wholesaling is not a passive investment strategy, just like flipping houses. Wholesaling, sometimes referred to as selling by assignment of the contract, is one of the options open to an investor with poor credit or limited access to finance. Being successful at wholesale investment requires various skills and abilities. Below is a rundown of wholesaling in real estate: Find a property, work out a deal on the price and other terms, then put together a purchase agreement. Identify a purchaser for the property. Sell the property under the conditions of the deal made with the buyer. The seller receives payment. The buyer is now the owner, and the wholesaler is due a finder's or assignment fee.Wholesaling is perfect for you if you're good at making sales. If you don't like the idea of making sales, you probably shouldn't use this investment strategy.
2. Rental Residences For anyone with DIY renovation skills and the willingness to supervise renters, owning rental homes might be a terrific opportunity. However, this tactic needs a sizable amount of funding to cover the void months and the upfront maintenance fees.Employing a property management company is crucial for those seeking passive income. A property management business will manage everything for a charge, including security deposits, tenant upkeep, and evictions.Additionally, knowing what amenities to provide tenants with and how to set rent appropriately with the market is crucial. A home could stay empty if it has insufficient amenities and excessively high rent.
3. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts invest in a range of real estate assets, including office buildings, single-family homes, and everything in between, including data centers and apartments. REITs fund the running expenses for real estate assets.A common and highly liquid way to invest in real estate is through REITs, frequently traded on well-known stock exchanges like stocks. Investors who desire to put money into real estate without engaging in conventional transactions might choose a real estate investment trust.Usually an excellent source of consistent income, REITs are mandated to distribute 90% of their profits to shareholders as dividends. In contrast to a traditional corporation, REITs avoid paying corporate income tax doing this. Conventional corporations get taxed on their profits and have to determine whether or not to distribute their after-tax gains as dividends.Finally, every real estate investor must know the difference between equity REITs and mortgage REITs. Equity REITs are more convenient because they represent building and real estate ownership.Mortgage REITs are about income from real estate mortgage financing and dabble in Mortgage-Backed Securities (MBS).Unlike other investment strategies, REITs are truly passive. They are similar to mutual funds and allow you to own a piece of several bonds or stocks.
4. BRRRR Investing
BRRRR is an acronym for Buy, Remodel, Rent, Refinance, Repeat. It's an excellent method to begin your investment career without incurring losses while building a rental portfolio.Just like the acronym denotes, this strategy comprises carrying out the following actions: Purchasing a property below market value
Repeating the procedure utilizing the money saved from renting and maybe a cash-out refinance.When purchasing the property with short-term cash or financing, you refinance it with a long-term loan after it has been repaired and stabilized. If done correctly, you can withdraw the majority or the entire amount of your initial investment for the following agreement.
5. Property Flipping
Flipping properties requires significant real estate appraisal, marketing, and renovation expertise. House flipping involves money and the capacity to make or supervise repairs as necessary.Renovations for a long-term rental differ from flips because a flip involves renovations followed by a sale. The speed of sale of the property serves as a barometer for flipping success.One such example is the desire of real estate investors to quickly and successfully resell the undervalued homes they purchase.One drawback of this strategy is that flipped could get into difficult situations if they can't sell the property quickly. Losses may keep mounting if they don't retain enough cash in hand to cover the mortgage on a property over the long term.
6. Real Estate Investment Groups (REIGs)
For those who want to own rental property without having to manage it, real estate investment groups (REIGs) are the best option. Groups of private investors pool their resources and expertise to make real estate investments using a variety of tactics.REIGs are flexible in their choice of organizational forms, membership dues (if any), and levels of participation. However, access to capital and funding is necessary for investing in REIGs.REIGs are different from REITs because they are not subject to stringent regulations. Rather than being subject to government laws, private contracts regulate REIGs.The investment group manages the marketing of vacant properties, rent collection, property management, and tenant screening in return for a portion of the monthly rental income. When the properties sell, investors in a Real Estate Investment Group profit from their shares of any equity growth and recurrent rental revenue.
7. House Hacking
House hacking involves living in a house that generates revenue. Homes in this category include duplexes, triplexes, and other properties with additional rentable space (like a guest house, basement, or spare bedrooms).Another way investors house-hack is by getting a loan from the Federal Housing Administration (FHA) or the Veterans Affairs (VA). You're good to go with a small down payment to buy a small, multifamily building.This strategy aims to cut your overall housing expenditure by renting out a portion of your property. Savings from home hacking rentals are used as down payments on rental properties till funds are available.One disadvantage of investing in rental property is the potential need for a sizable down payment. However, the fact that you can learn about the rental market while residing in your rental makes house hacking an excellent method. After living there for a while, you can leave and turn the house into a long-term rental.
8. BURLBURL is an acronym for Buy Utility, Rent Luxury. The guiding principle of this strategy is that investing in real estate with a higher cap rate enables investors to recover their initial costs more rapidly and begin turning a profit.Paying attention to this rule is more crucial than ever if you want to enhance your lifestyle and net worth. With this strategy, an investor might be able to rent out luxury properties with a modest cap rate, recouping their original investment and starting to turn a profit gradually.
Direct Vs. Indirect Real Estate Investment
Actual property ownership and management are considered direct real estate investments. Purchasing properties through collective institutions that hold and administer them, such as REITs or crowdfunding, is known as indirect real estate.Below are some of the implications of direct and indirect real estate investments.
— Direct Real Estate Investment
Direct real estate investment entails purchasing a specific property or a share in one, like a residential or commercial building. Rental revenue, property appreciation, and earnings from businesses that depend on real estate are how to direct real estate investors to profit from their investments.Increased control via direct investing—your control over direct investment in total. You can choose everything, including the venue, asset class, financing arrangement, financial strategy, exit strategy, and others.Direct investing has several drawbacks, one of which is that it takes time and effort. An additional drawback is financing. Investors frequently require a mortgage or loan to pay for their assets. There is a possibility that you could stop making payments on the loan if the market collapses or if you have trouble locating quality tenants.
— Indirect Real Estate Investment
On the other hand, purchasing shares of a fund or a REIT entails investing in the company's overall investment strategy, where the fund managers are in charge of all the choices. You would have very little to no influence over any investing decisions.Yet, it's easy to get started with indirect investing. Real estate investing requires money and effort. However, investing in REIT is similar to purchasing corporate stock. You open a brokerage account and are prepared to fund it with even a small investment amount.Additionally, indirect real estate investments provide better liquidity. Typically, you cannot just turn a rental property into its cash equivalent; you must prepare the property for sale, promote it, receive offers, negotiate the terms of those offers, and then enter escrow and close the deal. Finally, indirect real estate investments offer greater diversification. You can invest in several REITs with varied investment strategies that cover a wide range of asset classes in numerous geographic regions by purchasing shares of REITs.Most investors prefer diversification. To optimize their prospective returns, investors with high-risk tolerance can choose to focus all their investments.
The Bottom Line
There are many ways to penetrate the real estate market. And one strategy isn't strictly better than the rest. Your strategy choice as a real estate investor will depend on your business plans and objectives. Real estate investing will always need you to weigh your options and choose what is best for you. When you invest directly or indirectly, you must compromise on issues like liquidity, diversification, simplicity of entry, and control.
How can landlords and property managers prepare for the end of summer rush before school starts?Late spring and summer are considered peak season for home buying and selling. This can result in a back to school rush for tenants to relocate and get into new places before school starts.When you’ve got this much action all at once, it can get really crazy. If you aren’t prepared it may become very stressful and expensive. Stay ahead of the game, and you’ll keep earning the loyalty of the best tenants, and keep your returns up.Preparing for Exiting TenantsThe first step is to get ahead of the game on existing tenants. If you have leases renewing you want to touch base early and get new leases signed. You want to keep your good tenants and have a shot at talking them into staying. You also want to know if they are leaving as soon as possible. Then you can capture other movers in the market and get fresh rental property ads up before everyone is locked down for the next year.Prepare for TurnoversOne of the worst blunders real estate investors make is waiting to put property management in place after a new lease is all closed, and it’s time to collect rents. Savvy investors get property management in the game before the change in tenants happens. A good property manager can help with the needs in getting the property ready, the rental process, and ensuring a smooth turnover.Bring in Extra HelpWith more phone calls, move-ins, and repair requests expected at this time of year, it is smart to bring in extra help. This could just be a part-time outsourced assistant. Factor in what it takes to line up additional vendors and backup vendors for landscaping, turning over units, and handling bookkeeping and tenant screening.Home WarrantiesHome warranty plans can be a huge help at this time of year. Between new rental units, new tenants in units with older appliances, and perhaps new appliances being setup, there can be a lot of glitches. These can be a big time and money drain. Home warranty plans can help eliminate or minimize these expenses and disruptions.Inspections and Preventative MaintenanceThis is a smart time of year to set up routine property inspections and tackle any maintenance issues in advance before they get more expensive or disrupt the ability to keep units occupied. Preventive inspections of the heating units and winterizing the A/C unit is good to schedule for early fall.Better Property Management SoftwareBetter software may help streamline bookkeeping, reporting to any investor partners you have, and with accurately tracking property condition. These programs are constantly being updated, with new companies offering better and better solutions. Make sure you know your options and pick the one that suits your business. Preparing ahead of time and getting the proper players in place can get you ahead of the game and help you to deal with the back to school rush. Don’t let the big yellow bus, with the flashing red lights, get in front of you and hold you up in leasing your properties!
Property management can be a major time drain if you do not find ways to manage your time. Doing so is a crucial part of the bigger picture, of building a highly profitable real estate portfolio. The more efficient you can be in this part of your investing, the better overall returns you can achieve while preserving time to actually enjoy the rewards of real estate investment.Check out these ten simple ways to streamline your managing your properties.....Accept Online Rental PaymentsOne of the ways to most dramatically streamline property management is to start accepting online rental payments. It will help cut down on time spent taking payments in-house or following up with bank statements and deposit slips. This can also make it easier for tenants to stay on track with their own rent payments.Get a BookkeeperUnless accounting was your major, and you love it, leave it to someone else. Having at least a part-time bookkeeper can really pay off in maximizing annual tax breaks, and countless hours in pulling together receipts and documents at tax filing time.Proactive Inspections & MaintenanceSlash the time involved in fielding complaints and repair requests, dealing with juggling vendors and additional bookkeeping by staying on top of regular property inspections, and tackling maintenance in advance. Small fixes done early can save many weeks and thousands of dollars.Freedom to make RepairsWhether you are a rental property owner with a property management company, or you are doing the DIY thing and are directly dealing with tenants, consider giving them more leeway to make repairs. Do you really need to personally handle every time a tenant locks themselves out, a toilet gets clogged, or a fuse blows? If it is going to cost less than $150 or $250, why not just give them the discretion to fix it?Renew Leases EarlyIdeally, you’ll know whether tenants are staying or leaving at least 60 days before their lease expires. This way you can work with tenants who are on the fence, which can save an enormous amount of time in turnover work. Or at least you know, and can minimize any vacancy periods.Release Deposits on TimeNot handling potentially explosive legal issues fast can quickly create a lot of work and expense. That inevitably snowballs and impacts your finances in many ways over time. Deposits are a great example. If you delay mailing deposits back to exiting renters, that can lead to all types of problems, versus just handing them a check on the day of your move out inspection.Deliver Default Notices on TimeThe same as above applies to late notices. Train your tenants that if they are late you will start the eviction process. If they can come up with the money, that’s great. It’s also less likely they’ll let it go that far, and create a new turnover situation.Pay Vendors FastWhen you drag your feet paying vendors, they drag their feet. It’s going to cost a whole lot more dealing with late penalties, digging up old invoices, and in time on the phone. You may even wind up being limited to only being able to work with the worst local vendors who can’t get employed by anyone else.Streamline Tenant Selection ProcessIn your tenant screening process, go beyond the credit score or background check and choose who you think will maintain your property the best. The tenant selection criteria and screening process have to be process oriented and very cut and dry with no gray areas. By treating all applicants the same and completing the same process for each person it will help avoid fair housing and/or discriminatory issues.Passive Income InvestmentsOne alternative to cut out the need for virtually all the above is simply choosing passive income options, like turnkey rental properties, or investment models like Holdfolio which come with full-service property management.When looking at the time expenditure for managing properties, it is wise to take into consideration all of the factors that eat up the most time for you. Where can you cut, who can you outsource, and how can you ensure that you aren’t a slave to your properties?
What type of insurance coverage do you need for your rental properties?Rental property owners need insurance coverage. You may not love making premium payments, but you’ll be glad you’ve got it when something happens. If you plan to finance real estate investments you’ll often also find that insurance is mandatory.Here are five types of insurance coverage you need to know about…1. Title InsuranceTitle insurance covers your rights to ownership and use of the property and helps cover legal defense if issues arise. You do not want to buy property without this. Every dollar of your investment and future income can be on the line. There is a lot of fraud out there today, and without title insurance, you are at risk.2. Hazard InsuranceThis is your basic property insurance. It typically covers fires and other common forms of damage. This is usually based upon the amount of the loan you have on a property, or the cost to rebuild the property. Make sure you keep the amount of coverage updated as your property value increases.3. Special Disaster InsurancesBasic hazard insurance is very limited coverage. It typically does not cover a wide variety of other natural disasters which can destroy your property. If you are in a flood zone you will typically need special flood insurance. This is normally very inexpensive. Those in coastal zones may need windstorm or hurricane insurance which also can be very expensive.4. Renters InsuranceHazard insurance doesn’t cover tenant belongings. You don’t want to be on the hook for your tenants’ furniture and personal items if there is a fire, flood, or break-in. Typically, landlords will require that renters obtain their own renter’s insurance, at their own expense. This should be laid out in your lease.5. Umbrella Policy Insurance CoverageThere is generally a discount when you group all of the properties together and this also provides ease of management. If you do enough deals, and own properties long enough you’ll run into something. Often loopholes in the above policies will mean you aren’t covered by them, or they may not provide enough coverage. An umbrella insurance policy can be used to cover you and act as a second layer of protection across all of your real estate business and assets. This can help cover issues like “dog bite” lawsuits.Keeping in mind the need for all types of insurance coverage and this will make your property management experience a smoother and less risky endeavor.
Who are the essential professionals you need in your camp before you start investing in real estate? It is important to keep up your momentum when getting started in real estate investing. Yet, you also want to make sure you are investing wisely and can enjoy a smooth process which delivers the best possible real estate success.Here are the first five professionals you need to connect with before you invest: CPA Your actual investment returns will depend a lot on taxes. There can easily be a double digit difference in what you get to keep, depending on how you set yourself up, and how you file taxes. A good tax professional can help you strategize and get it right before you wind up with a big income tax bill. Attorney Sooner or later you will want or need an attorney. It is just smart to have one already pre-screened and on call for when that time comes. You may want a specialist real estate attorney who can help negotiate contracts, and aid you in defending against lawsuits. It might also be helpful to have a family law or asset protection lawyer who can help you personally set up the right structures to grow and pass on your legacy. Insurance Agent Part of real estate success is the reduction of risk. Even if you don’t need direct property insurance to cover individual real estate assets, you will probably need an umbrella policy, life insurance, and other types of insurance to cover your assets in various areas. Capital Partners Even if you don’t plan on needing credit or extra cash to invest, it can be wise to have relationships with these sources in advance. It will help you avoid any cash crunches or missing out on any great opportunities. This may be private lenders, mortgage brokers, or angel investors. You will also want to build relationships with bankers to make your transactions go more smoothly. Experienced Mentor Having someone you can pick up the phone and call or shoot an email to for urgent help or an experienced second opinion can make all the difference in your business decision making. Find someone who is experienced in what you are doing and who shares your values. If you plan to be an active real estate investor, make this a full-time thing, or to start a real estate business, you will also want these five people in your camp before you get going. Contractor Having a trusted contractor on call can be invaluable for fast property inspections, repair estimates, timely turnovers and getting work done quickly. Real Estate Agent Whether or not you actually use a Realtor to help buy, sell, and rent real estate, investors can find them very useful for making sense of the market, and keeping on top of evolving trends. Marketing Expert You simply can’t do it all as an investor. Even if you have a strong marketing background, the most profitable use of your time is probably inking new deals. Still, with 90% of your success relying on your marketing to secure deals, fill them with renters, and resell them, make sure you have an expert on your team. Virtual Assistant An assistant can be used to protect and free up your time so that you are getting the best ROI on every hour of the day. A good assistant can handle a wide variety of time-consuming tasks, including finding the other people on this list. Project Manager As you grow your real estate business, taking on a big multifamily property, or are building new homes to rent out, a project manager can save you time, and help things go smoothly. This could be a true project manager for a specific mission, a property manager, or a general manager for your organization. Putting some thought into what and who you need to have in your camp to be savvy and efficient will help direct you towards the path of success!
THE PURCHASE OF LLC INTERESTS IS SPECULATIVE AND INVOLVES SIGNIFICANT RISK, INCLUDING THE RISK THAT YOU COULD LOSE YOUR ENTIRE INVESTMENT. THE PURCHASE OF LLC INTERESTS IS SUITABLE ONLY FOR INVESTORS WHO FULLY UNDERSTAND AND ARE CAPABLE OF BEARING THE RISKS. SOME OF THE RISKS ARE DESCRIBED BELOW. THE ORDER IN WHICH THESE RISKS ARE DISCUSSED IS NOT INTENDED TO SUGGEST THAT SOME RISKS ARE MORE IMPORTANT THAN OTHERS.
SPECULATIVE NATURE OF REAL ESTATE INVESTING:
Real estate can be risky and unpredictable. For example, many experienced, informed people lost money when the real estate market declined in 2007- 2008. Time has shown that the real estate market goes down without warning, sometimes resulting in significant losses. Some of the risks of investing in real estate include changing laws, including environmental laws; floods, fires, and other acts of God, some of which may not be insurable; changes in national or local economic conditions; changes in government policies, including changes in interest rates established by the Federal Reserve; and international crises. You should invest in real estate in general, and in the Company in particular, only if you can afford to lose your investment and are willing to live with the ups and downs of the real estate industry.
NO GUARANTY OF DISTRIBUTIONS:
When you buy a certificate of deposit from a bank, the Federal government (through the FDIC) guarantees you will get your money back. Buying an LLC Interest from the Company is not like that at all. The ability of the Company to make the distributions you expect, and ultimately to give you your money back, depends on a number of factors, including some beyond the control of the Company. Nobody guarantees that you will receive distributions.
INABILITY TO ATTRACT AND/OR RETAIN TENANTS:
Our success depends on our ability to attract and retain tenants in our Rental Properties. The risks we face include the following:
Competition from other landlords could keep us from raising rents.
Changes in economic conditions generally, or in the Indianapolis, IN and Dayton, OH areas in particular.
Existing tenants might not renew their leases.
Our Rental Properties could remain vacant for extended periods.
A tenant could default on its obligations, or go bankrupt.
Certain of our properties may be specifically suited to the needs of a certain type of tenant and we may have difficulty leasing such properties in the event of a vacancy.
Any of these circumstances would hurt the Company financially. If a vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to shareholders. In addition, the resale value of a property with vacancies could be decreased because the value of a property may depend on the value of the leases of such property.
NEED TO RENOVATE PROPERTIES:
We might need to renovate our Rental Properties to make them competitive in the market. The more we have to spend to renovate our Rental Properties (assuming we can find the capital to do so), the lower the returns to our investors.
PROPERTY VALUES COULD DECREASE:
The value of the Rental Properties we own could decline, perhaps significantly. Factors that could cause the value of our Properties to decline include, but are not limited to:
Changes in interest rates
Competition from new construction
Changes in national or local economic conditions
Changes in zoning
Environmental contamination or liabilities
Changes in local market conditions
Fires, floods, and other casualties
Undisclosed defects in property
Incomplete or inaccurate due diligence
ILLIQUIDITY OF REAL ESTATE:
The Company might not be able to sell Rental Properties as quickly as or on the terms that it would like. For one thing, we cannot predict how long it will take to find a willing and able buyer. For another thing, we might be required to expend significant amounts of money to correct defects or make improvements before a property can be sold. The overall economic conditions that might cause the Company to want to sell Rental Properties are generally the same as those in which it would be most difficult to sell.
The costs of operating real estate – including taxes, insurance, utilities, and maintenance – tend to move up over time. We have limited control over some of our operating costs, and if our costs increase it may reduce the amount available for distribution to investors.
REGULATION AND ZONING:
Like all real estate, our Rental Properties are subject to extensive building and zoning ordinances and codes, which can change at any time. Changes in these laws and regulations could affect the Company adversely.
A fire, hurricane, mold infestation, or other casualty could materially and adversely affect the operation of the Company, even if the Company carries adequate insurance.
The Company will maintain insurance against certain kinds of losses, such as losses from fires. However, there are certain types of losses which either cannot be insured at all or cannot be insured for a reasonable cost.
LIMITED WARRANTIES FROM SELLERS:
In most cases, the Company will be required to purchase a property in “as is” condition, with few if any representations or warranties by Seller. If we learn that a property has defects after closing, we may not be able to look to the seller for reimbursement.
LIABILITY FOR PERSONAL INJURY:
As a landlord, we might be sued for injuries that occur in or outside our Properties, e.g., “slip and fall” injuries. Although we expect to carry insurance against potential liability in amounts we believe are adequate, it is possible that we could suffer a liability in excess of our insurance coverage.
We will conduct typical environmental testing on the properties we acquire to determine the existence of significant environmental hazards. However, it is impossible to be certain of all the ways that the properties have been used, raising the possibility that environmental hazards could exist despite our environmental investigations. Under Federal and State laws, moreover, a current or previous owner or operator of real estate may be required to remediate any hazardous conditions without regard to whether the owner knew about or caused the contamination. Similarly, the owner of real estate may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination. The cost of investigating and remediating environmental contamination can be substantial, even catastrophic.
The Americans with Disabilities Act of 1990 (the “ADA”) requires certain buildings to meet certain standards for accessibility by disabled persons, and we may be required to comply with its terms. If our Rental Properties are not compliant with all requirements of the ADA or if additional requirements are imposed in the future, whether pursuant to the ADA or otherwise, we would need to make modifications to those Properties, potentially at significant expense.
THE COMPANY IS A NEW BUSINESS WITH A LIMITED TRACK RECORD:
The Company is a new business with a limited track record, making it difficult for Investors to gauge our investment strategy. Like any new business, we face challenges on a number of fronts, including:
Developing a reputation and brand identity
Attracting, retaining, and motivating qualified executives and personnel
Implementing business systems, including technology systems
Responding effectively to the offerings of existing and future competitors
Managing growth and expansion
Implementing adequate accounting and financial systems and controls
There is no assurance that we will be successful on all (or any) of these fronts.
INCOMPLETE DUE DILIGENCE:
We intend to perform “due diligence” on each Rental Property we buy, meaning we will seek out and review information about the property. However, due diligence is as much an art as a science. As a practical matter, it is simply impossible to review all of the information about a given piece of real estate and there is no assurance that all of the information we will review will be accurate or complete in all respects. For example, sometimes important information is hidden or simply unavailable, or a third party might have an incentive to conceal information or provide inaccurate information, and we cannot verify all the information we receive independently. It is also possible that we will reach inaccurate conclusions about the information we review.
LACK OF DIVERSIFICATION:
We will own a limited number of Rental Properties in a select market and in a concentrated geographic location, or to put it another way, our portfolio of real estate will not be “diversified.” The diversification of a portfolio reduces both volatility and risk, which means that our portfolio is likely to be more volatile and more risky than if we had purchased a greater number of properties, purchased properties in geographic locations outside of Indianapolis, IN and Dayton, OH, or invested in properties outside of residential market (e.g.,commercial properties).
UNRELIABLE FINANCIAL PROJECTIONS:
We have prepared financial projections reflecting what we believe are reasonable assumptions concerning the conduct of our business. However, the nature of real estate development and investment is such that at least some of our assumptions are likely to be mistaken, either for better or for worse, so that the actual results of investing in the Rental Properties are likely to be different than the results reflected in the projections, possibly by a wide amount. Investors should be skeptical of financial projections in the real estate industry, not because developers intend to be misleading but because the industry is so volatile and difficult to predict.
PRICING OF ASSETS:
The success of the Company and its ability to make distributions to Investors depends on its ability to gauge the value of real estate assets. Although the Manager will rely on various objective criteria to select properties for investment, ultimately the value of these assets is as much an art as a science, and there is no guaranty that the Company and its advisors will be successful.
RISKS ASSOCIATED WITH DEVELOPMENT AND CONSTRUCTION:
We might renovate or repair our Rental Properties from time to time, as needed and if consistent with our overall investment strategy. Development and construction can be time-consuming and are fraught with risk, including the risk that projects will be delayed or cost more than budgeted.
RELIANCE ON MANAGEMENT
: You will not have a right to vote or otherwise participate in managing the Company, except on very limited matters. Instead, the Manager, along with its affiliate Sonder Homes (our property manager), will have full control over the business and management of the Company. As a result, the success of the Company – and its ability to make payments with respect to your LLC Interests – will depend almost exclusively on the skills of our Manager and its principals. Therefore, you should purchase an LLC Interest only if you are willing to rely on the ability and judgment of management and these third-party operators. If the principals of our Manager resign, die, or become ill, the Company and its Investors could suffer.
RISKS ASSOCIATED WITH LEVERAGE:
The Company may borrow money from banks or other lenders to refinance Rental Properties, purchase assets, or to finance development costs or other expenses. Borrowing money to purchase assets is sometimes referred to as “leverage.” While using leverage can increase the total return on the borrower’s equity, it also increases risk because the amount borrowed has to be repaid in accordance with a schedule. To repay its loans, the Company might have to sell assets at a time when values are low, for example.
BREACHES OF SECURITY: It is possible that our systems would be “hacked,” leading to the theft or disclosure of confidential information you have provided to us. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our vendors may be unable to anticipate these techniques or to implement adequate preventive measures.
NO MARKET FOR THE LLC INTERESTS; LIMITS ON TRANSFERABILITY:
There are at least three obstacles to selling or otherwise transferring your LLC Interest:
There will be no public market for your LLC Interest, meaning you could have a hard time finding a buyer.
The Operating Agreement prohibits you from transferring your LLC Interest without the consent of the Manager.
By law, you may not sell your LLC Interest unless it is registered under applicable securities laws or the transfer is eligible for an exemption from registration.
Taking all that into account, you should plan to own your LLC Interest indefinitely.
NEED FOR ADDITIONAL CAPITAL:
The Company might need more capital, whether to renovate one or more Rental Properties, to acquire additional properties, to carry the Company through periods when our rental income is insufficient to cover our operating expenses, to pay for uninsured losses, or otherwise. We might seek to raise additional capital through debt (borrowing money) or through equity (selling interests in the Company) or both. However, there is no assurance that additional capital will be available at the time it is needed, and if the Company needs but cannot obtain additional capital it is possible that the Company could fail. Even if additional capital is available, it could be on terms that are adverse to the interests of the Investors. A loan, for example, could bear a high interest rate or other onerous terms, while raising additional capital in the form of equity could dilute the interests of the Investors.
SUBORDINATION TO RIGHTS OF LENDERS:
The right of Investors to receive distributions from the Company is subordinate to the rights of the Company’s lender(s). In the event the Company were to default in its obligations to the lender(s), the Company might be prohibited from making further distributions to the Investors until the default had been cured.
LACK OF CASH TO PAY TAX LIABILITY:
The Company will be treated as a partnership for tax purposes. Consequently, your share of the taxable income from the Company (if any) will be reported on your personal income tax return. We will try to distribute enough money for you to pay your personal tax liability on your share of the income, but we might not have enough money to do so. In that case, you could have a net cash deficit from owning an LLC Interest.
NO REGISTRATION UNDER SECURITIES LAWS:
The Company and the LLC Interests will not be registered with the Securities and Exchange Commission (“SEC”) or the securities regulator of any State. Hence, neither the Company nor your LLC Interest is subject to the same degree of regulation, scrutiny and disclosure as if this offering were registered.
INCOMPLETE OFFERING INFORMATION:
The LLC Interests are being offered pursuant to Rule 506(b) issued by the SEC. Rule 506 does not require us to provide you with all the information that would be required in some other kinds of securities offerings, such as a public offering of shares. Although we have tried to provide all the information we believe is necessary for you to make an informed decision and we are ready to answer any questions you might have, it is possible that you would make a different decision if you had more information.
LACK OF ONGOING INFORMATION:
The Company will provide you with periodic statements concerning the Company, but it will not provide audited financial statements or other detailed information that you might receive in a securities offering registered with the SEC.
CONFLICTS OF INTEREST:
Your interests as an Investor could conflict with our interests in a number of important ways, including these:
Your interests might be better served if our management devoted its full attention to the Company. Instead, the principals of our Manager will be managing a number of different projects concurrently with the Company.
The principals of our Manager are also the principals of Sonder Homes, our property manager, which will receive fees from the Company. Although we will always seek to establish terms that are fair to the Company, the terms of any compensation or other agreements with Sonder Homes were negotiated between related parties, and therefore may not be as favorable to us as if they had been negotiated at arm’s length.
The principals of our Manager may be involved from time to time in other real estate ventures outside of the Company, and may be involved in purchasing and managing residential real estate projects in the vicinity of the Company. Therefore, they may be competing directly with the Company.
The lawyers who prepared this Confidential Investor Disclosure Document, the Operating Agreement, the Purchase and Investment Agreement, and the other documents related to your investment in the Company represent JB Holding Company LLC – our Manager – not Investors or even the Company. You must hire your own lawyer (at your own cost) if you want your interests to be separately represented.
DETERMINATION OF FEES:
The Manager and its affiliates may receive significant fees and distributions from the Company. Although we believe that the fees are consistent with the types and amounts of fees for other real estate development funds, the fees were not determined through arm’s-length negotiations with the Investors, but were established by our Manager.
LIMITATION ON RIGHTS UNDER OPERATING AGREEMENT:
The Operating Agreement limits your rights in several important respects, including these:
With a few exceptions, the Operating Agreement may be amended without your consent.
The Operating Agreement significantly curtails the right of Investors to bring legal claims against the Manager and its principals. Among other things, the Operating Agreement eliminates (to the extent allowed by law) the fiduciary obligations that the Manager would otherwise have to the Members.
The Operating Agreement limits your right to obtain information about the Company and to inspect its books and records.
The Operating Agreement restricts your right to sell or otherwise transfer your LLC Interest.
LIMITATIONS ON RIGHTS ON INVESTMENT AGREEMENT:
To purchase an LLC Interest, you are required to sign our Investment Agreement. The Investment Agreement would limit your rights in several important ways if you believe you have claims against us arising from the purchase of your LLC Interest:
In general, any legal claims brought against the Company or its principals must be brought in State or Federal Court in Indiana, which might not be convenient for you.
You would not be entitled to a jury trial on your claims.
THE FOREGOING ARE NOT NECESSARILY THE ONLY RISKS OF INVESTING.
PLEASE CONSULT WITH YOUR PROFESSIONAL ADVISORS.
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