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Investing in Multi-family Real Estate


Many investors who invest in multifamily real estate do so for various reasons: multifamily investments offer relatively low risk due to economies of scale, they offer an investment vehicle that can keep pace with inflation by increasing rental income as the market rises, and they can produce both cash flow and appreciation.

Most investors are looking for an investment that is not cash flow negative. Commonly, many investors looking to purchase multifamily properties are usually either exchanging one investment property into another or are looking to invest 20% for smaller properties such as a duplex or upwards of 50% for large apartment buildings.

The first step in investing in multifamily properties is to speak with a lender about how much of a deposit is needed for a particular price point. This will allow you to focus on the properties that fit your investment goals. There are many factors that decide on a multifamily investment’s return: purchase price, area, building condition and price of local residential real estate.

It is important to become familiar with the market and be able to analyze the potential property before making a purchase. Important indicators are the CAP rate, GRM, PPSF, Price per unit, vacancy rate and rental history, rental income, operating expenses, debt service, and cash flow.

Once an analysis is performed and an agreement is reached on a property including price and terms, the listing agent will provide a full history of the multifamily units including the last two years of income and expenses. This is the period when the buyer will have a chance to fully analyze the numbers, and paint a picture of what is reasonable to expect of the building’s
future performance. This is also the buyer’s chance to conduct a full inspection of the building.

If you are a seasoned investor or are interested in purchasing your first investment property we have a great place for you to get started. Sign up by filling out the form below and begin to receive email notifications with properties that fit your criteria. You may receive several property listings for your first few emails. After that you will only receive new properties that fit your criteria. We will also keep an eye out for off market deals that could work.

Exchanges

Investment Tools
In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of federal income taxes and some state taxes on the transaction.

The concept behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer’s investment is still the same, only the form has changed (e.g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a “paper” gain.

What is a 1031 Exchange?
Internal Revenue Code (IRC) Section 1031 is one of the last remaining tax loopholes. It is a powerful tool that allows investors to exchange any investment property for any other investment property. For your exchange to be valid, you must follow specific IRS regulations.
The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

Here is an abbreviated list of the regulations:
The properties being exchanged must be of like kind.

For example, you may exchange:

  • A house for another house (or several houses)
  • A house for commercial real estate land for rental property
  • A strip mall for an office building any investment property for any other investment property (as long as it is not occupied as your primary residence)
  • You must identify and close on your replacement property within a specific period of time.
  • 100% of the proceeds from your current property must be held by a Qualified Intermediary and applied toward your replacement property to get a full tax deferral.
  • Your replacement property must be of equal or greater value to the property you have sold to get a full tax deferral.
  • Properties being exchanged must be used for investment. Personal residences are not exchangeable

We can refer you to an expert attorney who specializes in that area.

Assignments

An Assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party – the assignor – to another party – the assignee. The legal nature of the assignment determines some additional rights and liabilities that accompany the act.

Assignment of Contract rights
Assignment of rights under a contract is the complete transfer of the rights to receive the benefits accruing to one of the parties to that contract. For example, if party A contracts car for $10, party A can later assign the benefits of the contract – the right to be paid $10 – to party C. In this scenario, party A is the obligee/assignor, party B is an obligor, and party C is the assignee. Such an assignment may be donative (essentially given as a gift), or it may be contractually exchanged for consideration. It is important to note, however, that party C is not a third party beneficiary, because the contract itself was not made for the purpose of benefiting party C. However an Assignment only transfers the rights/benefits to a new owner. The obligations remain with the previous owner.

When Assignment will be permitted
The common law favors the freedom of assignment, so an assignment will generally be permitted unless there is an express prohibition against assignment in the contract. Where assignment is thus permitted, the assignor need not consult the other party to the contract. An assignment cannot have any effect on the duties of the other party to the contract, nor can it reduce the possibility of the other party receiving full performance of the same quality.

Requirements for an effective Assignment
For assignment to be effective, it must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect.

Although this prevents a party from assigning the benefits of a contract that has not yet been made, a cout of equity may enforce such an assignment where an established economic relationship between the assignor and the assignee raised an expectation that the assignee would indeed form the appropriate contract in the future.

A contract may contain a non-assignment clause, which prohibits the assignment of specific rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made.

An assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that “all assignments are void”.

Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.

Requirement of a writing

There are certain situations in which the assignment must be in writing.

  1. Assignment of wages
  2. Assignment of any interest in real property
  3. Assignment of choses of action worth over $5,000
  4. Assignment as collateral for a loan or debt

For more information about contractual writing requirements see Statute of frauds.

Revocability
Assignments made for consideration are irrevocable, meaning that the assignor permanently gives up the legal right to take back the assignment once it has been made. Donative assignments, on the other hand, are generally revocable, either by the assignor giving notice to the assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another.

There are some exceptions to the revocability of a donative assignment:

  1. The assignment can not be revoked if the obligor has already performed
  2. The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for “thing”, as in a chose of action) – a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account.
  3. The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose – a contract right not embodied in any for of token.
  4. Estoppel can prevent the revocation of a donative assignment if the asignee changed their position in reliance on the assignment.

Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.

Breach and Defenses
A cause of action for breach on the part of the obligor lie with the assignee, who will hold the exclusive right to commence a cause of action for any failure to perform or defective performance. At this stage, because the assignee “stands in the shoes” of the assignor, the obligor can raise any defense to the contract that the obligor could have raised against the assignor.

Furthermore, the obligor can raise against the assignee counterclaims and setoffs that the obligor had against the assignor. For example, suppose that A makes a contract to paint B’s house in exchange for $500. A then assigns the right to receive the $500 to C, to pay off a debt owed to C. However, A does such a careless job painting the house that B has to pay another painter $400 to correct A’s work.

If C sues B to collect the debt, B can raise his counterclaim for the expenses caused by the poor paint job, and can reduce the amount owed to C by that $400, leaving only $100 to be collected.

When the assignor makes the assignment, he makes with it an implied warranty that the right to assign was not subject to defenses. If the contract had a provision that made the assignment ineffective, the assignee could sue the assignor for breach of this implied warranty. Similarly, the assignee could also sue under this theory if the assignor wrongfully revoked the assignment.

Successive Assignments
Occasionally, an unscrupulous assignor will assign the exact same rights to multiple parties (usually for some consideration). In that case, the rights of the assignee depend on the revocability of the assignment, and on the timing of the assignments relative to certain other actions.

In a quirk left over from the common law, if the assignment was donative, the last assignee is the true owner of the rights. However, if the assignment was for consideration, the first assignee to actually collect against the assigned contract is the true owner of the rights. Under the modern American rule, now followed in most U.S. jurisdictions, the first assignor with equity (i.e. the first to have paid for the assignment) will have the strongest claim, while remaining assignees may have other remedies.

  1. Earlier donative assignees for whom the assignment was revocable (because it had not been made irrevocable by any of the means listed above) have no cause of action whatsoever.
  2. Earlier donative assignees for whom the assignment was made irrevocable can bring an action for the tort of conversion, because the assignment was technically their property when it was given to a later assignee.
  3. Later assignees for consideration have a cause of action for breaches of the implied warranty discussed above.

Compare:Delegation
A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause also bars delegation.