March, 2023

Protecting your Capital Gains
A friend told me about someone they knew who had a capital gain of $1M after sale of a multifamily property. Big celebration, but unfortunately in these circumstances that person was not able to plan for deferring the taxes on that gain. Have you had a real estate gain you decided to just pay taxes on?

We have a few hugely valuable options when selling properties to defer the capital gains, including 1031 exchanges, IRS 453 tax deferrals, and opportunity zone investing. But often they are not the right fit.

First, I’m not an accountant. I utilize the best accounting resources and they have saved my bacon more than once, so verify anyone’s tax saving suggestions, including mine, with your accountant.

Would you like to just pay $200,000 in taxes on a capital gain like that, rather than risk getting in trouble with the IRS? Maybe you would, but you have to keep in mind that Congress wants to encourage certain behaviors. That’s why they passed the laws that say if you behave this way, you are entitled to save or defer some taxes. It’s not cheating, it’s not unethical, it’s not a loophole. It was designed that way. The behavior they are encouraging makes good things happen, like more housing.

Here’s a simple option. Invest your proceeds in another property the same year. Get it into a deal, fast. Don’t cram into the first deal that comes along, but get to know who the best syndicators are. One of them is likely to have a good deal offering before the end of the year.

Then study their materials and confirm they intend to do cost segregation on their new acquisition this year, the same year they purchase. With cost segregation comes bonus depreciation. Cost segregation is an engineering and accounting activity that allows all of the component assets within a real estate property, including the countertops, floors, appliances, etc., to be recharacterized for depreciation purposes as potentially shorter lifespans. So instead of depreciating your property on a 27.5 year straight line schedule, you’re able to take most of the depreciation the year you purchased it. Who owns a property for 27.5 years anyway.

I see most properties who perform a cost segregation able to deliver a depreciation deduction to their investors of 60-80% of their initial investment. If it’s highly leveraged, which unfortunately most properties these days are not, the depreciation deduction could be even higher.

You take your $1M gain from the property you just sold, invest it in a property doing cost segregation, and most of your gain is sheltered by the depreciation deduction on your new property.

Special considerations? Yes, a few. First is that the Bonus Depreciation benefit is being phased out. You can only deduct 80% of that depreciation in 2023, then 60% in 2024, 40% in 2025, etc. Unless they change that law, which hopefully they will. Still, 80% of the full depreciation is pretty awesome.

And why not? You keep that $200,000 you were going to pay the IRS and you invest it again into more real estate. Your motive may be to build your personal wealth but the net effect is it adds significant tangible support to real estate values. It is only through this process of having a low-friction free market of real estate purchases and sales that new development comes into the market. Developers will not build in an area if they believe there won’t be a buyer some day who will buy it from them, at a profit to them.

Invest your time now to find several syndicators who have demonstrated they are out buying, doing well for their investors. Can’t find one? Then check with financial advisors and find companies who manage and offer Delaware Statutory Trusts. Returns are a little lower but they can get your money into a tax deferred real estate investment pretty quickly.

Anything to defer those taxes and keep your money growing.

Providence, RI – a large city in a small state, population about 190,000, Providence is also one of the oldest cities in the U.S., ideally located on the protected headwaters of the Narragansett Bay. If you like boating, you’d be in heaven. It’s also right along the high density northeast corridor from Boston to its north, on down to Washington, D.C. If you drive that route, it’s safe to say you won’t get lonely.

Although historically a manufacturing center, for a time it was known as the jewelry capital of the world and was home to the wealthiest Americans. A series of calamitous events starting with the Depression and ending in the 80’s with the demise of manufacturing in Providence led to the growth of organized crime, and in fact the city became known as a center for the most notorious crime syndicates. Syndicates – funny how that term applied then and still has a lingering element of disrepute today deriving from those days.

But that was then and this is now. Just as in many major cities throughout the world, strong leaders emerge and conditions change. Perhaps because of the impoverished conditions many faced through those difficult times, Providence has become home to an extensive medical establishment. Several prominent medical facilities have a home in Providence, an outsized proportion given Providence’s relatively small size.

It is also home to Brown University, one of only eight Ivy League universities in the U.S. These schools turn out our government and industry leaders, and they also produce startups. Providence benefits from this, given its ideal centralized location and proximity to the intellectual and business centers of Boston and NYC.

Is it growing? Have to always ask this. Yes it is, population growing 26% over the last 20 years, and a pretty decent jobs growth rate of 3.5% over the last 12 months.

Providence also enjoyed recognition in a recent RentCafe article for being the fifth most competitive rental small market in the U.S. Average occupation is 96.4% and lease renewal rates are over 68%, very respectable.

It may not be easy to find decent multifamily property in a small tight market like Providence, and local renter/landlord laws no doubt favor the renter, but these markets can mean big money if you have bought right.

Marketing Yourself
99% of the people I meet are not excited about advertising themselves. Only a handful enjoy this, and truthfully they are not the people we even want to hear from. The people we want to listen to are genuine, credible, knowledgeable, and not pushy. We are hoping they share more with us and we sometimes even engage with them to encourage it.

Every experienced real estate investor tells us it is other people who will help us get where we want in real estate, that it is not a DIY (do it yourself) activity. But how do we find these people? How can they become aware that you are who they really want to meet?

It is marketing, specifically marketing yourself. Read about marketing, take a course, become informed. Marketing is not just advertising, and in most cases it is not advertising at all. It is creating an image, a brand, it is about having the courage to place something about yourself in a public space so others who don’t yet know you can learn about you. It is not about shouting this is what I do, or this is how I can help you. It is about allowing them to gain a perspective about you that comes from trusted sources, that is delivered in a way that they don’t immediately reject.

And even more relevant to most of us, it is getting over our fear of marketing ourselves. Huge limitation. What if we don’t do it right? What if our friends think we’re losers? What if they think we only want to be friends because we want something from them?

All valid concerns, but there are ways to market ourselves that don’t send us down those paths. You don’t have to be tagged as a self-promoter.

Shift your mindset. I’m still on my journey here but what I have understood in my learnings and my experiences is that we have to work toward an altruistic goal of genuinely trying to help others. Not hey I’ll give you some free advice and now you invest in my deals. If I’m not out there giving of myself, of my skills and expertise, then I have no right to their trust.

Putting yourself out there is not easy for most of us. It’s not just our comfort zone boundaries but it is techniques, processes, persistence, consistency. It is social media and in-person meetups and conferences. Not just friends and family. It is taking the bold steps one at a time. Forget about that person you worked with 10 or 20 years ago but haven’t seen since. If you continue as you are going now, you’ll never see them again so their opinion of you doesn’t matter.

But how do you know they wouldn’t be interested in learning from your multifamily experiences? That they haven’t been wishing they could make more than 4% from their CDs, that they could reach retirement before they turned 65. You don’t know that.

Once you convince yourself that they want to know these things, that they are in the same boat you were, that you are truly helping them by sharing what you know, then you will feel emboldened. You’ll get your butt out of bed a little earlier and start sharing. LinkedIn posts, Instagram posts, Facebook posts. Look up the multifamily conferences and sign up. Search for local meetups. Create your spreadsheet or sign up for a CRM database to keep track of your new contacts.

And stay in touch with them. They have a short shelf-life. They don’t know you from one quick introduction. They know you because they have talked to you multiple times and each time you shared more useful guidance with them, and yes a little more about yourself.

Only then do they begin to trust you. People you would have never met if you didn’t take that action.

Who We Are

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.