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Posted on January 27, 2022 @ 09:05:00 AM by Paul Meagher
Liz Hodgkinson in her book "The Complete Guide to Investing in Property" (5th Edition, 2010) distinguishes between "owning" a property and "investing" in property. She argues that we don't automatically "invest" in a property when we buy a property because many property buyers don't have an overriding intention of making a profit from the property. This distinction was probably clearer back in 2010 shortly after the subprime housing crisis when many home owners found that the
value of the property was worth less than the cost of their mortgage. In today's environment of low interest rates and rising housing prices, the distinction is arguably less clear, but the possibility of a housing bubble that could bust at any moment or rising interest rates means that if you are actually investing in property you are more likely to have a strategy for dealing with some of these potential threats to your investment.
About 3.5 years ago, I purchased 4 adjacent parcels of remote vacant land (no buildings on it) at what I considered a good price. At the time I justified the purchase of one 9 acre parcel on the basis that it was a property investment that I might make more off in the future owing to the fact that a power line ran through it along the main road (most parcels around here don't have access to the grid), that it had great cell coverage for a remote area, and that it had a nice view that overlooked a lake from a distance. The other parcels were purchased because they had wild blueberries on them that I wanted to use for wine making. Purchasing wild blueberry land was the main reason I purchased 3 of the parcels with the idea of property investing being my main justification for the remaining parcel.
The reason I mention this is because even though I thought I was investing in the 9 acre parcel as a property investment, I wasn't really doing much to increase its value. That started to change late last year when the power company cleared away a wide section of trees around the power lines. This opened up the possibility of putting in a road to the middle of the parcel. Just before xmas of 2021 I spent a few days cutting down more brush to define where a road might go into the property. One of my goals this year is to install a culvert, haul in some gravel, and make an actual road into the property. The simple act of making a road
begins to open up other possibilities. With a road in place, I can get a power truck in to extend power service into the property. I can also bring in my trusty old Massey Ferguson 135 with a bush hog to start maintaining some cleared areas before trees start to grow back in. This will help to define where lots might be setup.
It is easy to convince yourself that you are making a property investment just because you purchased some land that has some desirable features. In some cases, you can in fact just hold the land for a period of time and make a decent return. A realization for me this year is that I could increase the speed at which the land might increase in value by strategically adding features that would make it increase in value more quickly and signal to potential customers that work was done to make it more valuable. The reason Liz's distinction between investing and owning property resonated with me was because I realize now that simply owning a property doesn't make you a property investor. I need to be more actively engaged in figuring out how I can more rapidly increase the value of that property if I want to call it an investment.
Posted on April 26, 2021 @ 07:34:00 AM by Paul Meagher
There are different names for Real Estate Limited Partnerships (RELP). It might also be called
Real Estate Joint Ventures or Land Development Partnerships. There are probably other terms.
I am using the term Real Estate Limited Partnership because it better highlights the legal structure of the company as a limited partnership.
In general, a limited partnership is formed based on two main types of partnership agreements:
An agreement where all partners are general partners and have similar rights, obligations and liabilities.
An agreement where there are two classes of partners:
One or more general partners
Limited partners who mostly help fund the venture, are not involved in day to day operations, and have limited liability in the event that the losses of the company exceeds their investment.
Most of the time, when investment articles discuss real estate limited partnerships they are referring to the second arrangement which is is used to fund larger real estate projects or a portfolio of real estate projects. An arrangement where all the partners are general partners is also an option for real estate investing and I would argue should also be mentioned when discussing options for how a real estate limited partnership might be structured, especially for smaller scale real estate projects.
One of the main reasons to create a real estate limited partnership as an investment vehicle, versus incorporating, is because it can be easier to flow income and losses directly to the partners. A corporate structure may reduce revenue distribution because income is taxed at the corporate level before it is distributed to the partners (i.e., double taxation). A corporate structure also makes it difficult to claim the losses associated with the real estate development in your personal income tax filings, where a limited partnership generally allows losses to "flow through" to the partners to offset personal income taxes.
A drawback to using a limited partnership versus incorporation for real estate development is that you may be exposed to more liability if something goes wrong. When setting up a Real Estate Limited
Partnership as an investment fund, they can be structured so that the general partner is a corporation that is involved in financing and managing a portfolio real estate projects while the limited
partners enjoy limited liability while investing in a diversified portfolio of real estate investments.
Real Estate Limited Partnerships may sound complicated, but in my own case, me and my wife both invested in and own a secondary farm property that could be viewed as a form of real estate limited partnership involving two general partners. We have invested over the years to getting the farm setup to make money and have been able to claim these development losses on our personal income taxes. This is because
the losses from our partnership "flow through" to the partners. The farm as an entity is not taxed like it would be if the farm was an incorporated entity. Where farms chose to use a limited partnership structure, it is common for the owners to be general partners. Some farms may chose to incorporate to limit liability and to limit taxation of income to corporate levels if the farm is making a good income.
There is much more that could be said on this topic, but the point of this blog was to raise awareness on three topics:
There are different ways to setup a real estate investment vehicle. A limited partnership structure may have certain advantages from the point of view of claiming losses during development and income distribution when you start earning income. Being able to claim losses associated with development lowers the break even point for your investment. To get back your money, you don't need to get back the initial amount you put into it if the losses you can claim offset income taxes you might otherwise have to pay in.
An important consideration in private investing is the extent to which income and losses "flow through" to the investor. A limited partnership often allows income and losses to "flow through" to investors where this is less direct or impossible for an incorporated company.
If you own some land that you want developed, a real estate limited partnership is one way you might want to structure the investment vehicle. For example, your stake might be the value of the land you currently own, to be matched by an equivalent amount from one or more investors who supply the amount of capital required to develop the project to the point of a liquidity event - the sale of the real estate or the initiation of income streams from the development.
I am not an expert on these topics so I would advise you to research these topics on your own and form your own opinions. I do think it is worth the effort to research further because it is easy to assume that incorporation is always the way to go when there are also some advantages to limited partnership structures depending on your situation.
Posted on October 11, 2017 @ 01:03:00 PM by Paul Meagher
I've been enjoying a YouTube video series of a young couple renovating an old farm house. The name of their YouTube channel is Wabi Sab-e. It is a well done, fun and instructive video series. This is the latest installment.
Their process of renovating the old house seems to be driven by taking out walls, flooring, and ceilings to expose the older character of the building. Then they set about trying to improve upon the original character in a direction more consistent with the original style. Some of the blemishes are left to add character.
Me and my wife are also engaged in renovating the upstairs hallway in an old farm house property.
The big improvement here is to level the ceiling by raising it couple of inches halfway down the hallway. Not sure if you want to call the end product Wabi-Sabi but it is a Wabi-Sabi renovation process - semi-planned, opportunistic, and one-off for the most part.
Johnny was able to purchase a distressed and dilapidated house for $10,000 with the idea that he would fix it up and rent the upstairs and downstairs levels to respectable clientele.
Below is the house Johnny purchased and the changes he wanted to make to it (i.e., add a floor).
Where the proverbial shit hit the fan was trying to get these plans approved which he found near impossible (read the article for the full details). In the end, to proceed he could not add a second level and would have had invest in fixing up a 700 square foot house for rental income. Given his bad experiences, and his failure to see the upside to proceeding at this square footage, he flipped out of the house for a bit less than his cost of purchase and the service fees for an architect who helped him try to get his plans approved.
For the guy he flipped the house to, the house was part of a larger plan to fix up 8 similarly failing houses in the neighborhood and sell them. The guy had a bigger plan involving private investors, a local building contractor, and a quick turnaround on the resale of each property. His remodels were not flashy or big new upgrades so didn't have issues with getting approval from the city but were appealing to the people he would ultimately sell them to (e.g., modern kitchen and appliances, new windows and doors, nice facade, etc..). He was able to develop a good perception for the project as a whole given his local developer status and the general improvement in the appearance of the neighborhood that he helped foster.
StrongTowns.org is the online journal these articles were published in. I like the strong towns theme of the journal and the quality of the articles collected there. Looks like a site I might be visiting more frequently in the future.
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