|Passive Real Estate Investments
Many investors are turned off by real estate because they do not have the time or
inclination to become landlords and property managers. Both of which are in fact, a career in
themselves. If the investor is a rehabber or wholesaler, real estate becomes more of a business
rather than an investment. Many successful real estate "investors" are actually real
estate "operators" in the real estate business. Fortunately, there are other ways for passive
investors to enjoy many of the secure and inflation proof benefits of real estate investing without
Limited partnerships are a way to invest in real estate, without incurring a liability
beyond the amount of your investment. However, an investor is still able to enjoy the benefits of
appreciation and tax deductions for the total value of the property. LPs also can be used by landlords
and developers to buy, build or rehabilitate rental housing projects using other peoples money. If
you are seeking passive real estate investments, or have the ability to do a project and are willing
to do the work, but need to raise capital, the concept may be right for you. The primary purpose of
LPs is to limit investor liability to the amount of their investment. But LPs allow the "pass
through" of all the property's tax benefits to the investors, and also unlike corporations, their
profits are only taxed once. They allow centralization of management, through the general partner.
They allow sponsors/developers to maintain control of their projects while raising new equity.
Who makes decisions in a Limited Partnership? The terms of the partnership agreement,
governing the on-going relationship, are set jointly by the general and limited partner(s). Once the
partnership is established, the general partner makes all day to day operating decisions. Limited
partner(s) may only take drastic action if the general partner defaults on the terms of the partnership
agreement or is grossly negligent, events that can lead to removal of the general partner.
Who owns what? Ownership interests of the Limited Partnership are split between the
limited and general partners according to a negotiated formula. Limited partners can buy up to 99
percent ownership of profits/losses and cash flow (excluding fees to the general partner). The general
partner retains the 1 percent or more remaining ownership of profits, losses and cash flow (plus any
agreed upon fees).The limited and general partners split any profits from sale or refinance of
partnership assets. The split generally provides an incentive to the general partners who may receive
up to 50 percent of profits.
Partnerís Rights: The specific rights of each party are negotiated in the Partnership
Agreement. In general, the general partner has the right to make all the day-to-day and development
decisions, to determine how much cash to distribute to the limited partner(s) versus how much to hold
in reserve, and to assess possible sales proposals. The limited partnerís rights are to be informed
of operating conditions: to approve a sale or refinancing; and to remove the general partner for
gross negligence or breach of contract.
The General Partnerís Obligations. The general partner must complete the project as
proposed, must manage the partnership and the business as agreed upon in the partnership agreement
and must, generally, guarantee any additional funding needed to complete the project (repayable with
interest) In addition, the general partner oversees construction, leasing, property management
and maintains the books and records of the partnership. It must submit periodic reports to the limited
partners(s) on the projectís financial condition and status, including analyses o? the propertyís sale
potential. The general partner may not withdraw without the approval of the limited partner.
TRIPLE NET LEASED COMMERCIAL PROPERTY
Exchange Into Management-Free And Headache-Free Ownership
Are your real estate investments giving you a management headache? Are you tired of
tenant complaints and property destruction? As a real estate investor, are your goals security,
predictable partially tax-sheltered income with an inflation hedge, if so, then commercial triple-net
lease property is an excellent vehicle to create wealth through real estate.
This real estate investment product requires little or no management, has little risk,
and produces monthly income from lease payments. The lease agreement can also provide the opportunity
for rent increases as a hedge against inflation.
What Is A Triple-Net Lease Property? Over the past several years, owning commercial
property under a triple-net lease arrangement has emerged as a highly popular and effective strategy
in real estate investing. A triple-net lease property is an investment where one owns real estate
(land and building). Leases to a tenant for a 15-25 year term, who agrees to occupy the property,
operate their business on the premises, pay rent and all the property operating expenses (taxes,
maintenance, and insurance) with the opportunity for rent to increase over time as a hedge against
How Does This Differ From Owning Other Investment Property? Unlike owning duplexes,
apartments, land, or an office building, owning a commercial property under a triple-net lease
agreement to a business tenant is a passive investment (management and headache-free). In most real
estate investments such as mini-storage facilities, apartments, and office buildings you as the
property owner must perform property management duties, and pay operating expenses. You rent the
property, collect the rents, refurbish the premises, pay the property taxes, insurance premiums,
maintenance, accounting, legal, and other operating expenses. Whereas, under a triple-net lease
arrangement the tenant agrees to perform all these functions for you as the owner of the property
in return for a long-term lease agreement.
With a passive real estate investment, such as owning commercial property under a
triple-net lease arrangement, the tenant operates its business in the location. As the owner of the
property, you do not have to contend with monthly renters and operating expenses. This type of real
estate investment is passive, similar to owning stock in Sears, you receive the dividends or, in
this case, lease payments. Further, these types of commercial tenants are positive business renters.
Unlike apartment renters who tend to abuse the property and then move out leaving the owner to
refurbish and find new renters, commercial tenants have a vested business interest in seeing that
a location is well maintained and attractive to customers. As a result, there is an economic
incentive to enhance the owner's property over time.
Some Examples Of Commercial Triple-Net Leased Property If you drive through the business
district of any city or town you will see commercial triple-net lease properties: for example all
the major restaurants such as; Burger King, Taco Bell, Kentucky Fried Chicken, Pizza Hut, the
automotive after-market such as; Goodyear Tire, Pep Boys, Jiffy Lube, retail outlets such as; Toys R
Us, K-Mart, and Home Depot to name a few. Most of the real property occupied by these companies are
owned by real estate investors and leased to these companies under a triple-net lease arrangement.
What Are Some Advantages Of A Triple-Net Leased Property There are several advantages.
First, the monthly lease agreement provides a very predictable, long term income stream to the property
owner. Second, since there are no property expenses (taxes, maintenance, or insurance) to be deducted,
the income stream is not impacted by future increases in property operating expenses. The property
owner (investor) can enjoy a rental income stream, without property management or property expenses.
Subject to the credit worthiness of the tenant and the terms and conditions of the lease
agreement, the investor can enjoy a high degree of security and should expect to have additional
rental income over time as the inflation hedge feature of the lease agreement comes into play.
Can a Triple-Net Leased Property Be Used To Complete A Real Estate Exchange? A triple-net
leased property can be an excellent replacement property in completing a real estate exchange
transaction. Many real estate investors dispose of their management intensive properties such as
apartment buildings, duplexes, and office buildings, hoping to find management-free properties
producing long term, predictable income. If you are thinking of disposing of your business or
investment-held property, would like to "Pay No Capital Gains Tax" and reinvest into a
management and headache free property, the purchase of a triple-net leased property through a real
estate exchange, can be just what the doctor ordered.
PRIVATE MORTGAGE NOTES AND TRUST DEEDS
In this environment of low interest rates and uncertain returns, you can still find
opportunities to earn high yields and obtain large gains. The answer lies in understanding and
investing in alternative investments. These are investments that are not offered by the wire houses
or broker-dealers or mutual funds. In fact, these investments will seldom appear on the radar screen
of your financial planner or investment advisor. The alternative investments that I specialize in are
private mortgage notes. Carefully chosen, they can return 14-18% annually to the passive investor
with relatively little risk, making them ideal for any investor needing more income or a safe haven
from a possibly overvalued stock market.
If you're retired or saving for retirement, it's likely that your stock-laden portfolio
looks a little less invulnerable than it did a couple of years ago. It's possible, too, with interest
rates on bonds, money market funds and bank CDs at all time lows, that you're counting on a fixed
income that doesn't fully meet your needs.
"If only I could increase my monthly income without depleting my nest egg," you think,
"and without losing sleep over the stock market."
Well, there is a way to make this happen: by investing in trust deeds, or private mortgages
notes, or investment partnerships that specialize in investing in these debt instruments.
Private Mortgage Notes
Simply put, private mortgage notes, commonly referred to as trust deeds in the western
states, are short-term loans made to real estate investors secured by the value of the real property
as collateral for the loan. Investors who invest in private mortgage notes or trust deeds typically
earn a 12 to 18 per cent return, paid out monthly, with a minimum investment of just $5,000 and
relatively low risk. As a result, they are able to enhance their lifestyle significantly without
threat to their principal, or build a large nest egg, safely, in a relatively short period of time.
When you invest in a mortgage loan or note, you are in essence buying a mortgage secured
by real estate. You receive fixed monthly payments from the borrower based on the terms of a promissory
You can invest in trust deeds on your own, lending your money directly to a borrower. But
it wouldn't be advisable unless you have the time and expertise to evaluate property and to screen
out borrowers, and know your way around the legal maze of real estate transactions. Or, you can invest
in trust deeds through companies that specialize in this type of investment.
By far the biggest attraction of investing in private mortgage notes is their high yield.
Borrowers, often real estate investors, are willing to pay interest rates of 12 percent and higher
because they need a quick short-term loan to purchase or refinance a property without the hassles and
red tape they may run into at a bank.
Or sometimes borrowers may not qualify for traditional financing at lower rates because
of minor credit problems or liens against the property. Or the property may be too small or located in
an area that makes conventional financing difficult.
Your protection against default is the property that secures the promissory note. That's
why it is so important to invest in trust deeds (notes) with a low "loan-to-value ratio."
In other words, the loan should be only for a certain percentage of the appraised value
of the property (and you must use a reliable and experienced appraiser). As a guideline, investors
should seek loan-to-value ratios no higher than 70 percent for single-family homes, 65 percent for
apartments and 65 percent for commercial and industrial developments.
One risk of private mortgage notes is lack of liquidity - you typically can't get your
hands on your principal until the loan is paid off. Trust deed loans often are for a year or two.
Another risk is the possibility of default and foreclosure. True, you are likely to
recover your money eventually and even make a profit from the sale of the foreclosed property. But in
the meantime you may go months without receiving any interest payments.
That said, trust deeds available through reputable and experienced firms offer an
attractive combination of risk and reward.
But what happens in a recession, particularly one in real estate?
If you believe property values are going down 10 percent, you are still protected by
having claim to property assessed at a higher value than the loan amount. Of course, if you believe
property values are going to go down 50 percent, then you are not protected.
Don H Konipol has a BS in Economics and an MBA in Finance from the University of Michigan and is a
licensed Texas Real Estate Broker and Mortgage Broker. Mr. Konipol is General Partner of the Managed
Mortgage Investment Fund LP, a private limited partnership that invests in short term, high yield
private mortgage notes. He can be reached at 832.577.8838 or by email at firstname.lastname@example.org.
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