The Creative Answer to the Challenges of Today’s Real Estate Market
In a market troubled by record short sales and foreclosures, home ownership, the first and foundational principle of the American Dream, is facing its greatest challenge in decades. People still want to own their own home, but those displaced by the tragedy of circumstances are virtually eliminated from that possibility for a minimum of 2 to 3 years, maybe longer, with a compromised credit history. This scenario has contributed to a glut of homes now on the market either for rent or sale (quick flips) by investors.
The current situation is less a failure of demand as it is a failure to find workable financing. With both interest rates and the prices of homes at historical lows and stabilizing, now is the time to start looking for a home before the market begins the inevitable ascent we see in all cycles. In times past, the real estate market faced a similar dilemma, and various effective solutions emerged. One method involved finding a match between willing buyers (occupiers) and willing investors along with agreeing to a formula for sharing future potential appreciation through mutual ownership. Over the years, the process has enabled literally thousands of people to become new homeowners or to continue in “the pride of ownership” without taking second mortgages or having to wait years to save for a down payment.
In 1984, Jeff Stone, President of Capital Equity Resource, LLC, was introduced to the strategy sharing appreciation through joint-venturing, and became a pioneer– completing over 500 investment transactions. Jeff is now focusing on the Arizona market, and combining his expertise with nationally recognized CPA, Ken Lindow, to assist clients with the improved concept – Equity Real Estate Venturing(SM).This collaboration of experience and vision has helped to progress the concept to the point of little financial or management risk to the investor, while concurrently increasing the service and tax benefits. With the assistance of a highly reputable Real Estate law firm, the newly created Beneficial Equity Agreement provides even greater protections to the Investor.
While an Equity Real Estate Venture(SM) may sound complicated, it really is not, and there are many benefits to be derived for each participant.
What is an Equity Real Estate Venture(SM)?
Equity Venturing is simply the sharing of equity in real property by two or more parties for a mutually agreed period of time. We believe this will become one of the most popular ways that Real Estate will be transacted over the next decade.
It matches a qualified homebuyer (occupier) with an Investor whose contribution depends on the needs of each party, and negotiated in the agreement. In the current market, the Investor’s contribution most often involves qualifying for the financing on the property, but may also include putting up a portion of the down payment. Private Funds or a Self-Directed IRA/Solo-401(k) can be used (or) the investor can be the seller of a property with existing equity (no out of pocket cash). Ideally, the retirement vehicle will be established as a ROTH for tax free distributions, among other advantages.
The Owner (Occupier) resides in the property and is responsible for the monthly mortgage payment.
In return, the investor retains an ownership position in the property – thus securing the investment.
Many people are invested in certificates of deposits – and unhappy, earning miserable returns. The Investor’s capital contribution in an Equity Real Estate Venture(SM) can be compared to buying a CD, however a far greater Cash Flow return may be structured based on the terms of the agreement between parties, than can be provided by a bank. Additionally, the Investor immediately obtains a solid equity position at the front of the transaction. Two other components you will not find from a CD include the potential investment return from property appreciation, as well as tax deduction benefits. Finally, unlike a long term CD, Private Real Estate has historically offered greater inflation protections, and the ability to “leverage” the investment to increase the return.
Since there are multiple parties involved, a formal Beneficial Equity Agreement defining the terms and conditions agreed to by the parties should always be in place. There are many, many creative ways to structure these agreements to be mutually beneficial yet meeting the individual needs for each party – a “true” venture. A qualified CPA consults with both parties on each transaction.
Capital Equity Resource, LLC’s role is that of an intermediary that provides the Beneficial Equity Agreement.
During the agreement period, the homebuyer(occupier) lives in and enjoys all the comforts of home ownership and pays the normal expenses including principle, interest, taxes, insurance, maintenance, and upkeep. They also benefit from tax deductions based on the loan interest and property taxes they pay. Importantly, they begin the required time period for the tax free Capital Gains Exclusion – one of the greatest tax benefits available and fundamentally essential to creating wealth.
When the agreement matures, the homebuyer(occupier) has enjoyed the “pride of ownership”, the tax benefits as mentioned, and assuming the home has appreciated sufficiently, may have accumulated a “nest egg” that could allow them to purchase the home on their own at a pre-determined price.
The homebuyer then has the option to either 1) refinance, buy out the investor’s interest and remain in the home indefinitely as sole owner or 2) the parties can decide to sell the home on the open market, pay off all encumbrances, and each reimbursed according to their respective ownership position and cash outlay; and if properly structured, this may be tax free!
This program offers buyers in need of assistance a “stepping-stone” that can help get them off the rental rolls and achieve the American Dream of home ownership.
Being mutually beneficial, the Investor has assisted someone responsible and worthy of home ownership; and at the same time made a potentially good real estate investment – that may also offer tax advantages, cash flow, plus participation in future appreciation, all depending on how the transaction is structured. The flexibility to create the “Venture” based on the needs and goals of each party is what makes the strategy so appealing.
In addition, it is important to many investors to avoid the costs or management hassles associated with owning rental property. Upon the term of the agreement, they may also take advantage of depreciation benefits and defer capital gains taxes via the Internal Revenue Code 1031 exchange, or, even better, take the proceeds into a Roth IRA/Solo-401(k). Capital Equity Resource, LLC, specializes in assisting our clients to structure investments in the most tax advantaged way possible.
With an Equity Real Estate Venture(SM), the resident co-owner has all the financial responsibility. They pay all the taxes, insurance, utilities, maintenance and upkeep.
What is it worth to an Investor of rental property to not receive any phone calls from a resident because something had to be fixed or replaced, or having a tenant that is irresponsible or destructive of property they do not own? As they say, “Time is money!” And for those rental property owners that are exasperated from that experience but still looking for attractive returns – this can be the answer.