Top 5 strategies we use to protect your assets!

Top 5 Strategies Shalwin Properties Uses to Reduce the Risk on your investment

Did you know that hard assets are typically less risky investments than paper ones? They are tangible or physical items that an individual can own.

Real estate is a hard asset, as opposed to stocks which are paper assets.

As I became more financially educated, I have realized that not losing money and protecting the downside is more important to my financial growth than unpredictable upside. This is one of the many reasons that I’ve gravitated towards real estate and have shifted the majority of my portfolio to hard assets.

Hard assets are NOT risk free, neither is real estate. That’s why it’s important to consider what risk mitigation strategies the sponsorship team is using to protect your investment.

When investing with a sponsorship team, it’s important to know that sponsors can and will implement risk mitigation strategies, which can dramatically reduce the already reduced risk associated with real estate investing.

Risk Mitigation…

What does that mean when we’re talking apartment investing?

Here are Top 5 strategies that Shalwin Properties uses to mitigate risk on our investments.

♔ Interest rate cap purchase: this acts like an insurance policy for interest rate variability on floating rate debt in a rising interest rate environment.

♔ Interest Reserves: this is where the sponsorship team holds funds from investments and reserves it for interest rate fluctuations to cover the monthly debt service or unexpected capital needs. If the reserve is not utilized, it will be distributed back to investors.

♔ Market selection: we choose growing markets with population in migration and increasing, diverse job opportunities

♔ Conservative underwriting: you probably hear this one a lot, but what does it mean? That’s when the various data reports are predicting rent growth or occupancy numbers, we don’t use those numbers in our predictive financial models, we use lower numbers

♔ Insurance (property and business interruption): if a catastrophe occurs (ie fire, hurricane, hail storm), not only is the physical property damage covered and any displaced tenants taken care of, but also the business loss from of income is also reimbursed by the insurance company.

Your money is safest when it’s invested in real estate

It’s not safe in your savings account…

It’s not safe in your retirement account…

It’s not safe in your stock account…

It’s not safe in cryptocurrency….

but it is SAFE in apartments.

We MAKE SURE it is SAFE!

3 Lessons I learned from a BILLIONAIRE

Last week was a transformational week for Ben and I . We slept in tents, disconnected from emails, social media, and life. We climbed to scary heights, cat walked across 30 feet high logs, climbed a 45 ft tower, and ice plunged in bone-chilling weather. We stepped out of our comfort zones, pushed our physical and mental limits and learned to get comfortable with being uncomfortable .

As Tony Robbins says, “All growth starts at the end of your comfort zone”

During that time, we had the privilege of getting to know entrepreneur, author, and Billionaire Jesse Itzler.

I can honestly say that he is one of the most amazing human beings I’ve ever met, so generous with his time and his wisdom. He’s surprisingly very down to earth too! I never in a million years thought a billionaire would spray essential oil and throw more logs on the fire in my sauna to make it a more incredible experience for me.

He spent many hours of his limited time with us, sharing his perspective on life and relationships and teaching us how to solve the Rubik’s cube of life and mastering his techniques for success.

“Life is like a Rubik’s cube, once you learn the technique, the flood gates open”

The foundation of his success is about leading an intentional life and developing and deepening relationships. Part of that is creating winning habits, winning routines, and a winning mindset.

Mindset is so important in our success. Success is 80% mindset and 20% skill.

We all have to believe in the end of our story. We can decide what to believe.

I choose to believe in gratitude and hope.

I’m forever grateful for the blessings I have. I am thankful for my family and my relationships.

The Ultimate Secret to Explosive Wealth Building

You’re probably not surprised that I strongly believe that real estate is a great place to put your money. The convergence of the tax benefits, appreciation, capital preservation, and cash flow creates a very powerful strategy for wealth creation.

As an investor, your next step is to decide if you want to invest actively or passively.

It doesn’t have to be black or white. Why not do both? I know I do.

There are benefits to doing both active AND passive real estate investing.

Personally, I believe that passive real estate investing utilizes the most powerful tool of all for wealth building.

What is such a powerful tool for building wealth? One word….LEVERAGE

Leverage allows you to grow explosively, instead of linearly.

When you invest passively in real estate you are leveraging other people’s time, other people’s money, and other people’s expertise.

Other People’s Time

You’re busy. You’re busy with your family, your job, your side gigs, your life. Why make your most precious resource a limit to your wealth building?

Don’t have time to learn the business model of apartment investing? Don’t have time to hire maintenance personnel? Don’t have time to take tenants to eviction court? Don’t have time to explore a new market or underwrite a new property?

Why not work with people who do have the time? Leverage those people’s time. Remember, there are only 24 hours in the day. There are people already dedicating their time to these activities. Why not use their time to make your money grow for you?

Other People’s Money:

With passive real estate investing, you’re not relying just on yourself or your available funds to purchase a property. You can combine other people’s funds with your own to purchase a large property. Another component of leveraging other people’s money is using the bank’s money…using debt to purchase property.

Other People’s Expertise

It takes time and resources to become an expert in anything. But if you can rely on someone else’s expertise, then why do you have to spend the time or the funds to become the expert? It takes 12-16 years and hundreds of thousands of dollars to become a physician specialist. When we need specialized medical expertise, we leverage other people’s expertise. The same concept is applied in passive real estate investing.

Do you know that my passive real estate investments helped me leave my job in the ER?

BONUS Depreciation, why you should care!

Over the last several weeks, I’ve spent time educating you on the tax benefits of apartment investing. We’ve spent time understanding depreciation, what a cost segregation study is, and how apartment investing gives you more tax benefits than other asset classes.

There is one more term you need to know! BONUS DEPRECIATION.

This is an accelerated form of depreciation that allows for you take advantage of 100% of the depreciation in the first year of ownership. This is a HUGE benefit!

The Tax Cuts and Jobs Act, enacted at the end of 2018, increased first-year bonus depreciation to 100%. It went into effect for any long-term assets placed in service after September 27, 2017.

The 100% bonus depreciation amount remains in effect from September 27, 2017 until January 1, 2023.

After that, first-year bonus depreciation goes down as follows:

80% for property placed in service after December 31, 2022 and before January 1, 2024.
60% for property placed in service after December 31, 2023 and before January 1, 2025.
40% for property placed in service after December 31, 2024 and before January 1, 2026.
20% for property placed in service after December 31, 2025 and before January 1, 2027.

This year is the last year that you can get 100% bonus depreciation in your first year of ownership.

This doesn’t mean that tax benefits associated with real estate are going away. You will still be able to take depreciation, it just won’t be upfront in that first year of ownership, it will be spread over the next several years.

Many people utilize tax loss harvesting as a strategy to reduce yearly taxes. For those investors that are interested in harvesting your tax losses, you should invest asap!

Cost Segre-WHAT???

Recently, I talked about DEPRECIATION.

Today, I’ll cover why there is more depreciation with apartments than other asset classes, and how we determine the depreciation amount.

Two words: Cost Segregation

A cost segregation study is a detailed study of the cost components of the apartment building that looks at each element of a property, splits them into different categories, and allows you to benefit from an accelerated depreciation timeline for some of those building components.

This type of study is conducted by a specialized firm, usually a team of tax advisors and engineers, working together to decide which components of a building should go into each category, and how much each element costs on its own.

So why do apartments give you more depreciation?

Let’s compare a self-storage building versus an apartment building.

The self-storage building has very basic components, metal frame, roof, and a possible air conditioning unit.

Now let’s think about the apartment complex components. In a 200 unit apartment building, we have 200 bathtubs, 200 plumbing fixtures, 200 kitchen cabinets, 200 carpets/floor, and so on and so forth.

There are a lot more components which essentially equates to more depreciation!!

Ok, we’ve established we need depreciation to take advantage of the tax benefits, AND we get more depreciation with a cost segregation study.

We’ve also discussed why apartment investing translates into more depreciation than other commercial asset classes.

Next time, I’ll cover BONUS DEPRECIATION and why you should care about it!

Is it time to put our head in the sand and wait?

In the last few months, mortgage rates have gone up like crazy. They went up a fourth time last week. Unprecedented. This is the biggest change in interest rates in years! And it only happened over 7 months!

In most of our properties, this has resulted in our debt payment DOUBLING. We care about interest rates, because when we put together a capital stack, a big chunk of the capital is the loan. The debt service on that is determined by the interest rate, which is very important to your bottom line and cash flow.

What’s unprecedented about these hikes is that it happened fast, happened multiple times, and the market hasn’t had time to adjust to it, resulting in minimal and even negative cashflows.

This is a sledge hammer that the federal reserve is taking to what they perceive to be “red hot, out of control inflation”.

No one has a crystal ball. It would have been impossible for anyone to predict this scenario. Despite multiple “what if” scenarios that we play out when we are underwriting a deal, we couldn’t have predicted all the factors affecting today’s economy such as: the credit markets, the federal reserve, inflation, energy costs going up, and supply chain disruptions.

The good news is that real estate is cyclical. We are currently in a down cycle.There are less sellers, less buyers, and the debt market is unstable because lenders are hesitant to lend!

So, is it time to sell and get out? Is it time to put our head in the sand and wait?

The cycle is neither bad nor good…it just is. For current real estate portfolios it requires pivots in strategy and requires the courage to keep going! No, you shouldn’t sit this one out.

The truth is that a recession brings HUGE opportunities for those who can overcome their fear and prepare to take action!

Cap rates are expanding and real estate is at a discount. Debt is expensive but real estate prices are coming down! I’m seeing prices go down by several millions!

As long as the deal makes sense financially, you can bake in the interest rates.

Remember, interest rates go up and they go down. They won’t stay up forever, they will come down.

We just need to make sure we are able to play a longer game and ride it out.