Video: Real Estate Right Now | Student Housing
Real Estate Right Now is a video series covering the latest real estate trends and opportunities and how you can make the most of them. In the episode below, we cover the main advantages of investing in student rental properties.
Student housing properties have earned a significant niche in the commercial real estate market, and while they may evoke a natural reluctance on the part of the investor, they actually offer several unique investment advantages.
Investing in student housing properties often carries less risk than investing in traditional multi-family properties. The need for student housing is on the rise, with a projected 46 million people falling into the college age-range by 2031. In response, off-campus rentals have been attracting capital from savvy investors.
Universities and colleges are historically unaffected by recession or economic flux. Education is always a commodity in demand. By association, student housing properties are also less susceptible to economic downswings. College enrollment runs in continuous cycles, so new housing is needed every semester. This means that demand for this type of property remains stable and cash flows are predictable, albeit the downside of constant turnover.
Because student spaces are usually shared by multiple renters, student housing offers the investor higher returns. It also offers opportunities to generate ancillary income by supplying amenities like parking, bike storage or a gym.
In terms of risk, student rentals have lower default rates than most multi-family units because parents are often the ones to cosign on their kids’ rentals.
Student housing is considered residential, and therefore qualifies for a 27.5-year depreciation schedule, as opposed to industrial and retail real estate, which has a 39-year depreciation schedule. This means there are more deductions to shelter the property income.
Of course there are some disadvantages to consider when you’re thinking of investing in a student rental property. These include lower cash flow in summer months and the high potential for damages. Investors in student housing must also be equipped to deal with an inexperienced renter population and should be prepared to communicate with renters’ parents, who are often involved in the rental process.
To identify lucrative investment opportunities in the student housing market, the investor should stay informed about which universities are growing in enrollment. Higher enrollment means the demand for off-campus housing will increase. A property’s location is an essential factor in assessing the property’s success. Student housing located near a main campus will attract renters more easily than one further away and can demand higher rents. Amenities are important to the student population, with Wi-Fi, gyms, and communal spaces acting as a heavy draw. Lastly, look out for college towns with a stable economy, or an economy that’s on the rise. Colleges and universities in growing towns will look to expand and attract more students – and those students will need housing.
Diversifying your investments to include student housing properties can insulate your investment portfolio from risk and may offer a profitable option for optimizing its value. Speak to your investment advisors to learn more about this promising investment.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Perform an Operational Review to See How Well Your Real Estate Business Is Running
In the wide, wide world of mergers and acquisitions (M&A), most business buyers conduct thorough due diligence before closing their deals. This usually involves carefully investigating the target company’s financial, legal, and operational positions.
As a business owner, you can perform these same types of reviews of your own company to discover critical insights.
Now you can take a deep dive into your financial or legal standing if you think something is amiss. But assuming all’s well, the start of a new year is a good time to perform an operational review.
Why Perform an Operation Review?
An operational review is essentially a reality check into whether – from the standpoint of day-to-day operations – your company is running smoothly and fully capable of accomplishing its strategic objectives.
For example, a real estate business relies on recurring revenue from established clients as well as new revenues, in order to survive and grow. It needs to continuously ensure that it has the knowledge, talent and resources to acquire, buy or lease properties to develop or resell. The point is, you don’t want to fall behind the times, which can happen all too easily in today’s environment of disruptors and rapid market changes.
Before getting into specifics, gather your leadership team and ask yourselves some big-picture questions:
- Is your company falling short of its financial goals?
An operational review can spotlight both lapses and opportunities for increased profit and can offer recommendations to improve management performance.
- Are day-to-day operations working efficiently?
Implementing system controls like automated financial tracking systems and data analytic tools can help real estate companies streamline their operations and improve efficiency.
- Is your company organized optimally to safeguard its financial records and reports?
Protecting financial information is especially important in the real estate industry where most transactions involve large sums of money.
- Are your company’s assets sufficiently protected?
Implementing system controls to protect your business and its properties can prevent unauthorized access; making regular inspections will identify any issues or damage.
What to look at
When business buyers perform operational due diligence, they tend to evaluate at least 3 primary areas of a target company:
- Operations: Buyers will scrutinize a company’s structure and legal standing, contracts and agreements, sales and purchases, data privacy and security and more. Their goal is to spot performance gaps, identify cost-cutting opportunities and determine ways to improve the bottom line.
- Selling, general & administrative (SG&A): This is a financial term that summarizes a company’s sales-related and administrative expenses. An SG&A analysis is a way for business buyers — or you, the business owner — to assess whether the company’s operational expenses are too high or too low.
- Human resources (HR): Buyers typically review a target business’s organizational charts, staffing levels, compensation and benefits, and employee bonus or incentive plans. Their goal is to determine the reasonability and sustainability of each of these factors.
A Funny Question to Ask Yourself
Would you buy your real estate company if you didn’t already own it? It may seem like a funny question, but an operational review can tell you, objectively, just how efficiently and impressively your business is running. Roth&Co is happy to help you gather and analyze the pertinent information involved.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Buffet Wisdom
Within this flurry are what we call ‘bellwether’ companies, whose earnings reports carry significant weight in gauging the overall economic health. Want to gauge consumer spending? Keep an eye on iPhone sales and airline bookings. Curious about food prices? Look into the restaurant chains and food suppliers. You get the drift. However, amidst the hustle and bustle of earnings season, a few events hold sway far beyond the immediate financial realm. Among them are the much-anticipated letters and shareholder meetings hosted by Warren Buffett.
This year, Buffett’s letter began with a heartfelt tribute to his longtime friend and business partner, Charlie Munger, who recently passed away just short of his 100th birthday. Following this poignant start, Buffett delved into insights about Berkshire Hathaway, along with nuggets of wisdom about business and investing:
“One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed – not by everyone, but always by someone.”
True success in investing lies in maintaining a steady hand through the inevitable ebbs and flows of the market. But, there’s a catch. Media outlets thrive on sensationalism. When things are tranquil, people tend to switch off, so it’s in the best media’s interest to stir up drama to recapture attention. Wall Street – as Buffet explains – yearns for action.
We can’t stress enough the importance of being aware of the biases inherent in the sources we so often rely on. Are they tied to defense contracts, hyping up tensions in Ukraine? Are they predicting market volatility while pushing investment newsletters? Or are they perhaps peddling doomsday scenarios about nuclear conflict while selling long-shelf-life emergency rations?
There will always be a cacophony of distractions. It’s those who can tune it out who will reap the benefits in the long run.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Webinar Recap | The IRS Strikes Back
Roth&Co hosted a webinar on February 28, 2024, featuring Tax Controversy Manager Ahron Golding, Esq. The webinar discussed the recent approach that the IRS has been taking towards the Employee Retention Credit (ERC), scrutinizing ERC claims for abuse and fraud. Audits and criminal investigations on promoters and businesses filing questionable claims are intensifying, with thousands of audits already in the pipeline.
What is the IRS looking for? Here is what the IRS refers to as the ‘suspicious seven:’
- Too many quarters being claimed
Some promoters have urged employers to claim the ERC for all 7 quarters that the credit was available. Since the IRS believes that it is rare for a business to legitimately qualify for all quarters, making a claim for all of them is a red flag.
- Government orders that don’t qualify
In order for a business to qualify for the ERC due to a government order that compromised their operations:
- the order must have been in effect for the periods claimed
- the order must have been directed towards the business rather than towards the customer
- the full or partial shutdown must have been by order and not simply via guidance or recommendation
- the IRS is looking for the negative financial impact on the business
Claiming that an entire segment of a business was shut down, though that segment was not significant compared to the entire business, will cause a claim to be disallowed.
- Too many employees and wrong ERC calculations
The laws are complex, and have changed throughout 2020 and 2021. Dollar limits, credit amounts, and the definition of qualified wages changed as well. Make sure your calculations are accurate.
- Supply chain issues
The IRS is not looking kindly at claims based on general supply chain disruption.
- Business claiming the ERC for too much of a tax period
If eligibility is based on full or partial suspension, then a business can only claim the ERC for wages paid during the period of actual suspension, not necessarily the whole quarter.
- Business did not pay wages or did not exist during the eligibility period
If the business did not exist or pay any wages during the period of the claim, the claim will be disallowed by the IRS and prosecuted for fraud.
- Promoter says there’s nothing to lose
Promoters that urged businesses to claim the ERC because they had “nothing to lose” were mistaken. Incorrectly claiming the ERC invites repayment requirements, penalties, interest, audits, and the expense of hiring someone to help resolve the error, amend returns, and represent the business in an audit.
The IRS has a comprehensive ERC eligibility checklist here.
Many businesses have neglected to take into account the issue of aggregation as it applies to the ERC credit. This can potentially effect employee count, revenue, and other crucial calculations.
Overall, the IRS is not too pleased with ERC promoters. IRS auditors have been trained to start an audit by asking who the taxpayer used to help prepare their claim. The IRS expects a taxpayer to utilize a trusted tax professional, rather than a dubious ‘ERC mill’.
What if the employer has an opinion letter to back up his claim? Generally, opinion letters are only as valuable as the backup data they provide. If a claim can be justified by hard numbers, it will help the employer if challenged.
If a business determines that it incorrectly claimed the Employee Retention Credit, it can use the ERC claim withdrawal process outlined here, so long as the business has not yet received the credit or hasn’t deposited an ERC check. Requesting a withdrawal means a business is asking the IRS not to process their entire adjusted return that included the ERC claim. If the IRS accepts the request, the claim will be treated as if it was never filed.
If a business incorrectly received the ERC before December 21, 2023, and deposited the check, they can apply for the ERC Voluntary Disclosure Program before March 22nd, 2024. This program allows participants to repay only 80% of the ERC they received as a credit on their return or as a refund. Click here for more details.
If your business received an opinion letter regarding ERC eligibility that you would like us to review, please email engage@rothcocpa.com.
This summary has been presented for educational purposes only and does not constitute a comprehensive study of the ERC tax laws or serve as a legal opinion or tax advice.
Mergers and Acquisitions: Using the Due Diligence Process
A well-timed merger or an opportune acquisition can help your business grow, but it can also expose you and your business to risk. Buyers must consider the strengths and weaknesses of their intended partners or acquisition targets before entering into any new transactions.
When entering into any new buy/sell agreement, a robust due diligence process is imperative in order to avoid the risk of costly errors and financial losses. Due diligence means much more than just assessing the reasonableness of the sales price. It involves examining a company’s numbers, comparing the numbers over time, and benchmarking them against competitors. Proper due diligence can help verify the seller’s disclosures, confirm the target’s strategic fit, and ensure compliance with legal and regulatory frameworks.
What are the phases of the due diligence process, and how can they help in the decision-making process?
- Defining Your Objectives
Before the due diligence process begins, it’s important to establish clear objectives. The work done during this phase should include a preliminary assessment of the target’s market position and financial statements, and the expected benefits of the transaction.
The process should also identify the inherent risks of the transaction and document how due diligence efforts will verify, measure and mitigate the buyer’s potential exposure to these risks.
- Conducting Due Diligence
The primary focus during this step is evaluating the potential purchase’s financial statements, tax returns, legal documents and financing structure.
- Look for red flags that may reveal liabilities and off-balance-sheet items. The overall quality of the company’s earnings should be scrutinized.
- Budgets and forecasts should be analyzed, especially if prepared specifically for the M&A transaction.
- Interviews with key personnel will help a prospective buyer fully understand the company’s operations, culture and its practical value.
AI – A Valuable Resource
With its ability to analyze vast quantities of customer data rapidly and proficiently, artificial intelligence (AI) is transforming how companies conduct due diligence. Using AI, the potential buyer can identify critical trends and risks in large data sets, especially those that may be related to regulatory compliance or fraud.
- Structuring the deal
The goal of the due diligence review is to piece together all of the information reviewed into one coherent picture. When the parties meet to craft the provisions of the proposed transaction, the information gathered during due diligence will help them develop their agreement. For example, if excessive customer turnover, shrinking profits or a high balance of bad debts are revealed during the due diligence process, the potential buyer may negotiate for a lower offer price or an earnout provision. Likewise, if cultural problems are discovered, such as disproportionate employee turnover or a lack of strong company core values, the potential buyer may decide to revise some of the terms of the agreement, or even abandon the deal completely.
Hazards of the Due Diligence Process
Typical challenges in executing a successful due diligence process include:
- Asking the wrong questions, or not knowing what to ask
- Poor Timing – presentation or execution of documents may be delayed or unavailable
- Lack of communication between potential buyers and sellers or their representatives
- Cost – due diligence can be expensive, running into months and utilizing extensive specialist hours
We can help
Comprehensive financial due diligence boosts the quality of information available to decision-makers and acts as a foundation for a successful M&A transaction. If you’re thinking about merging with a competitor or buying another company, contact Roth&Co to help you gather the information needed to minimize the risks and maximize the benefits of a transaction that will serve the best interests of all parties involved.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
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