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.
Video: Real Estate Right Now | Hotel Metrics
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 this episode we dive into the 5 major KPIs to consider when investing in the hospitality industry.
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There are five major KPIs, or key performance indicators, that investors in the hospitality industry use to evaluate and compare potential hotel investments:
- The Occupancy Rate (OCC)
This measures the percentage of hotel rooms occupied by guests at any given time. The OCC is calculated by dividing the hotel’s occupied rooms by the total number of rooms available. A hotel with a low OCC will need to look for ways to increase room availability in order to remain viable.
- The Average Daily Rate (ADR)
The ADR represents the average price guests pay for a room. It’s an important metric because it reveals the price point that guests are willing to pay for a stay at the hotel. The higher the ADR, the better. A growing ADR tells the investor that a hotel is increasing the money it’s making from renting out rooms. To calculate the ADR, the investor takes the total (dollar) amount in room revenue and divides it by the number of occupied rooms
- Revenue Per Available Room (RevPAR)
The RevPAR is calculated by dividing a hotel’s total room revenue in a given period by the total number of rooms available in that period. The RevPAR reflects a property’s ability to fill its available rooms and measures how much revenue each rentable room in the hotel generates. A hotel’s RevPAR is particularly useful because it takes into account both the occupancy rate and ADR.
- Gross Operating Profit Per Available Room (GOPPAR)
To get a good picture of a hotel’s overall financial performance, an investor might want to look at its GOPPAR. The GOPPAR calculates the revenue from all hotel departments and amenities, then subtracts operating expenses, and divides that by the total number of rentable rooms. GOPPAR is a broad metric; it takes into account all of the property’s revenues – including room revenues and ancillary services, like on-site restaurants or stores.
- Market Penetration Index (MPI)
Finally, an investor will want to look at a hotel’s MPI to see how it fairs compared to others in the market. The Market Penetration Index measures a hotel’s occupancy against the average occupancy of its competitors. It helps the investor understand how well a hotel is doing relative to its competitors in a given market. An MPI is calculated by multiplying a hotel’s OCC by its number of available rooms. That number is then divided by the product of the average market occupancy rate and the available rooms in the market.
Remember that no single KPI will reveal the full story about a hotel’s potential. The KPIs are tools that are meant to work together to inform an investor about a hotel’s strengths, weaknesses and commercial possibilities.
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.
Video: Real Estate Right Now | Passive vs. Non-Passive Income
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. This episode discusses the difference between passive and non-passive income, and why it matters.
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When it comes to a real estate investment, the income generated can be defined as either passive or non-passive.
Passive income refers to income earned from any business activity where the investor does not materially participate in its creation. When a real estate investor invests in a real estate property, but has no substantial, hands-on, active participation in generating its income, that income is defined as ‘passive.’ Passive income comes from money that was invested in a property and was left to generate revenue; the earnings are regarded similarly to earnings from interest, dividends, royalties and bonds, though the tax rates differ.
On the flip side, when an investor materially participates in the day-to-day activities of managing a property – for example, collecting rents, managing tenants, advertising and maintenance – the income he generates is defined as ‘non-passive.’ Some other examples of non-passive income include wages, earnings from active stock trading and earnings from business activity.
Why is the difference between passive and non-passive income relevant?
Because the way your income is categorized impacts how it will be taxed.
Generally, the IRS does not allow a taxpayer to offset passive losses against non-passive income. Passive activity loss rules preclude a real estate owner from deducting losses generated from passive income (i.e. rental income) from non-passive income (i.e. business income).
However, when it comes to taxes, there are always some exceptions to the rule.
If a taxpayer qualifies as a real estate professional, as defined by IRC Sec. 469, the passive activity loss rules do not apply. The investor, or ‘real estate professional,’ can use the losses from real estate activities (like rentals) to offset ordinary and non-passive income.
In another caveat, if a taxpayer owns a piece of real estate and uses it for his own business (i.e. it is “owner occupied”), then real estate loss (passive) can offset the business’ ordinary income (non-passive).
The takeaway? It is essential for a real estate owner to correctly define his income as passive or non-passive in order to enjoy the greatest ROI.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it 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.
Video: Real Estate Right Now | Donating Appreciated Property
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. This episode discusses a tax-friendly way to maximize your charitable donations – by donating appreciated property.
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Donating appreciated property to a charitable organization that you care about is not only a do-good, feel-good undertaking; it also offers valuable tax benefits. When you sell a real estate property and donate the proceeds, your earnings are subject to capital gains tax. If instead, you donate that same property, you are free from capital gains taxes and the charity gets a higher-value donation. It’s a win-win.
A second benefit is realized when a real estate owner donates appreciated property held longer than one year. Appreciated long-term assets – such as stocks, bonds, mutual funds, or other personal assets like real estate that have appreciated in value – qualifies the donor for a federal income tax charitable deduction. Generally, this deduction is for the full fair market value of the property (or up to 30% of the donor’s adjusted gross income). If the property is held for less than a year, an owner can still benefit by deducting the basis of the property. Since the calculation is based on fair market value, it is highly recommended to get a qualified appraisal on the property so that the donor can substantiate its value if challenged.
What happens if the property is mortgaged? That debt is taken into account when calculating the deduction. The donation of the property is divided into two parts. The portion of the fair market value representing the mortgage is treated as a sale, and the equity portion is treated as a donation. The adjusted basis of the property will be prorated between the portion that is ‘sold’ and the portion that is ‘donated.’ The calculations are often complex, so don’t try this at home! Consult with an experienced tax advisor when donating a mortgaged property for the most accurate computation of your tax benefits.
The double benefits of donating appreciated property – a fair market value deduction and avoidance of the capital gains tax – makes donating to causes you care about both a generous and tax-efficient way to support a charity.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it 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.
Video: Real Estate Right Now | Syndication (Part 1)
Roth&Co’s latest video series: Real Estate Right Now.
Presented by Alan Botwinick and Ben Spielman, co-chairs of the Roth&Co real estate department, this series covers the latest real estate trends and opportunities and how you can make the most of them. Part one of our mini-series on syndication focuses on the use of a clause called a ‘waterfall provision.’
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A real estate syndicate is formed when an individual, partnership or organization pools together outside capital and invests in real estate. The syndicator will do all the groundwork on behalf of the investors, or “partners”, and will research, locate, purchase and eventually manage the investment property. Although the syndicator puts in sweat equity, it doesn’t invest any of its own capital.
There are several ways that a syndicator can share in the investment’s profits, and the role that each player assumes in the real estate transaction will determine its share. Those roles are explained in the “waterfall provision” found in their partnership agreement.
A ‘waterfall,’ also known as a waterfall ‘model’ or ‘structure,’ is a legal term that appears in a partnership’s operating agreement that describes how and to whom distributions are made. The property’s profits from operations, or from a “capital event” (i.e. refinance or sale), are allocated to the investors based on the terms of the waterfall provision. In the example in our video, the investors agree to contribute $2 million towards the property’s purchase. They make it a 70%/30% split and decide on an 8% “preferred return” on their $2 million capital investment.
Here’s how it will play out: The syndicator keeps an accounting of the property’s cash flow over the course of their ownership and will wait until the investors have been satisfied as specified in the waterfall agreement. In our example, the agreement ensures that the investors earn 8% of their capital investment – that would be $160,000, or 8% in preferred returns – and recoup their original $2 million investment. The syndicator will benefit from the profits of the operation, or its sale or refinance, only after the investors have recouped $2,160,000, (the amount of their capital investment and preferred returns). When the terms are satisfied, the syndicator will earn its 30% share of any residual profits, and the remaining 70% will be shared among the investors. It’s a win-win.
When distributions are made based on the profits of a property’s operations, it results in steady payments over the life of the property. However, it’s very common, and often very profitable, for an ‘event’ to accelerate the waterfall process. If the property is sold or refinanced, profits are actualized quickly and monies are released for distribution quickly. In either case, real estate investment by syndication offers an investment model that can benefit investors at many levels and presents profitable opportunities for syndicators and non-real estate professionals alike.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it 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.