Helen Brown Group

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Real Estate, 1031 Exchanges, and your nonprofit

This week our resident real estate expert, Josh Ostroski, shares some great background on a real estate trade called a 1031 Exchange. If someone wants to defer capital gains taxes on an investment property, a 1031 Exchange is a great way to do it, and it can mean opportunities for nonprofits, too. How? Read on! ~Helen

     Josh Ostroski

In my research (and in my previous work as a real estate agent) I’ve come across a particular real estate exchange a few times and wanted to share what I’ve learned and how it can be used for prospect research purposes.

What is a 1031 Exchange?

In a nutshell, a 1031 exchange is an IRS rule that allows real estate investors to defer capital gains taxes to some point in the future by swapping an investment property for another property of equal or higher value. For example, you could sell a single-family rental, apartment complex, etc. and purchase a similar or upgraded investment property and defer paying property gains tax. You are allowed to continue exchanging properties as many times as you want and for as long as you are alive.

Benefits of a 1031 Exchange

Deferring property gains tax allows the investor to have more buying power by having more money to put down on the next property. The investor could also sell their current property for one with a better return on investment.

The investor could diversify their portfolio by adding properties in a different market that may be hot, since there are no restrictions on where the new property is located. They could also improve their portfolio by either consolidating properties, or investing in multiple properties, which would create more potential for wealth. You could also increase your cash flow.

Rental properties are considered depreciating assets, and you can deduct a percentage of the cost of the rental property from your taxable income each year. If you exhaust the amount that can be depreciated, you could do a 1031 exchange, which would allow you to recapture your investment properties depreciation.

You can gift the investment properties to your heirs, and they won’t have to pay the accumulated capital gains. The heirs will inherit the properties in a step-up basis, meaning they will inherit the properties at the current fair-market price of the asset.

Downfalls of a 1031 Exchange

When you sell the property, you need to put the entire initial amount – including the downpayment on the property being sold – back into the new investment, so there is no liquidity event with a 1031 exchange.

When you sell the investment properties you will need to pay the capital gains realized on those investments, which could accumulate to large amount.

There are strict timelines: you have 45 days to identify a new property (or properties).

The process can be complicated and confusing, so some people may not want to deal with the rules and structure. It becomes even more complicated if there are multiple investors.

How it Relates to Prospect Research

A property owner could turn a vacation home that they don’t use into a rental property, then either exchange it for another rental or keep it and gift it to their children or a nonprofit.

If a prospect has investment properties, it could be advantageous for them to gift the properties, so they don’t have to pay the realized capital gains while also accomplishing their philanthropic goals. It can be akin to donating stock or crypto.

There are many factors that would affect if donating a property would make sense for your organization:

  • does your organization accept gifts of real estate?;
  • how much equity is in the property;
  • is the property marketable;
  • are there any additional associated costs with the property?

These are all things to consider.

To find the estimated value of the investment property, there are a couple of simple ways:

  • If it’s a commercial property, LoopNet is a good resource to find comparative values (“comps”).
  • If the prospect has single-family home that is used as a rental, you can see what the normal resale value of the home is by checking Zillow. In addition, Zillow will often list what the last asking rent price was on its listing for that property. If the rental price isn’t listed, I recommend doing a search on the property address to see if anything comes up for that property.

If a prospect has either a vacation home or what appears to be investment properties, let that be known in the profile you create and/or let the gift officer or planned giving officer know so they can talk about options with the prospect.

Here is a link to the IRS Fact Sheet about 1031’s. As always, if you have questions about the legalities of 1031’s seek out a tax attorney for information.

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Real Estate in the Age of Coronavirus

COVID-19 has impacted every single industry, usually for better or worse. But with real estate, the impact of the pandemic has been both better *and* worse, depending on the area of real estate you’re looking at. In today’s article, my colleague Josh Ostroski brings his deep knowledge of real estate to help us understand how our prospects who work in real estate (or who own well-placed properties) may be impacted now. ~Helen

There has been a lot of talk about real estate trends during the coronavirus pandemic. We have all heard about the urban exodus, housing prices increasing, and people working from home. I wanted to dig a little deeper to see if what we’re hearing is true or merely anecdotal and the reasons why.

The Urban Exodus

We have all heard that families are leaving cities to find more space in the suburbs. As the country was in lockdown, many people began to re-think what was important to them. With restaurants, bars closed, and shops closed, along with food delivery service expanding to more rural areas, there was less of need to be able to walk to amenities. However, according to a recent report by Zillow’s Economic Research team, they found that in most areas of the country “suburban housing markets have not strengthened at a disproportionately rapid pace compared to urban markets.”

There are some outliers, such as the Northeast, where new pending listings in urban zip codes re-accelerating more slowly than in the suburbs. “Some regions saw stronger evidence for a suburban-urban diverging trend than others. For example, in the New York City metro, home values in urban ZIP codes were decelerating in June relative to pre-COVID trends ( -0.2 pp) while suburban ZIP codes were accelerating (0.2 pp).

The same trend holds in Boston with urban home values down 0.5 percentage points and suburban homes values up 1.3 percentage points. However, this deceleration was already a trend (comparing February YoY to January YoY) in the Northeast Region overall, and the New York City metro.

Conversely, the Chicago metro area experienced the exact opposite trend with growth, decelerating in suburban areas while urban areas accelerated. And areas like Philadelphia and Miami saw accelerated growth in both regions, but more so in urban ZIP Codes.”

San Francisco is seeing a trend to becoming a buyers’ market, as inventory and days on market are up. According to Zillow’s report, “in San Francisco, list prices have fallen 4.9% year over year and inventory has risen 96% with a flood of new listings. Higher levels of inventory, up 96% year-over-year following a flood of new listings during the pandemic, are sitting on the market in the city proper, a significantly larger jump than the surrounding suburbs. In San Francisco, though, the softening is clear as sellers flood the market with their listings and buyers have not changed their pace to match.”

The markets where the largest share of renters in the center city would gain the power to buy if they looked outside city limits are San Francisco, Seattle, Washington, D.C., and Boston.

Check Out These Market Trends

Zillow: 12 mid-sized markets to watch

Realtor.com: Hottest Zip Codes

Insurify: Cities with the greatest pandemic real estate booms

Housing Price Increases

Normally in an economic crisis, housing prices drop. However, in this pandemic, prices in many locations have increased. Part of the reason is the drop in demand was matched with a drop in supply at the same time, protecting prices. Then when people began to look to move, the lack of supply has created a seller’s market, increasing prices.

Historically Low Interest Rates

Interest rates are still at an all-time low, so buying a home is more affordable. There has also been an increase in homeowners refinancing, putting themselves in a better economic situation.

Lender Standards

During the housing crisis of 2008, the use of subprime mortgages and lenient qualifications caused homeowners that were not really qualified to purchase homes out of their price range. When prices plummeted, they owed more than the house was worth (became “upside-down” or “under water” on their mortgages). Since then, the government and mortgage lenders have become much stricter in their lending qualifications. That means more homeowners are qualified now. According to CoreLogic, lenders have tightened credit requirements or increased payment requirements, making riskier loans less common. This helps to protect homeowners in a down market.

Home Wealth Gains

According to the Federal Reserve, housing wealth is a major component of total household wealth in the United States. According to the National Association of Realtors, “as of 2018, a homeowner who purchased a typical existing home five years ago (2013) gained $79,488 in wealth (equity), of which $64,200, or 81 percent was from the home price appreciation ($197,400 in 2013 to $261,600 in 2018).”

Home equity is at an all-time high in the U.S., which has not only helped weather the economic downturn, but has allowed homeowners to use that equity to their advantage by having flexibility to be able to sell their home for something that works better for them, like investing in another property (which can generate rental income), home renovation (which further increases the home value), a child’s college education, emergency or major life events, or expenses in retirement. National Association of Realtors has calculated equity reports on 181 metropolitan areas.

Default rates have also remained low during the pandemic. According to ATTOM Data Solutions, “Equity-Rich Properties Continue to Outnumber Those Seriously Under Water by Four-to-One Margin; Portion of U.S. Homes Considered Equity-Rich Ticks Up to 27.5 Percent; Seriously Under Water Properties Down to 6 Percent.”

Second Homes

Another trend that we are seeing is people are moving into their second home and using it as their primary residences. According to an article in the Colorado Sun, schools in Aspen, Vail, and Crested Butte reported record interest in enrollment as part-time resident relocated to their second homes. At the same time, the market has seen increased home sales in these resort towns as people are wanted to get away from cities.

This is also happening in New York City, which was one of the hardest hit cities by COVID-19, where people are moving into their upstate NY, Hamptons, and CT homes.

Real estate agents are also seeing an increase in people that live in cities, but are renters, buying second homes outside of the city.

As researchers, we should keep an eye on surrounding communities outside of cities that were historically vacation areas to see if there is an increase in sale prices. This could also trigger people to sell a home in a vacation area to take advantage of the increased demand.

Commercial Real Estate

One industry that is struggling is commercial real estate. As many businesses struggle to stay afloat, they have not been able to pay rent and commercial real estate companies are feeling the effects. Also, since many companies are having their employees work remotely, they are finding out they don’t need all the space they have and once their lease is up, they are either looking for smaller space or going fully remote.

Physical distancing is also changing the physical layout needed in office areas, meaning that potential tenants are going to demand less open spacing (can this mean we can finally put a nail in the open workspace concept?), updated HVAC systems, and improved amenities.

There is an increased demand for warehouse and storage space, as e-commerce has surged. Biotech companies are also seeing increased demand for lab space.

I think it would be smart to look at a commercial real estate firm’s portfolio and see what types of companies are in their portfolio. Consider using the HBG Whitepaper on who is doing well to help you determine if the RE firm has any of those clients or companies in industries that are doing well. At the same time, if the portfolio is full of restaurants or retail it could mean lean times for the commercial real estate firm.

Also, be on the lookout for commercial real estate firms to take advantage of opportunities to acquire properties at a good price and build their portfolio. Here is a good place to keep an eye on commercial real estate transactions and news.

Working Remotely

Due to the pandemic, many people were forced to work remotely. According to Business Insider, following the pandemic more than half of Americans want to continue working remotely while two-thirds of companies may render their current work-from-home policies permanent. A few major companies have announced they will continue to have employees work remotely, including Google, American Express, Uber, and Airbnb. REI plans to have its employees work remotely indefinitely and recently sold its brand new headquarters in Bellevue, WA to Facebook for $368M.

The National Association of Realtors created a Work From Home Score that studied “3,142 counties that are best poised to provide a supportive environment for working remotely, mainly, working from home.” They used nine factors to calculate the score. The top 30 work from home counties represent the top 1%. The top five counties include:

  • Forsyth County, Georgia

Part of the Atlanta-Sandy Springs-Alpharetta metropolitan area, 11.3% of the workforce already works from home and 99% of the population is served by three or more broadband internet service providers (ISPs). It’s a fast-growing area, and the population rose nearly 21% over the last five years.

  • Douglas County, Colorado

Part of the Denver-Aurora-Lakewood metropolitan area, 11.7% percent already work from home and 98% of the population is served by three or more broadband providers.

  • Los Alamos County, New Mexico

Part of the Los Alamos micropolitan area and the Albuquerque-Santa Fe-Las Vegas combined statistical area, less than 3% work from home but what stands out is that 68% of the workforce work in office-using industries. Homes are very affordable and only 11% of homeowners pay  30% or more of their income on their mortgage.

  • Collin County, Texas

Part of the Dallas-Fort Worth-Arlington metropolitan area, 8.6% of the workforce work from home, and its population expanded 17% from 2014 to 2019, indicating it is a fast-growing county.

  • Loudoun County, Virginia

Part of the Washington-Arlington-Alexandria metropolitan area, 7.5% of residents work from home, with 44% working in office-using industries. 100% of the population is served by three or more ISPs.

These areas could also be a good place to keep an eye on if you have prospects living there as they could see an increase in their property value. It is also going to change the type of home people want to purchase, which may now include two office spaces and an area that can act as a home school.

What trends are you seeing in your area?

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How GIS mapping can improve your real estate searching

This week I’m delighted to welcome Senior Researcher Josh Ostroski back to The Intelligent Edge. If you’re a long-time reader, you’ll know that Josh is our go-to guy on real estate research here at HBG, and this week he has a great article to share on a very clever way to find property information. Take it away, Josh! ~Helen

I had planned to write a blog post about some of the things I’ve learned in my 15 years as a Prospect Researcher since all I ever seem to write about is real estate. However, I’ve been noticing a new trend while researching properties that I think would be helpful for everyone – Assessor GIS Mapping – so I decided to go for a real estate theme for a blog post again.

Geographic Information System, or GIS mapping for short, is not necessarily a new technology, but I’ve noticed that it has popped up on most of the assessor sites now. I’ve found it so helpful that I wanted to share it so that more in the prospect development world are aware of it.

What is GIS Mapping?

GIS Mapping allows you to search for a property by address or by location and you will be able to see the property lines and, in most cases at least, who owns it and basic information about the property. Like all assessor sites, not all counties in the country share the same information and some are more robust than others.

Each site has its unique features and allows you to see different information, so be patient and play with each county (or sometimes state) sites. Even if it doesn’t give you all the information you need, you can at least have a visual of what the property looks like. Then you can use what you know and other resources to find out more specific information about the property. Often times the traditional assessor site will have more robust information on its site about the property.

Here is an example of what the map looks like. Each separate lot is outlined and you can simply click on the lot (be aware that some GIS Maps require you click on a tool in order for the assessor information to pop up), and the information will come up.

How is GIS Mapping Helpful?

I always use this feature when I’m looking at a property that has multiple lots; that way I can see what the property actually looks like. I’ve also found it helpful when someone may have multiple lots, but they are owned by different LLC’s or by family members.

Another way it is useful is when a mailing address and a property address don’t match. Sometimes that could be because the property is split between different streets or the owners bought an adjacent lot at a later date and use that mailing address.

Below is a screenshot from the San Miguel County, Colorado, GIS Mapping site. The property in question was located at 115 Francisco, Telluride, CO, which is Tom Cruise’s estate. It has been on the market for $59M.

What this shows us is that the property is owned by Client 2177 Living Trust, which if you run the property report shows an address in Los Angeles, CA, that is home to Chapman Bird Grey & Tessler, a Hollywood business management firm that Tom Cruise has been associated with. The other thing it shows is the properties adjacent to the main home that are owned by the same entity.

 

 

 

 

 

 

 

 

 

 

In this example, the adjacent properties are owned by the same name, but I have often found the names can be different but have the same mailing address. One example I came across just the other day was a home in New Jersey that consisted of six separate lots; each lot owned by a different limited liability company (LLC) (ex: 123 Briar Lane Acquisiton LLC, 129 Briar Lane Acquisiton LLC).

I always use a satellite view when using the GIS Mapping tool (I actually always use satellite view in life); that way you can really see what the home and property look like. You can also sometimes tell if a home was recently renovated or differs from what the assessment records indicate, which could be due to a delay in new information being uploaded.

Another example of how this has been very useful was a request from a gift officer after a meeting with a prospect. The prospect had mentioned in passing that he was selling some land he had accumulated over the years to a developer. It turned out he owned dozens of separate lots, all under different LLC’s and many with different mailing addresses. By using the GIS Map, I was able to click on all the lots in the area and determine if they were his or not.

He was indeed selling them off and to a developer that was building a new golf course community. We were also able to tell which lots he had recently sold and for how much. With traditional resources, it would have taken me much much longer to do and I don’t think it would have been as accurate.

How to Find GIS Mapping Tools

NETROnline.com is a great resource for individual assessor sites, including listing GIS Mapping links. The assessor sites are under the Public Records Online tab.

You can also do a search for “[County Name] Assessor GIS Map” and you will probably have luck. I’ve rarely found a county that does not have this capability. There are some outliers: Massachusetts, for example, does not do it by county, but the entire state has one map you can search.

Let me know what you think of GIS mapping tools, and what other interesting tools you use to find real estate information.

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Ski resort real estate

It may be the end of ski season for another year, but we’re always trying to figure out what factors impact the value of real estate in those wealthy areas. This week, Colorado-based HBG Researcher Josh Ostroski shares his insider information on three things he knows really well: skiing, real estate, and prospect research! ~Helen

Josh and his daughter hit the slopes

I grew up in a skiing family in New England and it has been a passion of mine since I can remember. One day a colleague at HBG was researching someone that had a house in Lake Tahoe which had a market value drastically lower than what they paid for it. My colleague asked what some of the factors could be that might cause this, outside the obvious decline due to the housing crisis that hit California especially badly. The more we discussed it, the more it became obvious that there were more things at play in these specialized locations than elsewhere. I decided to look more deeply into the factors that impact housing costs in resort towns, and I thought you might be interested to know what I found. [Read more…]

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My Gap Year From Prospect Research

Most of the time, taking a step back to get a broader view of a situation is a good idea. As we move into 2017, I’d like to welcome one of our newer team members, Josh Ostroski, as our guest blogger this week. Josh took a year out from a distinguished career in prospect research to try out a new profession that brought him great perspective, insight, and some new great resources to share with all of us when he came back into the fundraising fold.  I’m sure you’ll enjoy this – and bookmark as many things as I did!

Before joining The Helen Brown Group in July of this year, I spent just over a year as a real estate agent. Prior to that I had worked as a prospect researcher in various roles for a decade. In my year-long “sabbatical” I learned a lot about myself and prospect research, and I wanted to share my experiences with you.

Similarities Between Real Estate and Fundraising

At first thought you may not think real estate and fundraising are similar, outside of our daily scouring of property records, but the first thing I noticed during our weekly team meetings and trainings was how similar they are.

Both are industries that help people. Both have a sales aspect. Both are about reading people. Both require pipeline building and prospecting in order to succeed.

Four days into my re-introduction into the wonderful world of prospect research with The Helen Brown Group, I found myself listening to the APRA Prospect Development 2016 keynote speaker, Risa Mish, speaking about The Art of the Sale. It was essentially an overview of everything I had been learning as a real estate agent. When she was relating it to fundraising, I knew I was where I should be! [Read more…]

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