Charlotte NC Area Multi Family Property For Sale

Multi-residential commercial property, or apartment buildings, break down into two sub categories, by size. For example, in most states, when someone buys four units or less, even if it combines residential and non-residential units, the purchase will be treated, legally speaking, the same as a purchase of a single family residential property. Consequently, it is subject to all the same disclosure and agency rules as a single-family dwelling would be. Seasoned brokers know the rules in their state, having learned them when they became licensed to practice.

Additionally, most lenders also view four units or less as a residential transaction rather than an investor-owned transaction. They therefore offer very different loan terms and conditions. Lenders look to the strength of the

buyer's income and net worth when lending on these smaller properties (4 units or less). Whereas the lenders look to the strength of the income of the property when lending on larger properties. Larger commercial properties of all types are treated differently legally. This is because a purchase of that magnitude presupposes a grater degree of buyer skill and sophistication, and because the buyer will exercise a greater degree of due diligence when buying. Conversely, with the smaller units, there is a presupposition that the buyer might occupy a portion of the property as a primary residence and therefore needs the consumer protections afforded to buyers of single-family dwellings.

Location

Anyone who is familiar with real estate has heard the old cliché that the three most important aspects of real estate investment are location, location, location; but what makes a location desirable? To understand this important issue you need to look at the cycle nearly all development goes through. Development can be said to be born, grow to maturity, go into decline, and then either renovated or redeveloped in some fashion. If you look at many older downtown areas, you can see this cycle repeated over and over. So our first question in looking at a location is: In what stage of development is the area? If you find new burgeoning developments, it means the area is being born. If the area is still growing to maturity, the investment can be a good one. Signs of decline do not  bode well, and redevelopment should be well-underway before you take a position in the market. Redevelopment often stalls out after the early pioneer investors fail to get the desired returns.

Introduction to Valuation

Let's do a quick review of the 3 approaches to property valuation that appraisers use. This will help you better understand how the filters they use relate to valuation and finance-ability. First is the market-comparable approach, which simply estimates the value of property based on the prices which similar properties in the market have recently been sold. Appraisers make adjustments for time and appreciation or deflation. They look closely at the unit mix, unit size, condition, and location. Second is the income approach. That is the approach you will be looking at most closely because it's the most important in determining both the value of the property and the amounts that lenders are willing to finance. The third is the cost replacement approach, which is based on the square footage and adjusted for age and various obsolescence factors. You rarely, if ever, will use this third approach to value a property. In the income approach to valuation for multi-family commercial property, the first such filter is the GRM, or gross rent multiplier, which is simply a number derived from the number of times that the gross rent divides into the sale price.

1031 Tax Deferred Exchanges

The IRS allows investors to defer tax on certain types of property held for investment, including real estate, by exchanging one property for another of "like kind." The IRS has specific rules for what exactly "like kind" means, but generally it entails that if a property is held for investment, it can be exchanged for another property that is held for investment, and the taxes will be deferred until the property is sold without the benefit of another exchange property being acquired. If, in the transaction, the seller of one property realized either cash-in-hand or debt relief, that amount is taxable and is known as boot. Tax deferred exchanges can be simultaneous exchanges, which means that the properties close escrow at the same time, or delayed exchanges, where one property closes escrow at a delayed date. In a delayed exchange, which is more common, the seller sells Property A and buys Property B at a later date as an exchange. The seller has 45 days from close of escrow of Property A to identify Property B and up to 180 days from close of escrow of Property A to close escrow on the purchase of Property B for the transaction to be legally considered an exchange.

 

Most exchanges are not two parties swapping property; they are more likely to be a chain of transactions. For example, Seller A finds a buyer for Property A, then Seller A becomes the buyer of property B; however, the seller of Property B is not usually the buyer of Property A. Each of these transactions is known as a leg and there are many multi-leg exchanges.

To expand on the subject of tax and deferred exchange risks, delving into legal advice, is far beyond the scope of this investor's guide. Let me provide you with the key concepts and advise you to seek qualified legal advice when you're ready to do an actual exchange.

The most important concept to grasp is the subject of "like-kind" property. Like-kind tax-deferred exchanges have been around for a long time; since about 1921. The section of the IRS code permits like-for-like tax-deferred exchanges of property and has very specific ideas about what "like-kind" means.

First of all, the property must be held for productive use in a trade or business or be a property held for investment.  We are mainly concerned with the last part of that statement. The important concept to grasp is that the property you acquire must be the same general type as the property you're giving up. In real estate this is broadly defined. Bare land held for investment can be exchanged for a rental property. A multifamily rental property can be exchanged for a single-family residence as long as it is rented out and not your primary residence. An office building held for investment can be exchanged for a shopping center or an industrial building, mini-storage, bare land, or mixed-use property. It all goes to the intent to hold the property for investment. Again, this is only the key concept, and you will need specific legal or tax advice if you are contemplating an exchange.

In a typical exchange, there are several parties: the investor (who is seeking a property with the intent to exchange), the (qualified) intermediary (who immediately transfers the property between parties), and the new buyer of the investor's property. The transfer of the property to the new buyer, by the intermediary, is often referred to as phase one of the exchange, or first leg of the exchange. The intermediary holds the proceeds of the sales pending completion of phase two or the second leg of the exchange. This is the simplest form of an exchange. There are many multi-leg exchanges, but it would only muddy the waters to discuss them here. The concept to grasp here is that - as a seller intending to defer taxes using an exchange - you must use a qualified intermediary, not have access to the proceeds of the sale, conform to certain time limits and procedures in order to complete a successful exchange.

Handling exchanges correctly can be an important part of the investor's wealth accumulation plan.