Posted By: Pat Nelson / Jun 19 2017
While it would be a stretch to say that any investment opportunity is “perfect,” Nelson Brothers Professional Real Estate is confident in stating that its goals for every investor are “I.D.E.A.L.” “That’s a clever acronym that we use to demonstrate the five different ways that we can grow an investment simultaneously,” Principal Brian Nelson said.
Nelson laid out those five core benefits during the fourth segment of his “Ask the Brothers” video series, designed to explain the company’s business model and to address common questions from investors.
“I” Is for Income
By investing in properties that have high occupancy rates year in and year out, thanks to the anchor of a major university and the steady influx of students that provides, Nelson Brothers is able to benefit from a consistently reliable cash flow. That stability leads to a consistent income for investors.
“Most of our properties procure a monthly income that we pay out to investors on the 15th of every month,” Nelson said.
The monthly payments also help separate Nelson Brothers from the typical real estate investment trust, which pays dividends quarterly.
“D” Is for Depreciation
This accounting technique spreads the cost (and depreciation deductions) of residential real estate over 27.5 years, the amount of time the IRS considers to be the “useful life” of a rental property. As Investopedia notes, depreciation can be a valuable tool if you invest in rental properties because it allows you to spread out the cost of buying the property over decades, thereby reducing each year’s tax obligation.
For student housing properties, this depreciation schedule, set by the IRS, can often end up shielding 60 percent to 70 percent of the investment income from taxes, Nelson says.
“One of the advantages of owning a brick-and-mortar building is that we’re able to write off the wear and tear and usage of the building and use that loss to shelter a lot of the income from taxes,” Nelson said. “So it’s just a great way to enhance the net cash that you are receiving.”
“E” Is for Equity Growth
This is where we introduce the concept of amortization, which is a process that’s easily relatable to anyone who’s ever taken out a mortgage. It means that every monthly loan payment includes both principal and interest, so every payment helps to pay down the principal of the loan.
In the case of an investment in student housing properties, the tenants are, in essence, paying off the loan while investors’ equity in the property grows.
“For a lot of our properties, every month we’re not just paying off the mortgage but we’re also paying down loan principal, so it’s just another way to organically use cash flow from the operation to organically pay off the equity of the property,” Nelson said.
“A” Is for Appreciation
While student housing properties historically have appreciated over time faster than the rate of inflation, there are also things that can be done to accelerate the rate of appreciation, such a remodel or renovation. Nelson Brothers has its own construction management team, so it can take control of those costs to maximize the benefits.
Accelerated appreciation is accomplished through the due diligence of seeking out well-located, low-expense properties in strong rental markets. Nelson Brothers has been able to check off all those boxes by focusing on student housing.
“We’re not going to buy a property without some sort of strategy designed to grow the value of the property so that when we sell it, whether it’s three years, four years or five years down the road, we want your value to appreciate and grow over time,” Nelson said.
“L” Is for Lifetime
“That’s a lifetime of capital gains tax deferral,” Nelson said. “What makes real estate so unique is that we have the ability to do a 1031 Exchange. It’s one of the only places outside of an IRA where you can defer capital gains taxes and even depreciation-recapture taxes indefinitely. And when you pass away, you pass along to your heirs on a stepped-up basis.
“That’s what the L stands for – using the 1031 Exchange to constantly keep that money working and growing for you, rather than writing off a big check to Uncle Sam every time you realize a capital gain.”
We’ll talk much more about 1031 Exchanges and how depreciation works in the next installments of the “Ask the Brothers” series.