Category: Finance

Last week Revolve Capital attended the IMN Opportunity Zones (Midwest) in Chicago.

The conference discussed Opportunity Zones surrounding the Tax Cuts and Jobs Act of 2017. Opportunistic zone areas include neighborhoods infected by factors such as distressed mortgages, lost jobs or boarded up neighborhoods. By building in these areas, investors can actually retain their capital gains tax instead of paying it to the government. What exactly are opportunity zones, who can invest in them and how can you benefit from these incentives?

What are opportunity zones?

According to the IRS, the Tax Cuts and Jobs Act (TCJA) is a “Major tax legislation that will affect individuals, businesses, tax exempt and government entities”. The Act added the IRS Code of 1986, which essentially effects multiple major taxed sectors: individuals, estates, business taxation, corporate tax, churches and nonprofit organizations, distressed communities, and more.

Opportunity Zones are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment”. These qualified zones were “created by the 2017 Tax Cuts and Jobs Act. Designed to spur economic development and job creation in distressed communities throughout the countries, they provide tax benefits to investors who invest eligible capital into these communities.”

Who can invest into these zones?

These opportunity zones are open to every private investor that has the sophistication and wherewithal, who knows how to structure their fund based on the rules and limitations of the Jobs Act, and who would like to tap into the opportunity zone revenue dollars and concurrently defer capital gains taxes. Historically, these types of opportunities were sometimes available only to accredited investors (typically requiring a net worth of $250-500K+) to invest in these projects. The Qualified Opportunity Zones program can be utilized by investors on any end of the spectrum… whether you are a private investor, a small investor, a new investor or a larger seasoned investor, you can benefit from the advantages of building in these areas.

Note, there are special reporting requirements. Reporting ensures the restabilization of the distressed area is being pursued.

How can investors benefit from these types of investing opportunities?

If you are interested in diversification into other asset classes or are already diversified, then investing in opportunity zones might be a revenue stream you should explore. Sectors such as commercial, strip malls, communities, hotels, gas stations, land, homes, etc. can take part in building in the distressed zones. By looking for ways to invest dollars to A) avoid capital gains taxing and interest from the IRS to be retained into your projects; and B) seeking to find a way to help revitalize these opportunities (by purchasing acres for housing development, revamping strip malls, creating gas stations and hospitals, etc.) you can play a part in this economic development tool. Revolve Capital Group has product (both non-performing and re-performing loans) located across the nation, many assets being directly located in these areas of opportunity.

By utilizing alternative asset class diversification, our investors can segue way into putting single-family home investments into the fund. Meanwhile, making these areas livable, appealing and fundamentally opportunistic. In return, we can expect an influx of first time home buyers, renters, borrowers, and families. When you create charming up-and-coming neighborhoods filled with Walmarts and Targets then people will be incentivized to move there, filling the demand of customers.

There is a big crossover between building in opportunity zones that lasts between 7-10 years and economic growth of communities that have been boarded up, people have moved out, building has been condemned. Communities that might have previously been more attractive, had a larger population, and where investors and developers were once putting their investment dollars. That is the crux of the message… that these opportunity zones create a number of different ways to invest into single-family homes, commercial properties, land, etc. in terms of both long-term and short-term benefits. Now that we are 11 years removed from one of the biggest crisis since 1929, you can tell banks, lenders, communities, developers, builders are not interested in those areas. The government is creating an opportunity to go back to these areas and develop.

Revolve Capital Group has continued to be at the forefront of revamping communities. Our firm and many of our investors purchase homes that are pre-foreclosure all the while helping families avoid foreclosure altogether.

What are the disadvantages?

While anyone can benefit from investing in these areas, the only way to qualify for the tax incentives is by purchasing the investment through a qualified opportunity fund. EIG.com released information explaining “You cannot simply purchase real estate in an opportunity zone, there has to be improvement to the property to ensure it meets the qualifications of the investment and providing economic stimulation. Additionally, the Fund must invest at least 90% of their assets in a qualified Opportunity Zone.”

According to the Economic Innovation Group, Opportunity Zones incentives are “tied to the longevity of an investor’s stake in a qualified Opportunity Fund”. They continue on explaining…

“There are three core tax incentives:

Temporary deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the Opportunity Zone investment is disposed of or December 31, 2026.

Step-up in basis: A step-up in basis for the deferred capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original deferred gain from taxation.

Permanent exclusion: A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued on investments made through an Opportunity Fund. There is no permanent exclusion possible for the initially deferred gain.”

Essentially, if you choose to invest in qualifying opportunity zones your capital could be tied up for 7-10 reducing additional opportunities to invest in a variety of other asset classes.

The Opportunity Zones is a step in the right direction for the government to stimulate economic growth in underserved areas; however, our company firmly believes it is more advantageous for investors to focus on preforeclosed assets. There is not a requirement to hold a distressed note investment for an extended period of time if it is not providing the expected return, you have the option of investing in any nationally located area, and most importantly you can still revamp communities by choosing to keep families in their homes

For a more passive income stream that provides economic stimulation, potential growth for lower income distressed neighborhoods and multiple exit strategies we suggest considering notes for your future investments. Contact us today to learn more information on how we can help you grow your portfolio.

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Sources:

Economic Innovation Group (2019), Opportunity Zones FAQs
Retrieved from: https://eig.org/opportunityzones/faq

IRS (2019), Tax Reform
Retrieved from: https://www.irs.gov/tax-reform

IRS (2019), Opportunity Zones Frequently Asked Questions
Retrieved from: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

The definition of landlord is “a person who owns a building or an area of land and is paid by other people for use of it”.

When a person chooses to invest in the real estate market, a common income stream is to become a landlord. Generally, the real estate market is a stable and profitable income source. When the economy is on an incline, the profit margin can produce 10-15% ROI. You can usually expect to receive both passive income on a monthly basis with renters while acquiring equity in the home. On paper, this sounds like a win-win scenario.

However, as a landlord you have a lot of responsibility.

You are legally bound to providing a healthy living environment for your renters, you are required to have your property insured, you take the late-night phone calls that the water heater is broken, you communicate with the tenant as to why they were unable to pay utilities that month, etc.

What if we told you, you don’t have to be a landlord to receive the benefits of a landlord?

Let us explain.

The term “lienlord” refers to a person who owns a mortgage note and that debt is paid by the borrower (or homeowner). When a homeowner doesn’t make their payment for a duration of time, the mortgage gets sold from the bank to an investment company, such as Revolve Capital Group. We receive our assets directly from Top Tier 1 banks. When an investor (like yourself) purchases the note from us, the investor now becomes the “leinlord” (or the “bank”).

As the lienlord, you can benefit from owning the mortgages via the bank without having to be responsible for property repairs/maintenance, property taxes, legal-renter responsibilities, property taxes or renter issues that come into fruition with traditional real estate investment routes like buying rentals or buying fix-and-flips.

Property Repairs/Maintenance

Put yourself in the position of a homeowner. You take a mortgage out from Wells Fargo, for example, and you go purchase a house. Hypothetically, if your water heater breaks in the middle of the night would you call Wells Fargo to fix the water heater? Typically, no. The reason for that is the responsiblity of taking care of your home lies on you as the homeowner.

Let’s apply that same principle to being a lienlord vs a landlord. As a landlord, it is your responsibility to fix the water heater. As a lienlord, you are acting as the “Wells Fargo” and you don’t take those calls. Essentially, the lienlord is the bank -and- when you purchase the housing note, you become the bank. You would become the “Wells Fargo” and you (similar to the “landlord”) can continue receiving passive income coming in from the homeowner every month, and when you’re ready you can still sell the note to another note buyer. As a note owner, you also have the option to do other types of exit strategies or creative financing options.

Legal Responsibilities

With being a landlord comes endless levels of responsibility to accommodate renters. There is an implied warranty of habitability, which ensures the renters live in a safe, healthy and clean environment. Health and building codes must be followed, safety features need to be maintained regularly. The responsibilities trickle down even to proper handling of abandoned property. In the event the tenant must vacate the property, if they leave items in the rental they have to be properly stored, the tenants must be notified of where to pick up their belongings. Your main focus needs to be how to recoup and refill that vacant rental if you haven’t received rent for that property in a number of months and instead you are having to worry about the abandoned property from the previous tenant. Similar to property repairs/maintenance, when you’re the leinlord you are now the bank. Chase Bank, Wells Fargo, Bank of America, the bank that owns the mortgage to your home is not legally responsible for traditional landlord-tenant laws. When you “become the bank”, you collect the monthly payment while removing yourself from being legally obligated to maintaining a habitable environment, health/building codes, safety features, abandoned property, etc.

Property Taxes

You are also financially responsible for property taxes. If you have 10 or 15 rentals, you have to pay taxes on all those properties even if the renter stops paying. According to SmartAsset.com, “the national average property taxes are 1.211% of Assessed Home Value, averaging at $3,028”. If the condition of the rental property is average or below average, you are potentially using your profits to make repairs on the home, then to add yet another financial responsibility, such as property taxes, can reduce your profit margin even further.

Control of Terms and Interest Rates

As a leinlord, if you feel the terms of your agreement with the homeowner (the borrower) are unfavorable, you can control the terms and change them as you see fit.

If the homeowner was originally financed at (for example) 4.5%, and they stop paying on their home for 12 months, and the bank then sells the now non-performing note off to a company, like Revolve Capital Group. We will then sell that note to an investor (like yourself), and let’s say you turn that note into a re-performer. Because you own the note, and because you are now the leinlord (you are now “the bank”), you have the power to renegotiate the deal. You have the power to renegotiate any part of the contract you would like.

For example, you can change…
– The term
– The duration, how long the loan is going to be valid for
– The interest rate
– The monthly payments
– Is it going to be a potential balloon payment?
– Will you advertise the payments over a 15-year time frame, then after 15 years require the rest of the balance be paid at once?

So long as you are within the legal limits and not conducting unethical practices like predatory lending, you have the power to do so. If you plan on changing terms, make sure to research usury laws so you know the maximum amount of interest that can be levied.

There is not only 1 term that can change when you take ownership of a note, but you can also change anything you deem necessary because you are now the bank.

Emotional Investment

To remove another layer of responsibility, you can choose to completely remove yourself from the decision making process. If you’re used to this type of real estate investing, you understand what it’s like being in the position of the landlord receiving a call from the tenants that the wife got sick and the husband lost his job. Now you are in the position to decide if you will let them continue to not pay for the next 3 or 4 months rent. There is a huge emotional tie to being a landlord. However, working with a vendor/servicer, you have the benefit of choosing to remove yourself from personally having to deal with these issues when they arise.

Vendors / Servicer Utilization

We have a network of nationwide vendors who can be as involved or as uninvolved as you direct them. The vendor will go through a process we call KYC (know-your-customer), which is a “know your client” type of process where they will find out what you’re looking for in a vendor and what expectations you have for your assets. For example, if you own a non-performing note and the homeowner starts paying, the non-performing note would turn into a re-performing note. These vendors will handle that entire process with your instruction. Another example would be if the homeowner is asking for a reduction in their interest rate, let’s say there were paying 8% and now they’re wanting 4%. The vendor will come back to you as the leinlord, request your approval or denial, and continue according to your instruction. You are able to take a step back, allow the vendors/servicers to take over some or all of the management, and you can focus your energy, time, and resources on other aspects such as growing your investments. The secret to the buying notes and which investment company you choose to utilize is within their network of vendors.

The traditional real estate world generally pushes one of two exit strategies:

1. You purchase a run-down property, rehab that home, decorate it high end, and sell for a large markup.

2. You maneuver into a long-term cashflow by purchasing a decent property, find occupants, and you will become the landlord.

By taking the alternative approach to investing you can become the actual lienholder to that same property. Ultimately, you can make the decision if you don’t want to take the late-night “landlord” phone call, because you prefer to take calls during business hours. Being a leinlord allows you to take on investments that you can own for the next 30 years while the homeowner continually makes payments, but all the property condition concerns fall on the shoulders of the homeowner.

There are many downfalls to becoming a traditional landlord. Choosing to become a landlord comes with a lot of responsibility… this includes general property repairs/maintenance, legal responsibilities, property taxes and emotional investments. When you make the decision to become a lienlord you reap the benefits of being a landlord without the same negative drawbacks. Because you are now “the bank” you can control the terms and interest rates, and by utilizing our national list of vendors/servicers you can remove yourself from the majority of those responsibilities and you can focus on your monthly passive income.

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Young entrepreneur discussing new business plan with colleagues
August 29, 2019 by Chaz

In the investment world there are times when things do not go exactly as planned. As an investor, sooner or later, you may be faced with ethical dilemmas bringing you to that moral fork in the road. Do I foreclose on the homeowner or do I put more energy into the deal? This is a very real-world decision you may have to make.

Picture these scenarios:

When a monthly payment is missed, whether it be a mortgage payment, car payment, student loan, etc., you will soon be getting a call from the owner of the debt. You can surely hop into the seat of the homeowner receiving the call from the bank asking “where is our money?”. You can also imagine being the bank needing to collect money from the homeowner.

Sometimes, we will takeover a file from a company who was working on a modification with the homeowner. The company that sold it to us did not finish their discussions before closing the deal. We inherit the file and take over contacting the homeowner. If the homeowner answers, they usually have their guard up. In some cases they were talking to previous note holder just weeks prior. Unsurprisingly, they are confused that we are now claiming to own the note. This becomes a dispute of the homeowner saying “you don’t own my mortgage”. This results in us having to show them that we are in fact the note holder, we will then supply them documents that prove our ownership.

Once that is handled, we now have to settle the dispute of…

– Do you want to stay and pay?

– Do you have enough income?

– Do you have the ability to make the payment after you make your car payment, groceries, gas and all living expenses?

Now pretend the homeowner is on disability and receiving medicare/medicaid but their funds have been stalled for the past six months. They inform you that their medicare has been switched back on and they are now able to make their monthly payment on time each month. A little bit of ethical decision-making comes into play that causes us to be a human and look at them not as a file number but as a real person. It makes us think of how we would want to be treated in this situation and say yeah, maybe this doesn’t follow the guidelines of what I wanted to do initially but I also want to do right by Mrs. Smith who has been in the house since 1974.

As with all investments, there may be oversights when purchasing a file. Should an issue arise, ask yourself “what was my original strategy?”. How long did you want to be in the file for? Do you event want to mess around with these scenarios or would you rather sell the note for a higher price than what you bought it for? These are some of the decisions that we face as note investors. Some issues are exclusive to notes and are new-to-you if coming from traditional real estate. These speed-bumps are manageable and you have multiple exit strategies to pursue.

Ultimately, there are various routes to take in the note industry that cause us to look at everything in real time, make hard decisions, and have our servicer or loss mitigation team make a decision as it comes up. In an industry full of loan numbers, debt, and labels, sometimes it pays off simply be human. There is still profit to be made while showing compassion. Many times both sides win and that is the beauty of notes. Making money, while helping people.

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August 15, 2019 by Chaz

At Revolve Capital, we are proud to have long-standing relationships with our clients. While ensuring transparency is key, we feel every aspect of the business is important. Each stage of the process, from product selection through post-close, we work with you every step of the way.

We separate ourselves from the competition by not only helping with the purchase but also helping our clients grow their portfolios. By creating a long-term relationship, we ensure success for you and us both.

How does Revolve Capital assist the client in growing their portfolio? Visit our new blog post now:

Consistency of Product
We are aware of how important regularly available inventory is. If you are in the process of talking to your investors and raising capital, you need to be purchasing your assets from a company you know will continue pumping out assets on a consistent basis.

We regularly update our website with general criteria of our available inventory (contact our Trade Desk for a more detailed list of assets.)

Safe Purchases
The assets we purchase and we sell to investors have been put through a heavy vetting process. We always vet, qualify and disqualify deals before we even purchase them. Therefore, we know the deals we eventually bring to market have been tried and true amongst many different vendors and eyes (other than our own). We utilize many third-party companies to vet our product.
Clean Collateral (Recycle Your Money)

Our collateral will always represent a clean product. We will always notify you when you are purchasing (for example) a single-family house, that is secured by real estate, you are in the first-lien position, and anything else that we say we are selling you that is included in the file is accurate. If you find the product is not as represented, you can always come back and recycle your money -or- get your money refunded back based on the reps and warranties given.

Post-Close Asset Management
The post-close management process is one of the most important aspects. Our clients see their money enter the real estate market and truly be worked to the hill so that it comes back to them. If you put out a dollar, then a dollar-quarter comes back to you**, and you can rinse and repeat and surely grow a business.

**These numbers are estimated based on past client purchases. Not guaranteed

We assist our clients in growing businesses, -and not just their business but also growing their investment profiles. If you are ready to purchase a note portfolio with Revolve Capital Group, contact us today and we will help with growing your investments.

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