Real Estate Returns
From 2004 through 2007 I was securities licensed and participated in Tenant in Common (TIC) market. TIC’s were classified as securities and were essentially sold as a security backed by a fractional interest in real property. The attraction to the TIC product was it’s qualification for the IRC Sec. 1031 Tax Deferred Exchange and was considered the investment of choice for property investors planning to retire from active management of their investment property. TIC’s just like any investment in real estate in the 2004 – 2007 era are having varying results but the supply of capital they generated for commercial investment market was robust.
TIC investments in apartments are generally doing OK or better than the market and the same can be said of Health Care Properties. The areas of concern and hurt are Office Buildings, Retail Centers including Auto Facilities, Student Housing and Hospitality. There has been some total losses in these property types and there would be a lot more if there were not some form of loan modifications or cooperation from lenders. Don’t get me wrong! Lenders are not accommodating because they’re good guy’s,. They’re doing it because they’ve discovered being a landlord usually costs them a lot more money, headaches and liability. They don’t like that last one!
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A home for Generations
For almost a decade now, every time we talked about real estate we immediately discussed money and how much more we have this month or year. We didn’t talk about the value of a home but instead about the price of the house. We didn’t worry about a roof over our heads but instead the ceiling on our interest rate. We didn’t care as much about where we raised our family as we cared about how much we increased our family’s net worth.
We believe that will change in 2011. We believe very strongly that real estate will return to what it has been for the dawn of independence in this country: a place for us and our families to live comfortably. It will also prove to be a great long term investment as it always has been.
Our parents and our grandparents didn’t buy their homes as a short term financial investment. They bought it so they had a place of their own to come home to at the end of the day; a place to raise their family; a place they could feel safe; a place they would call home.
Sure they dreamed of a ‘mortgage-burning’ party. They realized it was a form of forced savings. They were taught that, if they paid their mortgage every month, they would wind up with a little retirement account decades later.
And, they realized that wouldn’t happen if they rented.
However, in the last decade, we somehow forgot that the financial aspect was the serendipity not the major reason to buy. We believe that 2011 will be the year that people return to the historic reasons families purchased a home. This is the year when we again remember that home ownership is a major part of the American Dream.
Who Gets Your Vote?
The cast of characters—sounds like a Hollywood type of deal. Some of these characters actually think they are in Hollywood, or they are Hollywood material. This is an area where a lot of people screw up, and I don’t want you to be one of them.
Just as in life, the top players in the real estate market get the top dollar. So you pay a little bit extra and you get the best in the class. They usually make the difference up anyhow—they can get you that little bit extra in the sale price or save you that little bit extra in the purchase price that will pay their fee.
Let’s put it this way: if you’re in the bottom of the ninth inning of a baseball game with the game tied and the go ahead run coming to bat… who’d you send to the plate? The 200 hitter or the 340 hitter? That’s right! You’d send the guy that has the best chance to win the game for you. You’d look for that pinch hitter that could bring those runs home for you. Continue reading »
Tax Benefits of IRC Sec. 1031 Tax Deferred Exchanges in Real Estate
City Living With Style
Here’s the biggest advantage of doing a 1031 exchange? By deferring tax, you have more money in hand to invest in another property. In effect, you receive an interest free loan from the Government, in the amount you would have paid in taxes. A wonderful estate builder indeed! In most cases the tax bite on the profits of a real estate deal fall between 30% to 35% and by doing an exchange the investor get to roll all the profits into the next deal. Consider what a benefit that is over a lifetime of investing.
Despite this generous benefit some folks elect to sell and pay the taxes. This is often done out of ignorance on behalf of the investor of the broker the used to sell the property. Another reason could be the seller decided to finance the deal for the buyer. Depending on what side of the deal you’re on with this seller financing there are advantages. However, the tax still has to be paid but the question now is, when?
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Everyone Want's A Beach Community
A few years ago Stephen Covey authored a book titled, The 7 Habits of Highly Effective People® in which he strongly advocated beginning projects with the end in mind. Unfortunately few people took heed of that advice, especially in the multifamily or apartment investment property market.
As a result of ignoring that advice many find themselves in what we metaphorically refer to as the harvesting season for the landlord that’s had enough of tenants, taxes and toilets and would just like to enjoy the fruits of their effort. Shrewd investments and savvy exchange moves for many years combined with careful management, saving and sacrificing to build their retirement nest egg. But even with a plan…would it have prepared anyone for the debauchery of the credit default swaps and the collapse of the funding for the investment property market? It’s no secret the condition of the apartment house market is completely different now than it was in 2007 and that’s not the Landlords fault. Continue reading »
I fear ye Sacramento
It’s been a while since we last spoke and I wanted to get to what our elected representatives in Sacramento have been up to on their desire to repeal of the IRC Sec. 1031 Tax Deferred Exchanges in Real Estate Transactions. Fortunately, there is no harm done yet as the bill is still in committee as of the last posting date on May 28th 2010.
It has become increasingly obvious that our elected officials either don’t know or worse still, don’t care if we loose all those investment dollars when they place us in such a disadvantaged position of being one of the few states in the union to not match and mirror the Federal Law.
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California State Building
The California legislator are attempting to eliminate the 1031 & 1033 Tax deferred exchanges in AB 2640. A bill currently working it’s way through the process in Sacramento could have a serious effect on the real estate market and investor profits if passed into law. To make matters worse the bill would be retroactively effective to 1/1/2010.
The IRC Sec. 1031 Tax Deferred Exchange has been around in the federal tax code since 1921 and there is no indication that there is going to be any change there. There has been several modification’s to the law over the years, usually for the best as far as the investor is concerned, but occasionally some State Government will get a dumb idea and try to generate revenue from this source.
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Tax Benefits of IRC Sec. 1031 Tax Deferred Exchanges in Real Estate
Lifetime Exchange Benefits
Here’s the biggest advantage of doing a 1031 exchange? By deferring tax, you have more money in hand to invest in another property. In effect, you receive an interest free loan from the Government, in the amount you would have paid in taxes. A wonderful estate builder indeed! In most cases the tax bite on the profits of a real estate deal fall between 30% to 35% and by doing an exchange the investor get to roll all the profits into the next deal. Consider what a benefit that is over a lifetime of investing.
Despite this generous benefit some folks elect to sell and pay the taxes. This is often done out of ignorance on behalf of the investor of the broker the used to sell the property. Another reason could be the seller decided to finance the deal for the buyer. Depending on what side of the deal you’re on with this seller financing there are advantages. However, the tax still has to be paid but the question now is, when?
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Seldom, if ever were there a group of investors, either organized or disorganized such as we see and have experienced in the residential apartment house or Multifamily property market.
Most people I know got into that business by accident! After 18 plus years of dealing with landlords in their day-to-day business, assisting them in buying, selling and exchanging their properties. After many lengthy chats and informal surveys, I have come to the conclusion that most people got into this type of investment property by accident rather than on purpose.
Among the reasons most people finish there was they bought a new home and kept the old one. Some bought a house next door just so they could control who their neighbor would be, others helped a family member or a buddy with a loan and finished up getting the property instead of the loan repayment. There is also a considerable portion of this market who inherited their property and decided to continue in the business of their benefactor.
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Pride of Ownership Multifamily
Here’s why we think Apartment House – Multifamily Properties are key to wealth building.
Income
Properties like these are usually referred to as investment property. Apartment Investments, multifamily properties deals, properly structured with enough down payment, will generate a positive cash flow equivalent to, or perhaps better the interest rate of the mortgage on the property. This cash flow will increase in most markets, even a highly leveraged, negative cash flow property can turn into a positive cash flow investment with the passage of time.
Depreciation
Depreciation is the tax deduction one can use against the income real estate produces. Here’s the layman’s version of how this works. The Government in an effort to encourage investors into the multifamily rental property or residential income property allows the value of the improvement (that’s jargon for the buildings) to be written off or depreciated over 27.5 years. (39 years for commercial) This was a solution to the problem of Government providing housing to the poor or low income citizens. Only the improvements are covered under this law, not the land as that is expected not to decline in value during the hold period.
Equity
Growth Build-up – Most folks grow their equity over a period of years because the historic trend in real estate has been upward. However, they also get equity buildup results from the periodic pay down of the principal amount of the loan, usually through monthly payments on an amortized loan. Even if there is no appreciation over the life of the loan, the property owner would end up with a free and clear property at the end of the loan payment period on a fully amortized loan. This is usually a 30 year period on residential property but it is exceedingly rare to find such financing.
Appreciation
While the amount of appreciation varies from market to market, real estate is a growth asset and often the largest part of the return on an investment in real estate is the equity gained through appreciation. Even small amounts of appreciation year after year can be considerable. Usually, the longer you hold on to a property, the better. The effect of appreciation is greatly magnified by the use of leverage. Since the late 1970′s real estate has been a tremendous inflation hedge. Some would claim that is away better than hoarding gold or other precious metals.
Leverage
Through the use of a mortgage or borrowed money along with a small (but increasing recently) amount of money of your own, you can control a real property. The best leverage most of us can obtain in the stock market is 50%. In real estate, it is not unusual to obtain 65%, 70%, and even 75% leverage. If we take the latter, you can control a dollars worth of property for a quarter. With leverage usually comes the risk of lower cash flow after operations costs, but also with that risk comes potential for greater investment return.
Bonus
In addition to the I.D.E.A.L. as stated above, multifamily real estate investments have potential additional tax benefits including the aforementioned IRC 1031 Tax Deferred Exchange and cost segregated treatment by your CPA. There’s always a way to use real estate as a bank or reserve for a college fund for kids or grand kids, additional source of down payments for expanding your holdings or just plain borrowing against. Remember if real estate is part of your retirement savings, there’s no rule against borrowing from it or taking a withdrawal in the form of a loan anytime either. Bonus! No immediate taxes due! But check with your CPA for your particular case.
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