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.

Long gone are the days when lenders were lining up to provide financing, and as I write this post, it has just been announced that Freddy & Fanny have been delisted from the NYSE. It’s too early to tell what effect that will have on their lending programs, but they’re basically the only game in town now for residential investment property loans. It can’t be a good result for the investors of residential income property. As it is we’re looking for buyers with 40-50% down payments to get a deal done. A far cry from the, “tell em a story and get the funds” of the 2004-2007 era.

An argument can be made that Fanny & Freddy’s trouble may bring with it an opportunity to get back to some old-fashioned real estate deal making. The kind of deal that provides security, cash flow and comfort to both sellers and buyers. Eliminate a bunch of “Wall St. Wing Tippers” in the middle to boot. The kind of deals we had before the Wall Street boys got control of the mortgage market. Before franchise real estate companies would only do, or allow their brokers and agents to do only the vanilla cash or cash to new loan transactions. Let’s look at what we have now and what we could do to improve the investor’s security, control and return on investment.

As I see it here are the retiring landlords options and opportunities:

• Sell and pay the Taxes. (Ochs!) 30-35% goes to the taxman.
• Sell a do a 1031 Tax Deferred Exchange. (But I thought you were tired of tenants)
• Donate the property to a Charity for an annuity payment. (Property needs to free & clear and your cash flow is controlled by the Charity and their investments)
• You could do a master lease if the lender allows it. (But you’re still a Landlord)
• Last but not least… In fact it’s the best option of all! Seller Financing. Sometimes referred to as “Owner will Carry.” (Opportunity!)

OK! OK! Lots of seller’s won’t entertain the idea of financing the deal for the buyer’s and in the past I’ve have been in complete agreement with them. But, things have changed in a lot of respects, so please hear me out on this. The last 3 years have shed a lot of light on the security or lack of it, on our investment markets. If you were a believer in the security of real property as an investment, then you’d surely believe in a loan or loans that are properly structured, using cash flowing real estate as security or collateral. Right!?

A Suburban Multifamily Community

Never! I don’t believe you’d come to that conclusion if read the articles in the financial press, but real estate has always been, and continues to be, the ideal investment for the average American. While it’s true, the best real estate most of us will ever own is the real estate we invested in at the beginning of our investment process. It’s just like the trees we plant, the best ones were planted a long time ago and if we use the same care in managing both the trees and the investments we’ll have the shade and shelter we need for retirement.

It’s interesting that most investors I speak with now are cautious about real estate investments, Why they’re cautious after nearly four years of declining prices at least here in Orange County, CA and almost record low interest rates for mortgages is a mystery to me.  In my humble opinion, this is precisely the time to make an investment even if it’s your first one.

Three years ago in our Orange an LA Counties market, most people would have told you that they wish they had purchased, and held on to more real estate over their lifetime. Now, is the best time to begin or add to your real estate portfolios especially if you’re  smart about the way you make your deals. Beginning or investors in the accumulation stage of their investment cycle can make great headway by using the IRC Sec 1031Tax Deferred Exchange to leverage their nest egg exponentially.

The one issue with real estate is the need to work at managing it yourself or give up some of your profit margin for a property manager. However, when all is said and done, this is no different than any of the other investments, except that in most of the others you do not have a choice. The investment is managed by a professional money manager or Wall Street type where the management fee is paid somewhere in the agreement. Nobody works for free or at least they didn’t in my 18 tears of financial markets.

The age old arguments against real estate as an investment is management and liquidity. The opinion or objection most offered by financial advisers about real estate is it’s lack of liquidity. This is a hollow argument. While it is true, one cannot execute a sell order an liquidate the real estate holdings immediately, real property priced right sells quickly and in most cases real estate can be borrowed against which are two ways to raise cash should the need arise.

The other advantage real estate has over the equity markets is you won’t be forced to sell at the wrong time by margin calls. You have more control over your own destiny and you can sell when the market will yield it’s highest return.  As in all markets,”Buy low, sell high” is sage advice, but when it comes to real estate. “Buy Now, hold for a long time, then use the IRC Sec. 1031 to defer your capital gains tax and roll all the profit into a larger deal is the real home run play.

More about IRC Sec 1031 later, but for now using this method, an investor will almost always yield fantastic overall investment results. Having spent a considerable amount of time (30 plus years) working in both market I’ve seen the good, the bad and the ugly in them both. Depending on where in your investment cycle, find an adviser you feel comfortable with and plan a strategy that will accomplish what you want.

If you’ve got a question or comment, we’d love to hear from you.