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.

Real estate’s similar in so much as there are specialties, or brokers who work in certain specialties. If you have a real estate property that’s in the rental housing market or the 2-4 unit size, the broker that you hire to assist you in that transaction should specialize in the residential investment section of the market. A similar type of property is the 5 residential units and up or the apartment house investment, but has different requirements for financing and disclosures that the former. Completely different still is the broker that specializes in industrial or office property sales, and still they are different than brokers who specialize in representing tenants and landlords in leasing. So it’s a good idea to select a specialist in the type of property and transaction you’re planning to conduct. Oh! Don’t forget to inquire about the 1031 tax deferred exchange experience of your chosen professional as well.

Another rule of thumb when you’re going out there to select an agent is to interview two or three of them. And you’ll also notice that I said brokers, not agents, not sales persons, not vice-presidents. The reason for that is you need a guy or girl that’s at least taken the trouble to go and get a broker’s license to represent you. Somebody that’s been around the real estate market for fifteen or twenty years and hasn’t considered it worth their while to go and get the extra education to get the broker’s license is somebody that you should not have representing you.

If you’re looking for some additional qualifications, a good way to look at those is to find the agent that took the time and patience to go and get specialty real estate designations. In terms of designations, the top one there is for real estate agents in the commercial field is a CCIM, followed by an SIOR. A CCIM is a Certified Commercial Investment Member, they have a very broad range of knowledge. If anyone can handle cross sections of properties, it would be a CCIM. An SIOR is an agent or a broker who specializes in office and industrial property. Both these organizations have a great network of people all across the country, and indeed, across the world. CCIM’s & SIOR’s are both national and international.

The last designation I’m going to discuss is an RECS, and that is a broker that sells property in cyberspace. That is a Real Estate Cyber Society member. In today’s market, people are buying all over the country, so it is to your advantage to hire a broker that is also Internet-savvy.

Knowing this information will help you find the right agent for the job, not some Hollywood wanna-be. Taking this step will save you both time and money in the long run, and give you a smoother transaction all the way around.

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.

This is not a law change that will effect just the investor’s in the properties. Firstly it will greatly reduce transactions as there is no incentive for investors to leverage the profit from one investment property to a larger one since the the transaction costs and the State Tax will siphon off all the profit. The first causality in this instance is the transfer taxes collected by the counties and some cities on transactions. Next of course is going to sound self serving since I’m a Real Estate Broker, but look at the amount of folks involved in the real estate transaction market here in California… Half of them will have to go, at least!

Now for the obvious… Business doesn’t pay tax, they collect it and forward it, usually including an administration fee for the trouble. Since investment property is owned by investors and administrated by some form of business entity, there is an expectation of profit or return on investment. This means there are going to be some adjustments to accommodate this 10% tax bite into an investors margin. This will have a profound effect in replacement of facilities with new buildings or tenants will have to pay higher rents for functionally obsolete properties. How do you think this will work in the Silicone Valley?

The residential property will be effected just like the retail, office and industrial only over a greater number of investors. Since residential investors tend to be entrepreneurial folks, they’ll look for other places to invest first and avoid the hassle of tenants and toilets for the reduces return. The alternative to all the above is that is a further decline in property values will take place to offset the loss of the 1031 tax deferred exchange. This, of course will will reduce the revenue from property tax and defeat whatever temporary benefit these fools hope to achieve by their misguided attempt to eliminate a section of tax code that has served the nation and the state well since 1921. 89 years… What are they thinking?

It’s time for all responsible citizens to call these folks in Sacramento and remind them they need to defeat this proposed law in the interest of keeping California on the cutting edge and maintaining our standard of living. Please call your state representative and enlighten them to the error in their short sighted proposal.

Sorry I just had to have a rant on this stuff. It’s too important to ignore. Leave us a comment.

One Stop Medical Center

We all agree that real estate investing is a cyclical creature but there are specific sections that can provide a hedge to the boom and bust cycles. In previous downward trends in the real estate market, the three types of investment properties for stability and income in good times and bad were the types of properties that fall into the categories that service food, shelter, and wellness. This time around it’s no different.

In the food category shopping centers with grocery store anchored tenants are still holding up quite well for investors, although the big box stores have made a dent on their performance in this cycle. This would make them the slowest performer out of this trio, but then again, much better than any other section of retail. By and large the restaurant section is in lots of trouble with lots of closures and are not included in the food section.

When it comes to shelter everyone has got to live somewhat and that’s what makes this my favorite type of investment. The key to Apartment house or Multifamily Properties investing is “location”. People will drive to own, but will not drive to rent so the location of the property has tremendous importance on the value of the investment. Well located properties are always in demand by tenant residents resulting in less turnover of tenants and they will also command a higher rent when available.

With the huge surge in home foreclosures over the last three years, the apartment market has become a desirable place for both investors and residents. For residents there several advantages to apartment house living. Typically there are better facilities in apartment complexes than in most single-family homes and the renter always has the option of living close to where they work or play thereby eliminating commuting costs in terms of time and auto expense. For most people it’s also a lot more cost effective to rent and live in an apartment that it is a single family residence.

For the investor, apartment houses have the advantage of numbers. A multifamily apartment complex with 100 units is technically not concerned if he has four or five units vacant at a particular time versus the investor with a retail center or an office building that has fewer tenants with larger percentages of the overall income involved in a vacancy. The apartment house investor also has a more favorable tax treatment as his depreciation schedule is 27.5 years versus the 39 years in commercial property. Another advantage here is, that in lean times, tenants can take advantage of government assisted rent programs enabling them to stay in their apartments and in some cases the landlord can get paid a little more. These among other things make multifamily apartment house investing the favorite among savvy rental property income investors.
That brings up the wellness sector. For many reasons the Medical Offices Facilities are always in demand especially where the demographics are trending toward senior. There are pros and cons with medical offices from the investor prospective. First the pros. Stable long term tenants with a steady reliable source of income. Expanded health care insurance coverage to more people will create more demand and increase the value of most medical facilities. A disadvantage or con in Medical Office is the requirement of additional parking in most markets.

Included in the wellness sector are the drug stores. These have long been the darling of the NNN lease investor and favored by many. The concern I have with these leases types are twofold. Firstly, they’re away too long and secondly, the rent adjustments are very low and will effect the value of the property for the later years of the lease. In the liquidation of an estate I recently encountered a franchise lease in the final 5 year leg of it’s 25 year life. The scheduled rent was only 30% of what was considered fair market, resulting in a huge adjustment in the price to allow for the reduce income for the 4 remaining years. Och!

This current week in our local market there has been a rather large Medical Office building deal involving 2 hospitals and 3 medical group facilities. There was also a 128 unit apartment deal right here in Orange County, CA.

If you’d like to ask a question or leave a comment, we’d welcome it and assure you we will respond.