The post on Warren Buffett made it into the Carnival of Real Estate over at 7DS Associates.
Real Estate Investor
...now browsing by tag
1 Million
Accumulation Phase
American Dream
Bay Area
Cash Flow
Commercial Real Estate Investing
Contra Costa County
Deed of Trust
Depreciation
Diversification
East Bay
Institutional Real Estate
invest
Investment Group
Investment Income
Investment Opportunities
Investment Property
Nest Eggs
Note Purchases
Principal Reduction
Property Investors
Property Managers
Real Estate Investing
Real Estate Investment
Real Estate Investor
Real Estate Investors
Real Estate Notes
Rental Property
Retirement
Retirement Freedom
Retirement Goals
Retirement Strategy
Section 1031 Exchanges
Social Security Benefits
Walnut Creek California
The Carnival of Real Estate
Wednesday, February 3rd, 2010Is a Property Manager Right for Your Investment?
Tuesday, January 26th, 2010Property managers are very important to passive investment property owners, to out of town property owners, and property owners with multiple real estate investments.
Passive owners, as opposed to active owners, generally don’t want to deal with the three “T”s of real estate investment ownership; toilets, tenants, and trash. Passive real estate owners are not the “hands on” investor. They allow others to manage the day to day activities while there investment produces income for them.
What do property managers do?
A property manager, manages property. They provide oversight and administration so that a property meets the investment objectives of the owner.
A good manager will find and screen tenants, maintain an investment property, collect rents, evict non-paying tenants, and pay bills related to the real estate under management. They perform almost all of the tasks that an owner would normally handle.
How are property managers paid?
Most property managers receive a percentage of the gross income from a rental property. This can range from 2% to 10% of gross operating income depending on the standards for a geographic area. In some cases a property management company may charge a flat fee for individual rental homes.
How does a property manager help a real estate investor?
Daily Management Issues
Property managers can add value to owners that are unable or unwilling to handle the day-to-day activities of a property personally.
Thanks to the Second Law of Thermodynamics we know that things break down. Pipes and water heaters break, toilets and drains clog, and roofs can leak. A property management company takes these calls rather than the landlord. This leaves the landlord free to pursue other interests and invest in other projects.
Local Management
An owner with real estate in a another city or state will find it valuable to have a local management company collect the rents, screen tenants, and perform routine property maintenance. A real estate manager can help establish competitive lease rates from their local market knowledge.
Efficiency
Investment property owners with multiple properties may benefit from the efficiency a real estate manager can offer. An investor could continue working a 9-5 job while still reaping the benefits of owning multiple real estate investments, without having to deal with management responsibilities.
Legal Knowledge
The legalities of being a landlord vary from city to city. Rent control and tenant rights, if mishandled, can open a property owner to risk of a lawsuit. A knowledgeable property manger will keep a property in compliance with local, state, and federal laws.
Caveat Emptor: Buyer Beware!
Not all property managers are equal.
Unfortunately, property managers are tempted by greed like the rest of us. Some real estate managers may have unscrupulous arrangements with outside contractors that charge property owners above market rates for repairs, then pay a kickback to the real estate manager for using their service. Investors should “trust their gut” and go with managers that they feel are honest and trustworthy.
An investor should make sure that a property management company adequately maintains properties. Checking a few of their properties to see how well they maintain properties is a good idea.
When selecting a property management company ask for references or client testimonials.
The Institute of Real Estate Management (IREM) is a source for education, resources, and membership for real estate management professionals. IREM allows owners to search for IREM members.
(Photo: Front_Corner_Perspective_Landscape by Chad Jones)
has been the source for education, resources, information, and membership for real estate management professionals for more than 75 years.
Selling Tax Deferred Properties at a Loss Still Can Trigger a Taxable Gain
Tuesday, December 8th, 2009One of the benefits of holding real estate for investment is the ability to defer taxes on capital gains through what is known as a 1031 exchange. Section 1031 of the Internal Revenue Code provides for investors to delay capital gains on the sale of property as long as they invest the proceeds in a “like-kind” (same type) investment within 180 days.
Real estate investors have been using 1031 exchanges for decades to defer gains in properties and use the proceeds to invest in larger properties. With the recent decline in real estate values and the loss of some properties through foreclosure, 1031 exchanges may actually trigger capital gains tax for real estate investors.
The California Real Estate Journal detailed this dilemma in an article on September 14, 2009.
For the thousands of people who have invested in 1031 tax-deferred exchanges, the real estate downturn may be coming home to roost.
Section 1031 exchanges allow real estate investors to defer their capital gains taxes as long as they roll the gain from the sale of one property into the purchase of a like-kind replacement property. With today’s sharp decline in commercial real estate values, their current property likely is worth less than what they paid for it.
If they sell their property, even if they don’t make money on the sale, they are going to trigger the capital gains taxes that were due from their previous sales. Selling at a loss does not eliminate those deferred taxes, according to Daniel Oschin, managing director of BGK-Integrated Group and president of BGK-Integrated Investment Services.
“Your taxes are never wiped out,” Oschin said.
It’s a situation that is likely to hit home with people who have traded properties over three, four or even five different legs of a 1031 exchange, re-leveraging them over the years and rolling significant gains into the property they’re currently holding.
What appears to be a loss, may in fact trigger taxable income, because of a low tax basis. This unfortunate situation can leave a real estate investor caught trying to find cash to pay Uncle Sam. (Jeff Brown details how this catastrophe was avoided here.)
Competent tax professionals are necessary for every real estate investor. A CPA or tax attorney should be contacted when considering a real estate investment decision.
Real Estate Investors of Tomorrow
Wednesday, August 26th, 2009Enoch Lawrence, Senior Vice President at CBRE Capital Markets, has written an article Deconstructing the Downturn in the Commercial Real Estate Capital Markets. While the title led me to believe it would be an analysis of how we got here, I was surprised to find a commentary on where commercial real estate investing is headed.
The new world order in commercial real estate will be governed by patient, well-capitalized investors. Many new names and faces will appear and many old ones will re-surface again to cherry pick the market for quality assets ―the players are changing daily. The acquisition decision process is driven by equity, not debt, in this alternate universe. Investors must match their equity profile with the appropriate mode of lending, while at the same time monitoring the state of flux of the commercial real estate capital markets where respective sources of capital become more or less available. Government supported programs will significantly impact the availability of capital in the short run, but investor confidence must return to the market to help stabilize the lending environment. For this to happen, all market participants must realize that capital is available. The world has changed, and to access this capital, a healthier balance between risk and return must be achieved.
The market will be characterized by investors that have capital and are willing to earn a reasonable return equal to their risk. Mr. Lawrence questions whether 20% Internal Rates of Return (IRR) are realistic in the model going forward:
One may inquire about the vast sums of money raised to deploy into opportunistic investment strategies. In an environment where valuation remains challenging, you may ask how a 20% Internal Rate of Return over a 3-5 year holding period is being modeled and presented as a sustainable investment model en masse. This may be possible with small pools of capital deployed in niche markets, but the large scale deployment of this capital in search of distressed opportunistic returns has not materialized and is further exacerbated by more conservative underwriting from available debt sources.
Prior to the Lehman Brothers collapse in September of 2008 real estate markets were awash with inexpensive leverage. The market for debt that existed allowed real estate investors to leverage deals over 90%, in some cases, at historically low rates. The leverage boosted returns and allowed investors to have Internal Rates of Return of 20% or greater on paper.
Going forward investors must adjust their expectations to a lesser return. The important factors are going to cash on cash return and a stable long-term investment.
Gathering Your Real Estate Investment Team
Tuesday, August 18th, 2009Every real estate investor should have a team of trusted professionals that advise them on real estate investments. It is best to have an attorney and a tax professional on your team. As well, you should have a real estate broker and a real estate finance expert on your team of advisors.
Jeffrey Hare, an attorney in the Silicon Valley, demonstrates why gathering your team is important before you invest in his article, Get Legal Advice BEFORE You Invest.
Why should you seek legal assistance as part of your due diligence when considering an investment opportunity? For starters, it might be a lot less expensive than seeking legal assistance after something goes wrong. To be perfectly honest, I would really prefer not to hear a client tell me “I wish I’d talked to you sooner.” Actually, there are several ways an attorney can be a valuable member of your real estate investment team. Here are a few points to consider when making the decision how to maximize the return on your legal dollar.
For starters, you need to focus on your goals. Most successful real estate investors have a clear focus on their financial objectives. If you have a plan and are focused on clearly defined and realistic objectives, you’ll be able to communicate these objectives to your investment team. By staying focused, you can avoid distractions and concentrate on your goals. How can you expect your advisors to help you get where you’re going if you don’t know where you want to end up?
The next step is to make sure you consult with an attorney familiar with real estate issues. Not all attorneys are equally knowledgeable in all areas of the law. You wouldn’t hire a plumber to do your electrical work, or consult with a foot doctor for a head injury. For the same reason, a brilliant patent lawyer may not be the best choice for evaluating a real estate investment opportunity. If you are not sure — ask. It will save both you and the attorney time — and money.
Next, heed the age-old maxim: “You get what you pay for.” Don’t start the conversation “Do you give free advice?” The right attorney is going to provide you with valuable advice that will be worth the cost. The attorney – client relationship is not only privileged, and over a period of time your attorney can become a very valuable and trusted member of your investment team. Work on developing a long-term professional relationship with your attorney, and you will realize a good return on your investment.
Spend wisely. Let the attorney know your budget. Most attorneys will work with you, so long as you have realistic expectations and take a reasonable approach. At the same time, recognize that the true measure of value of professional advice is avoiding the loss of your investment. If you are investing $50,000 in a project that promises to yield a 10% return, you need to measure your legal costs against the risk of losing the entire $50,000, not as a percentage of your profit. Remember, you will hopefully be able to apply good legal advice over and over — thus maximizing your return on your legal investment.
Avoid litigation. One of the reasons to do your due diligence is to avoid situations that will result in litigation. Unfortunately, there are many: poorly drafted investment contracts; easement disputes; zoning violations; and overzealous promises, to name a few. No one benefits from litigation except trial attorneys. Aside from the costs, there are the inevitable delays, fractured relationships, and lost opportunities. Again: Avoid litigation.
Follow the advice. You paid for it — so use it! Of course, it’s your choice. But you should at least give the legal advice some consideration before you take action. Many times, an attorney cannot unequivocally state that a particular real estate investment complies 100% with all applicable state and federal laws, tax codes, SEC regulations, etc. Each investor should recognize that there is no such thing as 100% certainty, and adjust their risk tolerance accordingly.
Ultimately, the decision whether to proceed with an investment is up to the individual investor. Seeking advice from financial planners, tax advisors, real estate professionals and attorneys, as well as from experienced investors, is all part your due diligence. Getting legal advice before you invest is often a smart investment strategy.
A Window of Opportunity
Wednesday, July 15th, 2009Dear Bay Area Real Estate Investor,
If you are reading this and you still have equity in your real estate investments, Congratulations! (I apologize if that offends others of you.) You have managed to buy at the right time and have kept your property performing well.
However, at the current time you face an important juncture. What will you do with that equity?
Will you allow your equity to ride? Or will you cash in your chips to play at another table?
What Do You Believe About the Future?
Your decision whether to stay in the properties you currently own or leave for greener pastures will likely be based on your perception of what the future holds.
You are likely to stay in your current properties if you believe that:
- Real estate in California is the best and always goes up;
- You need to drive by a property to “sniff the dirt”;
- Rents and vacancy are stable and will go up;
- Appreciation is not important, only cash flow;
- Inflation is nothing to worry about, I have a fixed rate amortized mortgage; or
- Cap rates won’t go higher.
However, you might be ready to move if you believe that:
- Cap rates are headed up;
- Inflation is coming and interest rates will go up;
- Rents are declining in the near term and vacancy is rising;
- Other states may provide a greater return on my capital; and
- Appreciation is important to you.
The Open Window
If you find your beliefs more closely aligned with the second group, I want to offer you a reason to move your hard earned real estate equity now.
For Multifamily Owners
There is a window now before vacancy peaks, rents bottom, and cap rates rise to sell your Bay Area property and transfer your equity into a property that will appreciate faster than California properties.
Currently, commercial real estate has begun its slide to a new normal. Vacancy is rising and rents are decreasing as companies lay off employees and those laid off move back in with Dad and Mom.
As well, cap rates have begun to increase. As they do so they erode the value of a property as investors consider alternative investment returns. If inflation finds a foothold, interest rates will rise taking cap rates with them.
This leaves a brief window when vacancy hasn’t soared and rents haven’t bottomed to sell your property before inflation takes cap rates higher.
For 1-4 Unit Owners
If you have equity in a single family home, a duplex, a triplex, or a fourplex, now may be the time to move that equity to another property in an area that will provide above average appreciation in the coming years.
It is likely that the value of your rental property will further decline for two reasons.
- Expect to see rental rates decrease and vacancy increase as more investors purchase single family homes as rentals increasing the supply.
- As well, California has imposed a temporary moratorium on trustee’s sale. The Contra Costa Times reported that while foreclosure filings are piling up, actual trustee’s sales are slowing. This could mean that another wave of foreclosures is yet to come to market, further driving down prices.
Why Move Now?
Moving your equity now is a chance to preserve your equity and invest in in a location that will offer you above average appreciation in the coming years.
However, moving your equity is not the best option for every individual. You need a personalized investment strategy tailored to your needs, desires, and situation.
If you would like help evaluating your situation and charting a course to retirement freedom, please give us a call at (925) 385-8798.
