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Archives for 2012

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Real Estate Investment Is a Business

Modern BuildingI was talking with a long-time real estate investor over lunch. He said that he had recently realized that real estate investment is a business.

Many real estate investors think that real estate provides passive income (and it does) and that they can sit on the beach while the checks roll on in. However, they don’t realize that it takes work and a plan to develop that passive income.

Self Employed or a Business

Many people find themselves self-employed. They end up trading their time for dollars. If they don’t work, they don’t get paid. Robert Kiyosaki calls this “Owning a job.”

Business owners leverage the work of other people to convert employees’ time and effort for dollars. Business owners build a system and a team to produce a product or a service. Business owners can go on vacation and have the business run on its own.

Real Estate Business

Owning rental and investment real estate is very similar to a business. You have clients – tenants, a product – housing or rental space, managers – property managers, sales – leases and rent, and profit – cash flow.

Realizing that real estate is a  business helps the investor develop a plan or strategy to reap the greatest reward from the business. How?

Image courtesy of sritangphoto / Freedigitalphotos.netImagine a strip retail owner. If she thinks of her rental space as a product, she can envision who she will sell it to, how she will market to them, and what they are willing to pay. She can also think through objective ways of making her product (space) more attractive to tenants — fresh paint, a new sign, cleaner landscaping.

Correctly thinking about systems and personnel enable an investor to step away from the day-to-day entanglements of real estate. Viewing your real estate investments as individual businesses can help you to improve the profitability of your properties and your personal wealth.

What do you think? How else does real estate correlate to business? Leave a comment below.

Image courtesy of sritangphoto /Freedigitalphotos.net

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Stuck in 2007

I speak with a number of real estate investors that own duplex, triplex, or fourplex properties and they expect to get 2007 pricing for their property, even though it is 2012. They are stuck in 2007. When I tell them that I think their property would sell for a range of value, they are upset that the market won’t pay them more for their property.

For some owners, this is bad news because they bought in 2006 or near the peak of the real estate bubble. When I tell them the current market’s assessment of their property they are underwater on their investment property.

For other owners that bought prior to the real estate bubble, they still have a significant amount of equity in their property. This equity may be earning a very low return when compared with other investment alternatives.

Harmful Thinking

One of my favorite shows is ABC’s Shark Tank. On the show aspiring entrepreneurs and inventors pitch their ideas to a team of wealthy investors or “sharks”. The entrepreneurs have to sell the Sharks on why their idea is going to make money and be a good investment.

On many of the episodes a Shark will tell the aspiring entrepreneur that although he/she likes the person or the investment, he/she cannot invest because they are a disciplined investor. Kevin O’Leary frequently refers to his money as “an army” that he likes to send out making sure that they bring back more than they left with.

Living in the past is detrimental to making wise decisions about the future. Eventually prices may get back to the level of 2006 or 2007. The question is: How long is the investor willing to wait for those prices? How many better investments are you going to miss because you are waiting for the market high to come back?

Thoughts?

What motivates people to hold on to an investment even if it is not generating optimum returns?

 

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Thinking of a Short Sale… Do it Before 2013

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. The IRS generally considers the forgiveness of debt as a taxable income to the person that receives the forgiveness. (This is not tax advice. Please contact your tax attorney, CPA or other tax professional before making a business decision.)

Imagine Joe owes $100,000 to Frank. Joe only has $80,000. Frank agrees to let Joe pay him $80,000 and he will forgive the rest. Frank wants to claim the loss of $20,000 on his income taxes. In order to do so the IRS requires him to file a 1099-C for cancellation of debt. The 1099-C names Joe as the recipient of that $20,000 of “income” on which Joe is now liable for taxes.

The Mortgage Forgiveness Debt Relief Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This act only applies to debt on your primary residence and not investment properties or second homes.

Time is Running Out

The Mortgage Forgiveness Debt Relief Act was set to run from 2007 through 2012. It is set to expire on December 31, 2012. Depending on Congress this act may not be extended beyond its initial term.

This means that short sales must be done prior to 2013 in order to qualify for forgiveness under this act. If you are considering a short sale of your primary residence, now is the time to list if there is any hope of closing prior to 12/31/2012.

 

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Don’t Forget the Property Insurance

Most lenders require that you have property insurance on your property. Since the loan they made is secured or collateralized by a property with structures on it, they want to make sure that if the structures burn down (and the value of the property decreases), they can still collect their money.

Consequently, most lenders notify your insurance carrier that they want to be notified when policies are up for renewal. They also want to be notified when property insurance is not renewed by the borrower.

If a borrower does not have their insurance in place, a lender will place what is called force-placed or lender-placed insurance. Most of their loan documents require that you reimburse the lender for the cost of this policy.

As this NYTimes article lays out, forced insurance comes at a much higher cost from insurance companies. For homeowners these policies can be 2 to 10 times more expensive than standard policies, according to the article. It can be a crippling experience to a property owner that is trying to get back on their feet.

What’s the moral of the story: Keep you property insurance paid. If you pay it, your lender won’t have to.

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Investment Choices and Timing

When do you need your retirement income? Ten, 15, 20, or 30 years from now?

I read an article about how Canadian pension funds are switching their investment models. The major change is to a model centered around liability driven investments (LDI). Pension funds take money in, but don’t need to pay that money out until 20 or 30 years down the road, when the pensioner retires. Consequently, LDI investing seeks to buy longer duration investments that match the timing of cash disbursements to retirees.

Another interesting tidbit from the article is that Canadian pension funds are targeting long-term returns of 6% per year. This is in contrast to U.S. pension funds which average a target return of 8% annually and European funds which target 5% per year.

Investment Choices

I think it is very interesting that the pension fund managers (arguably some of the smartest investors in the world) are moving away from traditional stocks and bonds.

One of the advantages of stocks and bonds is liquidity or the ability to quickly sell the investment and convert it to cash. Because of the liquidity of stocks and bonds, it is also more volatile and subject to pricing fluctuations.

Pension funds are investing for the long term 15-30 years down the road. They don’t need the liquidity that stocks and bonds provide. Consequently, they are also avoiding the volatility of the market while still able to generate their target returns.

Retirement Investors

If you need money in the near term, less than a year or two, the liquidity of stocks and bonds may make them advantageous.

However, your retirement funds are probably going to be used in 15-30 years just like the pension funds. Consequently, liquidity is not a primary concern. Longer term investments, like real estate, make sense for retirement accounts. Retirement investors can forego the volatility of stocks and bonds, and pursue longer term gains with a vehicle that matches their investment horizon.

What do you think? Is this a strategy you would put in place?

Company Profile

Welcome to Maclennan Investment Group, Inc., your East Bay Area real estate investment advisors. Maclennan Investment Group assists buyers and sellers of real estate maximize the investment potential of their real estate assets.

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Offering real estate services in the communities of: Walnut Creek, Concord, Pleasant Hill, Martinez, Alamo, Lafayette, and surrounding cities.

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925.385.8798

Maclennan Investment Group, Inc.
3380 Vincent Rd, Ste HUB
Pleasant Hill, CA 94523
p. (925) 385-8798
Licensed Broker in the State of California, DRE#01871809
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