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Commercial Real Estate & Inflation

Many in the media and financial world are predicting Inflation. Because the Fed is devaluing the U.S. currency, many assume that inflation will come.

Inflation

What is Inflation? I am glad you asked.

Inflation is the gradual or rapid loss of purchasing power. Many of us have seen this at the grocery store or gas pump. When I first started driving, gas only cost $0.99 per gallon. I recently filled up at over $4.00 per gallon. I used to be able to buy a candy bar at the checkout counter with 2 quarters. Today it will likely cost you closer to $1.00.

In both of the examples above one dollar ($1) lost it’s ability to purchase an item. One dollar used to purchase a whole gallon of gasoline, now it only buys 1/4 of a gallon. A dollar used to buy 2 candy bars, now it only buys you one.

Inflation occurs when an abundance of money chases after scarce resources.

Effects of Inflation on Wealth

Inflation can ravage the wealth of an individual. If an individuals portfolio does not grow at a rate faster than inflation, the portfolio is actually losing the ability to buy services, food, and shelter.

In the example above a $1,000,000 portfolio used to buy 2,000,000 candy bars. Now it can only purchase 1,000,000 candy bars. If the rate of inflation remains the same, the same portfolio may only buy 500,000 candy bars in the near future.

Exchange the candy bar for bread, water, electricity, or healthcare and you can see the devastating effects that inflation can have on the wealth of an individual.

Protecting Against Inflation

Kyle Bass is the founder of Hayman Capital, a hedge fund. He made quite the fortune by short selling the sub-prime mortgage market. He spoke to a CNBC reporter after a conference about his thoughts on inflation. A link to the video is below.

In the video Mr. Bass says at the 2:05 minute mark that he expects inflation. At the 2:22 mark he suggests owning productive assets (apartment buildings). At the 2:35 minute mark he also recommends securing long-term fixed rate financing on those assets.

http://video.cnbc.com/gallery/?video=3000143907

If you want to learn more about purchasing hard assets to protect your wealth, please contact Peter at 925.385.8798.

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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.

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.

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

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Disclaimer: Information deemed reliable but not guaranteed. This site is not meant to offer legal or tax advice.

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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
Equal Housing Opportunity
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