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Risk: Getting Your Money Back Guaranteed?

I have been reading Investing for the Future by Larry Burkett on investing principles. I was struck by the author’s clarity in defining risk.

Almost without exception the degree of risk is rated based on the guaranteed return of the principle, not how much earnings the investment might yield.

The key factor in evaluating an investment’s risk is: Will I get my money back?

An investment that could lose lots of money, should provide the investor with a greater reward for their willingness to take that risk.  Conversely, “safe” investments provide less reward to investors, because they have a greater certainty of getting their money back.

This explains why savings accounts are bearing such a low rate of return. The federal government has guaranteed that savings accounts up to $250,000 will be made whole, by the FDIC. Investors in savings accounts are taking almost no risk, so they get almost no reward or return.

If you are interested in earning a higher yield on your savings, please feel free to contact me at (925) 385-8798.

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The Carnival of Real Estate

The post on Warren Buffett made it into the Carnival of Real Estate over at 7DS Associates.

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Is a Property Manager Right for Your Investment?

Property 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.Condominiums or Apartments

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.

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Selling Tax Deferred Properties at a Loss Still Can Trigger a Taxable Gain

One 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.

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Real Estate Investors of Tomorrow

Enoch 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.

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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