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August 18, 2009 by Peter Maclennan Leave a Comment

Gathering Your Real Estate Investment Team

Every 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.

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Filed Under: Real Estate Investing Tagged With: Real Estate Investor, Real Estate Investors

July 15, 2009 by Peter Maclennan Leave a Comment

A Window of Opportunity

Dear 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.

  1. Expect to see rental rates decrease and vacancy increase as more investors purchase single family homes as rentals increasing the supply.
  2. 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.

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Filed Under: Bay Area Real Estate News, Real Estate Investing Tagged With: Bay Area, Real Estate Investing, Real Estate Investor, Retirement Freedom

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