Wednesday, December 27, 2006
After I finish the book in the next few days, I'll discuss some of its best sections. But to start, it appears to do a very good job of explaining all of the benefits of tax depreciation, which many investors still don't entirely understand. Specifically, the book explains how depreciation is a paper loss or tax deduction, which does not require any out-of-pocket cash payment. And, how it saves tax dollars.
More to come . . .
Thursday, December 21, 2006
Property appreciation is truly "wealth forced upon the property owner."
A property gains in value about 2-5 percent annually without the owner doing any work. (Of course, if you make improvements your appreciation can be greater). With that, owners can pull money out through a re-finance, tax free, for use in any way they see fit. Remember, when you pull money out of an investment property you own, it is a tax-free loan that you never have to pay back. Your renters (office tenants, multifamily renters, industrial tenants, etc.) pay it back for you.
So for example, if a $100,000 investment appreciates $10,000 over a couple of years, you can pull out about 75 percent of that amount, or $7,500. Pay for kids' braces, college loan, trip, down payment on another investment property . . . whatever. All this helps insulate investors from the effects of inflation.
Inflation is actually a good thing for investment property owners. Inflation forces wealth upon them. But as one of my colleagues noted at the meeting this morning, you can't exploit this "hedge" if you don't own anything.
Monday, December 18, 2006
TMG Ventures chairman and CEO Michael Covarrubias recently characterized his firm's approach to development. Interviewed by Real Estate Media Group during the inaugural RealShare San Francisco gathering to chat about the things that set his Oregon-based investment firm from the others, Covarrubias kept repeating his organization's penchant for "taking looser assets and converting them to winners." That is key to TMG, which has acquired or built a respectable 18 million square feet of commercial space--totaling $3 billion--since Covarrubias took control. Here is what he said about finding properties that need better management and some fixes, and how they are the real money makers...
"There is so much money chasing real estate and it's looking for different ways to arbitrage. Our arbitrage is to find broken assets or assets that need significant fixing, let's say an office that needs a seismic upgrade. For us the niche is value-add. That's why we'll always be different."
Covarrubias also talked of how they plan to jump into multi-family investment and the opportunities it such properties present..... "We've done condo projects, but we just got a $100-million equity investment from CalPers with which we'll be able to do $400 million of residential projects. We'll keep looking for broken deals. But with the money from CalPers, we now have a housing strategy with a long vista. I'd love to find some broken residential deals."
Like I said, if the big boys are doing it, so can anyone with some common sense. And it does not take a $100 million investment to get cash-on-cash returns of eight, 10 or even 12 percent.
Thursday, December 14, 2006
The main objective of the Ohio House Bill 294, titled "Expedited Tax Foreclosure of Abandoned Land," was to permit certain foreclosure cases to be filed with the county board of revision now, instead of going through the judicial process. It further authorized the county treasurer or a certificate holder to compile a list of abandoned parcels of land suitable for disposition under the act's expedited foreclosure procedures. Often this is a result of delinquent real estate taxes.
The rationale of the legislation is to speed up the foreclosure process of abandoned and blighted rental properties in Ohio's larger cities and counties. In addition, the bill establishes an appeal procedure for challenging determinations of eligibility for the 10% "rollback" exemption from real property taxes. Though all properties are recorded with the auditor's office, there was a perception that bad situations can be averted if the name of a contact person, rather than just the owner, is available, especially for cases where the property has been neglected or the owner has failed to pay taxes in a timely manner.
For a copy of the proper form, contact your Ohio County Auditor. Here is a link to the overview letter sent by the Franklin County, Ohio Auditor's Office. The form is identical for all of Ohio's 88 counties. Go to: http://18.104.22.168/proprent/
Wednesday, December 13, 2006
Policymakers held back an extra gift that Wall Street was hoping for: a signal that rates might actually be lowered soon. Discussing economic conditions, Fed policymakers said growth has slowed over the course of the year. Nonetheless, they stuck with their previous judgment that the economy will probably expand at a moderate pace in coming quarters. This time they hedged their assessment a bit and noted that recent economic barometers have been mixed.
Tuesday, December 12, 2006
In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. It is often used to evaluate the cash flow from income-producing assets. Generally considered a quick napkin test to determine if the property qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is king. We in the business, however, also use it to determine if a property is underpriced, indicating instant equity in a property.
Suppose an investor purchases a $1,200,000 apartment complex with a $300,000 down payment. Each month, the cash flow from rentals, less expenses, is $5,000. Over the course of a year, the before-tax income would be $5,000 × 12 (months) = $60,000. You then divide your before-tax income ($60,000) by the down payment invested, or initial equity ($300,000). So the cash-on-cash return would be .20, or 20 percent.
Because the calculation is based solely on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor's tax situation, the particulars of which may influence the desirability of the investment.
I need to point out that this calculation does not take into account appreciation of the property, nor depreciation (cost recovery), which provide additional value when calculating a project's worth.
Monday, December 11, 2006
Here's the word/phrase for today: "Realized Gain." Realized Gain in a tax-free exchange is a gain that has occurred financially, but is not necessarily taxed. Example -- Reggie's land has a tax basis of $10,000. Its market value is $75,000. He exchanges the land, tax free under Section 1031 of the IRS Code, for Pam's warehouse, which was appraised at $75,000. Reggie's realized gain is $65,000. None of his realized gain is recognized, however, because he did not receive boot.
But multi-family in slightly older, more established areas is booming, and demand to invest in such properties remains VERY strong. I wrote last week about all the millions of dollars pouring into the Midwest -- and Ohio -- from California investors seeking to buy multi-family projects. There simply isn't enough product on the market. But out-of-state investors are somewhat hesitant to acquire brand new projects until they have some sort of track record.
The Trueman family owned hundreds of acres along I-270 20+ years ago, and have either sold off or developed most of the property. It was a great business the Trueman family started, Red Roof Inns. It helped pay for college in the early 1980s for me -- I was a night auditor at the Worthington, Ohio property. Its nice to see the family, and an old acquaintance from my old neighborhood, teaming up to make sure the last pieces of the Trueman holdings are very nicely developed.
Sunday, December 10, 2006
Thursday, December 7, 2006
Hats off to the guys in Alabama who put together this revolutionary tool! I look forward to working with you!
The 15-year fixed-rate mortgage averaged 5.84 percent, down from 5.87 percent last week. A year ago, it averaged 5.87 percent. This is the lowest the 15-year FRM has been since the week ending Feb. 9, when it averaged 5.83 percent. Rates for five-year adjustable-rate mortgages (ARMs) came in at 5.92 percent this week, down from 5.95 percent last week. A year ago, the five-year ARM averaged 5.78 percent. It was the lowest since February, when it averaged 5.89 percent. One-year ARMs averaged 5.43 percent, down from 5.46 percent last week. A year ago, the one-year ARM averaged 5.16 percent. This is the lowest it has been since March, when it averaged 5.41 percent
"Continued signs of slowing in the housing market and weakness in the manufacturing sector helped keep mortgage rates down this week," said Frank Nothaft, Freddie Mac vice president and chief economist.
Tuesday, December 5, 2006
Monday, December 4, 2006
"Unlike the larger rental market, which is subject to economic swings, student housing is recession-resistant, and may well be practically recession-proof," say Richard Levy and Michael Tucker. The two are executives of the National Multi Housing Council, so naturally, readers might suspect they are biased. Still, they confirm what investors in campus area properties -- and brokers handling those properties -- already know. Off-campus housing is a tremendous place to grow investment funds.
"In addition to the favorable demographics that the echo boomers will create over the next decade, the non-cyclical economic nature of higher education is an important consideration. In good economic times, a college degree provides an important credential in the job market. In difficult economic times, people attend college to improve marketability and temporarily avoid a challenging job market," they write. A quick check with The College Board shows that many students take longer to graduate these days and remain in student housing longer than previous generations. In fact, almost 40% of today's undergraduates are over age 24, The College Board reports. So in either good or bad economies, student housing is in strong demand.
I can tell you that many owners of property around the Ohio State campus, for example, are absentee owners and have never seen their properties in person. They are quite content to get a check once a month, or once a quarter, and fully, and legally exploit their tax advantages. The same can be said for other "big city" campuses. Currently, several out-of-state colleagues in the Prudential CRES network have investors seeking off-campus student housing investments.
Who knew that people would want to return to college after all these years ? . . . only as investors instead of students?
Friday, December 1, 2006
Thursday, November 30, 2006
The company rates manufacturers to sell its services to industrial purchasing agents. In a prepared statement, eMvoy CEO Craig Landy said: "There is so much confusion about the state of American manufacturing. The public perception is that, overall, U.S. manufacturing is weak. After looking at 100,000 manufacturers, we found that the state of U.S. manufacturing is not bad -- as long as you are in the right state.
Here are the Top 10 states in manufacturing competitiveness, as ranked by eMvoy:
9. New York
Wednesday, November 29, 2006
Let me go on the record. I don't like flipping. There is too much risk for the potential reward. And you don't get any of the tax advantages of long-term investing. It's quick money here and there, but does nothing to build long-term wealth. In the go-go 2005 market, when property flippers were "having their fun," sales and prices were being driven by what King calls the "greater fool theory" -- that is, buyers were paying inflated prices, assuming they'd find a "greater fool" who would pay even more.
So what happens next? "Every time speculative fever takes hold of a market -- any market -- it's just a matter of time before you run out of fools," King says. Boy is he right! It happens with stocks, coins, gold, futures trading and more. King points out the classic case of "Tulip Mania" that gripped the Netherlands in the 17th century. Tulip bulbs were traded on stock exchanges at outrageous prices and speculators were even trading in tulip futures. The Dutch lost sight of what a tulip is - a lovely flower to be planted, watered and enjoyed."
That's where the lesson sits for all of us, and Craig has hit the nail on the head. Homes and condominiums exist to provide shelter and comfort. They're intended to be lived in, loved, personalized, and enjoyed. When they turn into commodities to be traded for a quick profit, you can be sure that "silly season," as Craig calls it, is here. Seasoned investors and investment brokers understand this. When real estate is sold without regard to its underlying value or function, the pros will step out of the way and let the novices tear each other apart in a questionable profit feeding frenzy.
In a business networking group to which I belong, one colleague mentioned a friend who invested in and fixed up a Florida house to resell. The friend intended to take advantage of the outrageous appreciation that was taking place on homes there. Ultimately, he wound up upside down (owing more to the bank than the property was worth) because of sinking values. But my colleague (a human resources guru) says his friend admitted that he didn't know the Florida market very well when he got in, and used a real estate agent -- his wife -- who also did not live in Florida (nor, I suspect, did she know the Florida market). Someone talked him into jumping on the bandwagon without his taking a moment to look and see whether the economic wheels were tightly affixed, or in this case, ready to fall off. He crashed.
Feeding frenzy indeed....there is a lot of chum floating around in the flipping waters these days. It's what's left of those who don't do their homework, don't use an knowledgable real estate investment adviser to go to war for them, and who forget (or never learned) that property investments should be about ongoing income, not "one-off" turnarounds that are full of unnecessary and often unmanageable. Craig King says it differently: The novices "soon learn an eternal truth -- that at the worst possible time, the world will run out of fools."
Tuesday, November 28, 2006
Friday, November 24, 2006
There have been several news stories in the business media in which some analysts say that EOP may not have received the best price for the deal. “James Core, head of real estate investments at Cohen & Steers Inc. – which held 38.9 million shares as of September 2006 – stated EOP is ‘worth a lot more’ than $48.50 a share,” according to the suit.
And why do they think its worth a lot more? Because real estate provides higher returns they virtually any other investment and they don't want to be pushed out of the Equity gravy-train unless they have been adquately compensated. Stay tuned....this story will likely heat up further.
Wednesday, November 22, 2006
Monday, November 20, 2006
- Apartment buildings can be leveraged to a higher degree than other commercial properties.
- The tax shelter benefits have been favored, although investors usually do not purchase apartments solely for the inherent tax benefits. Benefits include cash flow, leverage and appreciation.
- Real estate has never been considered a liquid asset, and prior to the mid-1980s, apartments were usually more liquid than other real estate vehicles. In the late 1980s, the apartment market slowed as a result of the loss of favored tax treatment. After a period of adjustment, they are regaining popularity. The resale market is generally good.
- Less sophistication is required to own and operate apartment buildings.
- A utilitarian demand exists because people need a place to live.
- Variety of apartment sizes and prices allows various types of investors to enter the apartment ownership market. From "Ma's and Pa's" to major corporations and pension funds—all own apartment buildings.
- Responsiveness to entrepreneurial efforts. Unlike other real estate vehicles, apartment building value determinants (occupancy, income, expenses, financing, etc.) can be affected by the owner, and it is easier to do (as opposed to an office building, where major tenants have long-term leases that cannot be renegotiated until the end of the lease period).
- Professional management is usually available, but at a cost.
- Unit mix must be matched to the demographics of the area (e.g., studio apartments are less likely to succeed in a family area).
- Not having key or anchor tenants may be an advantage.
- Exposure to government regulations (primarily rent control).
- Institutional and seller financing availability.
- Apartment visibility and close proximity to major highways, labor, transportation, shopping, and residential housing tracts are good elements.
- Pricing apartment buildings involves the use of the gross-rent multiplier, price per square foot, price per unit (CPU), and capitalization rate as "rules of thumb," or value measurers.
- Deferred maintenance can be extremely costly and detrimental to achieving investment objectives.
- Ratio of land to improvements affects the amount available for depreciation, and this affects the tax benefits associated with the property.
- If the owner is required to pay utilities, it will substantially affect the expenses connected with the property.
- Vacancies affect the appeal of the property, as do the number of units on the market, and whether or not rents are in line with competition.
- Investors can move up to larger properties through IRS 1031 tax deferred exchanges, thereby delaying payment of capital gains taxes.
- Parking conditions and the number of spaces available, as well as the type (covered, carports, open).
Furnished vs. unfurnished affects the rental schedule and amount of depreciation available.
"The lack of public parking in the Short North has held us back, especially the business district," Lahoti told the Columbus Dispatch. Lahoti, who with his partners owns three Short North nightclubs and three residential projects including the Dakota, said Arms Properties would operate the garage through a third-party company. He said they’re still working out financial details, but he thinks the condos and garage could be built by the end of 2008.
Short North development projects have been generally successful. But the biggest objection I hear from businesses that like the area for a future move is lack of parking. This proposal would be a boost the area sorely needs.
Friday, November 17, 2006
State Teachers Retirement Furor Over Fees To Hire Real Estate Experts Dies Down On Word Of Performance Returns
This is another validation of real estate as a key investment strategy to building wealth. STR stated real estate doesn't just do better than stocks, mutual funds or other investment vehicles; the agency stated that real estate is far outperforming every other investment type in use.
Thursday, November 16, 2006
Despite higher long-term interest rates in the second quarter
and a modest slowdown in transaction activity, commercial
real estate loan origination and securitization activity in
2006 should surpass the record levels set last year.
REITs rebounded sharply in the third quarter from their
relatively weak second-quarter showing and should
outperform the broader equity markets for a remarkable
seventh consecutive year.
Although the near-term outlook for the U.S. property
markets remains healthy, slower economic growth will
affect investor and tenant demand for most, if not all,
For a copy of the full report, drop me a note and I will email the PDF.
With space market fundamentals across all major property
types healthier than they have been in years and with little
evidence that supply will outstrip demand in the next 12
months or so, private real estate should continue to perform
well. This year, we expect the NCREIF Property Index
(NPI) will deliver a total return at the high end of our
forecast range of 12% to 15%. Returns will likely moderate
further next year, but as long as the economy does not
weaken suddenly and long-term interest rates do not stray
too far from the 4.5% to 5.25% range they’ve been in for
most of 2006, the NPI should still deliver 9% to 12% in
Anyway, CREE is an organization of commercial/investment agents and brokers who specialize in real estate "exchanges." These are IRS 1031 tax-deferred exchanges, that enable the seller to indefinitely defer paying taxes on capital gains. We have weekly meetings to tell each other about properties we have listed, or properties we are looking for for our clients who want to buy. We don't just "pitch" properties to each other to see if someone is interested. We brainstorm and problem-solve to help each other sell listings. You see, I might have the third or fourth leg of multi-leg transaction, and be able to help the selling agent with one property put together the puzzle for the benefit of all our clients. A question about capitalization rates from a few weeks ago led broker Furman Tinon to discuss the issue at last week's meeting. Which led to more questions on overall rates of return. Bob stepped up to discuss cash-on-cash returns, after-tax returns, etc., which is what he and I deal in virtually every day with our clients. Something for everyone this morning. Heard about homes in the country, development land in and out of Columbus, investment rentals, a large restaurant near Cincinnati that might be perfect for an outdoors store or conversion to offices, folks looking for apartment complexes, and more. To the good for one of my clients, I learned about four new-build rental homes for sale at the resort area of Indian Lake, 90 minutes northwest of Columbus. I've got a client who is coming out of the sale of a duplex in the Ohio State University area and this might work for him in an exchange as he and his partners exploit the tax advantages of moving to ever-larger investment properties.