Highly Rated New Book On Investing

There is a new book out that is creating quite a buzz in real estate circles. Titled, "Real Estate Advantages," the book penned by CPA Sharon Lechter and attorney Garrett Sutton appeals to every reader. Organized into two sections, the first is about tax benefits of owning real estate. The second section focuses on legal strategies, with particularly well-rounded discussions of the best way to hold title to investment property, and why.

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 . . .

Investment Property: The Hedge Against Inflation

Inflation is on the rise, and investment real estate is the hedge against it. At my weekly Columbus Real Estate Exchangors (CREE) meeting this morning, we noted that the federal government is reporting wholesale prices surging in November by the largest amount in more than 30 years. So what does inflation have to do with real estate? Its simple. The key is property appreciation.

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.

See our Ad in 'Buy, Lease, Build'

We've got an ad in the latest issue of "Buy, Lease, Build" magazine (Ohio edition) promoting Prudential CRES and properties for all investor levels. Business opportunities, multi-family, c-stores/gas stations, offices and more. Check it out!

Even The Big Boys Admit "Broken" Properties Provide Most Opportunity

If the big boys are doing it, so can anyone with some common sense and a good management plan.

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.

Venison in the Freezer

Success this past weekend in Knox County, Ohio. Tom N., Jamie, Tom P., Pete . . .we hit an 80% return this season. Thanks for your support, gentlemen!

Huge Tax Abatements To Spur Further Growth at Rickenbacker Port

The Columbus Regional Airport Authority and Franklin County are creating a community-reinvestment area for a 160-acre strip of land near Canal and Vause roads near Rickenbacker Airport. Developers will be eligible for abatements on all of the real property they build for up to 15 years. The end result will be better lease terms for tenants. Long term, 20,000 jobs are expected to be created in the next 20 years in the Rickenbacker area as warehouses and new manufacturing pops up. County officials say the new reinvestment area will be in addition to one that’s about to be extended for 20 years. It includes nearby land in Franklin County owned by the port authority. Together, the these so-called CRAs cover about a quarter of Rickenbacker Global Logistics Park, an industrial area near the airport being developed by the airport authority, Duke Realty Inc. and Capitol Square Ltd. The new CRA covers about 160 acres near Canal Road that contains mostly single-family homes. The authority expects to close in early January on these properties, which it will add to the logistics park portfolio. Robin Holderman, vice president of real estate for the airport authority, said that the average cost per acre was $57,000. According to the Columbus Dispaptch, the Ohio Department of Development must approve the CRA, which the county expects soon. A key benefit is direct access for tenants to the Norfolk Southern rail line that borders the western edge of the Canal-Vause property. There was some opposition. Hamilton Local School District officials had to agree to it, and two incentives made it work. The authority agreed to buy Hamilton South Elementary School at Shook Road and Rt. 317 for $1.1 million. The school is expected to close in August. Also, the authority is expanding a current pre-annexation agreement that covers land it owns at the rail campus to include the Canal-Vause tract. It will reimburse the school district for property-tax benefits it loses when the houses are acquired. That’s necessary because the airport authority is a nonprofit organization and is exempt from paying property tax. Land prices in the area have been driven up by the development, and expected expansion of free trade zones. Many warehouses built in the past 24 months are still empty, but may be full in the coming months with these new moves.

REMINDER: New Ohio Law Requiring Registration by All Rental Property Owners

Just a quick reminder that a new law that went into effect Sept. 28, 2006, in Ohio requires all rental property owners to register their contact information with the County Auditor in which the property is located. It's passage was supported by the Ohio Association of REALTORS®, the Columbus Apartment Association (CAA), and the Ohio Apartment Association (OAA).
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://209.190.122.34/proprent/

Twin Condo Towers To Rise Above Ohio River

Two condominium towers on Pete Rose Way in Cincinnati, to be built where the Montgomery Inn Banquet Center currently stands, will mark the next step in development of the Queen City's riverfront. Cincinnati's City Council on Wednesday approved the $140 million development called One River Plaza, which will be built by the Miller Valentine Group. When complete, the project will be a mix of 150 condos, ranging in price from $400,000 up to $2M. It also will feature two restaurants, 5,500 feet of commercial space and about 27,000 square feet for retail - all built on a parking garage containing a little more than 500 spaces.

Fed Keeps Key Interest Rate Steady at 5.25

Wrapping up its last meeting of the year, the Federal Reserve yesterday decided to stay its course and keep its key interest rate steady at 5.25 percent, the fourth straight meeting without budging the rate. This gives a break to borrowers who until this summer had endured the pain of two-plus year of rate increases.

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.

'Cash On Cash' Definition Comes Up Again

Questions about "Cash On Cash" (the name of this column, and what it means) came up in two emails this week. I'll explain again, for while its not complicated, its not something most people deal with every day. I do, though! ;)

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.

Word of the Day -- "Realized Gain"

I've had several emails from readers recently asking about certain definitions. So when I have time I'm going to include a word or phrase from real estate, and provide a definition. I try to post in as simple language as possible, but sometimes I get caught up in jargon. For those whom I confused, GET OVER IT! No seriously, sorry about that. I promise to work to explain as much as possible without talking down to people.

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.

Overbuilt Multi-Family in NW Franklin County Does Not Reflect Demand for MF Investment Properties

I read with interest today that Colin Trueman (whose father built the Red Roof Inn budget hotel chain), and Drew Berlin, long-time builder for the Trueman family (and a neighbor of mine when we were both kids in the north end of Columbus), have teamed and are developing land along the I-270 corridor in NW Franklin County, Ohio. One statement gave me pause, however, about their plans. Stating that the apartment market was sluggish, they were going to change their plans from constructing multi-family to medical office/retail near the booming Mill Run development area. True, the area is incredibly overbuilt when it comes to apartments. You can't tee a golf ball without hitting a brand-spanking new apartment complex. Renters have too many choices and occupancy in these newer units is off from projections.

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.

Past Apartment Residence Has Gone Condo

In the late 1980s and early 1990s, I lived in a really upscale apartment complex in the Columbus, Ohio suburb of Dublin, in northwest Franklin County. St. Andrew Village had a great mix of young married couples and suburban professionals, was was located near old Dublin's town center. Yet it was far newer, with restaurants and offices popping up all around it. Fast forward to 2006: St. Andrews Village is now known as "The Villas at St. Andrews." A condominum conversion has units selling from the 110,000's to the $180,000's, depending on number of bedrooms and location. I am surprised they aren't selling for more, but competing "apartment to condo" conversion projects in the area are putting pressure on prices. Still, these projects are taking apartments out of inventory in Central Ohio and are putting more pressure on existing multi-family properties- especially at a time when they already are in high demand by both residents and investors, alike.

RIISnet Will Be Hot for Matching Acquisition, Disposition Needs

I was invited to a private online demonstration today of a software tool coming to market, exclusive to Prudential CRES (for now), that enables asset managers of commercial portfolios valued at $5 million and higher to electronically -- and quickly -- match their acquisition and disposition needs. It simplifies the buying and selling process as REITs and others regularly buy and sell properties. Called RIISnet, for Real Estate Information and Insurance System network, this is an incredible tool, and I'll be writing more about it in the near future.

Hats off to the guys in Alabama who put together this revolutionary tool! I look forward to working with you!

Mortgage Rates At 2006 Low

Mortgage rates fell for the sixth week in a row, to nearly the lowest level of the year, as a slowing housing market helped keep rates down. The data is the result of the Freddie Mac (Charts) Primary Mortgage Market Survey. The 30-year fixed mortgage rate fell to 6.11 percent in the week ended Dec. 7 from 6.14 percent in the prior week, according to the survey. It was the lowest the 30-year has been since the week of Jan. 19, when it averaged 6.10 percent. A year ago, the 30-year averaged 6.32 percent.

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.

Who's Guarding Your Mutual Fund Investment?

Well here's another news item I'm going to print off and use when I talk about the benefits of investment real estate. And this time it's not just about its superior financial returns. The Securities and Exchange Commission announced yesterday that high-power brokerage Jefferies & Co. Inc. has agreed to pay some $9.7 million to settle regulators' charges that it illegally lavished nearly $2 million in golf trips, entertainment including a Playboy party and other gifts on Fidelity mutual fund traders in exchange for their trading business. The SEC and the National Association of Securities Dealers, the brokerage industry's self-policing organization, on Monday announced the settlements, under which two Jefferies executives also were sanctioned. Under the agreement, Jeffries neither admitted nor denied guilt. Hmmmmm. I'm sure there are several investors who placed their money with Jeffries who are mad as hornets. Mutual funds can be decent investments. And most brokers are honest. But you don't know how your broker uses your money, and you have absolutely no control over it. Well, actually, with reports like this, you kind of do get an idea how some mutual fund investments are used. Sheeeesh!

Downtown Columbus Holiday Inn To Get $4M Renovation

A Miami, Fla. hotels group yesterday announced it will invest more than $4 million to renovate the rather tired Holiday Inn on Town Street in downtown Columbus. The property has reported low occupancy in recent years. Ben Castera, president of Sound Hospitality, bought the 240-room property in July for $6.1 million. Sound Hospitality's focus is the mid-scale market. Castera said that the lobby and restaurant also will be renovated, and new windows will be installed throughout the hotel. The Columbus Dispatch reports that through September 2006 the Holiday Inn has been only half full, "far below the 65 percent average occupancy for Downtown hotels." Sound Hospitality owns three Holiday Inns in Florida, and Radisson and Hampton Inn and Suites properties in Arlington, Va.

Off Campus Student Housing A Strong Investment Choice

My business partner and I have long advocated the investment benefits of student housing properties. I can show the benefits on paper, but two industry experts have recently written on the subject, calling off-campus student housing an even better bet than most might think.

"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?

Dollar Falls, Fed Less Likely To Raise Rates

The dollar suffered sharp falls on Thursday, hit by reports of weak US business activity and a benign inflation picture. The euro rose 0.7 per cent against the dollar to $1.3247 by late afternoon in New York. Sterling rose to its highest level against the dollar since its ejection from the European Exchange Rate Mechanism in September 1992 as UK house prices continued to show rapid growth. A report revealed that inflation in US personal consumption expenditure excluding food and energy, the Federal Reserve’s preferred inflation benchmark, held steady in October at 2.4 per cent year-on-year. Data suggested further inflation-fighting interest rate rises by the Fed, which could support the dollar, were even less likely to be needed.