Tuesday, July 22, 2008

Questions For The Day

A conversation with a colleague this morning relating to blogging made me realize I haven't posted to this site in a while. In fact, when I looked at the date of my last post I freaked a bit.

A question for the day: How many times have you been approached to purchase real estate as an investment? No, I don't mean someone trying to sell you tapes or DVDs in the middle of the night, but someone who actually sat across from you and explained Cash on Cash returns, depreciation, cost segregation, and more.

Here's another question (perhaps this should be "questions of the day"): If the concept of investment in real estate makes people so nervous, why do many of these same people blindly turn their hard-earned savings over to people they do not know, working far off in offices they have never seen, in a hope that the funds will grow? Isn't that a bigger risk?

It was pointed out in a recent meeting that despite insurance firms and giant investment houses success at selling their products, managing their clients' money doesn't always go so well. One gentlemen whom I know watched his pension fund value drop in a single calendar year. Oh, the broker was trading, but the only person getting any money was the brokerage in the fees that were charged each time a trade took place. The pension fund holder saw his value drop.


And what's more? Why are giant investment houses like Merrill Lynch and others posting billion dollar losses? They are the first to be paid. They take the fees. Last week, Merrill Lynch booked its fourth-straight quarterly loss, this time losing nearly $5 billion, as the nation's largest brokerage was forced to once again take massive writedowns. Why?

"Merrill said it lost $4.9 billion overall. On a continuing operations basis, it lost $4.6 billion, or $4.95 a share, down from a profit of $2.01 billion, or $2.24 a share a year ago. Analysts polled by Thomson Reuters were expecting the company to report a loss of just over $1.8 billion, or $1.91 a share on this basis.

"The company has now lost more than $19.2 billion in the past twelve months . . ."

Because even though people say the thought of real estate investment makes them nervous, they blindly turn their money over to people they do not know in the hope that it will grow. And it has not been growing.

But when you invest in real estate, your initial entry can be large or small. It does not have to be in a Class A office building. Further, each time you receive a rent check from a resident (in the case of residential properties), you are getting an amount equal to approximately one-fourth of that individual's income for the month. People pay you, so you can pay your bills. Rent checks from office or industrial tenants are strong, also.

It is less risky than stocks these days. In fact, the stock market is so volatile that many people have moved holdings into real estate, gold and other metals. But real estate not only gives you appreciation (added value) over time, it also provides you with monthly income, tax deductions for your expenses to operate the property, depreciation, and more.

And as a buddy reminded me this morning, changing market conditions dictate you change with the market. There is still this mindset that people want to flip. It is these bloody TV shows that perpetuate the myth, THE MYTH that flipping houses is lucrative. You may as well walk out into the middle of a Las Vegas street, pull all your cash out of your pocket and set fire to it. Flipping is a dumb move at any time, IMHO. You will get a little cash doing that.

But to build wealth, you hold real estate. And today everyone is buying single family homes ias fast as they can. It is a buyers' market. Everything is negotiable. Holding real estate for income today, and future appreciation is far smarter. The value builds. As your equity increases, your net income grows also. And then there are the advantages of the 1031 tax-deferred exchange, which I have written on ad infinitum. You indefinitely defer any capital gains taxes on the increase in value in your investment.

Can you do that with shares in a company?

The bottom line is that there isn't a smarter approach right now than investment real estate. Too many people say "I wish I could be doing that." You can't do it if you don't find a way to jump in. You can earn extra cash by working extra hours, or taking a second job. Building wealth is about sitting back and having other people share with you the earnings they work hard for.

Let others work hard. Let them pay you for a place to live or work. Its far more simple than most people realize. So then there should be a third question of day, don't you think? It would be . . .

. . . How can an individual build wealth without taking a second job? Asked and answered. See above.

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