Thursday, August 28, 2008

Group Investing Helps The Skittish Jump Into Wealth Building

There are many fallacies about getting into commercial/investment real estate as an investor. Sadly, too many people don't use their brain, but worry about tiny little things and that keeps them out of the market. I like professional financial advisers. They usually understand the intricacies of utilizing investment real estate to build wealth, and the myriad of tax benefits that accompany income. But increasingly, I find that people will say they need to consult their financial advisers, and it is their uncle, or a neighbor, or a long-time (and now retired) stockbroker friend.

Listening to the news, one would think that the market is in the toilet and that a one-and-a-half percent passbook savings account is the way to go to keep your money safe. It is anything but that. Remember, it is the residential market that is having difficulties. People buying and selling homes in which to live. If you are a buyer, however, it is your market. Don't like the terms on this house? Pick another one down the street. You might get a better deal.

With investment real estate, it's all about the numbers. If the deal doesn't work financially, you go on to the next opportunity. And there are tons of opportunities today.

One of the possibilities is group investing. This is where a number of people go in together on a property. While there isn't a lot of risk in a good, income-producing property, when people buy something as a group the perception is that whatever risk there was has just diminished exponentially.

From a collague of mine who put this together, here are some of the excuses people will use to block their ability to succeed:

I don't have enough money; I don't have the know how; I don't know where to start; What if I buy the wrong property; What if my timing is wrong; What if prices go down; What if I make a mistake . . . people will think I'm foolish; What if I can't get a loan; What if this is a bad location??? And so on . . .

Here is why people buy interests in real estate:

To gain net spendable cash flow; To take advantage of favorable tax laws to real estate; To acquire equity through leverage; To hedge against inflation; To profit from appreciation; To put existing capital to work; To achieve overall higher investment yield; To avoid the management burden; To avoid signing a large mortgage not;e To purchase without a credit report or bank financing.

Get the picture?

With group investing, everyone puts in some cash at the beginning -- often from existing equity in their homes (dead equity), or self-directed IRAs. But not out of pocket, meaning not from the weekly or monthly checking account. The property can be paid for up front, or over a period of two to three years. Either way, cash flow begins immediately. Add in appreciation, cost recovery (depreciation) and avoidance of capital gains when the property is sold later on (utilizing an IRS 1031 tax deferred exchange) and you have the makings of a solid investment that will build wealth.

This way, the perceived risk is spread around.

Friday, August 15, 2008

Retail Weakening, But Commercial Investment Real Estate Staying Strong Overall

Here is some more news on the continuing strength of income producing properties. The residential mess that everyone is talking about has had little impact on commercial brokerage.

For buyers and sellers alike the market remains strong, though there is some weakness appearing in retail properties. Those banks that are having problems have lumped their residential development lending packages in with their commercial loan programs. Which give a very skewed view of the market.

Lenders agree while there is some slight weakening, there has been no significant or a concerning amount of tangible deterioration on the part of custumers. Cash flows are still there andmost lenders have few concerns. Why? Because income producing properties produce just that -- income.

That is in contract to single family homes used as our primary residences. They aren't the same as income properties, unless someone is being charged rent.

For the full story, click here.

Saturday, August 2, 2008

Political Wordplay: Taxing Income, Capital Gains Is Far Different From Taxing Assets

Earlier, I wrote on how Sen. Barack Obama -- presumptive democrat nominee for the U.S. presidency -- has proposed an increase in the capital gains tax. Also increases in income tax.

This post today is not about politics, and my choice or where I lean, but more about the politics of politics, and where big money donors come from -- and more importantly, what motivates them (and to the contrary, what scares the crap out of them).

I read a piece earlier this week that asked why some of the most wealthy people in this nation are writing big donation checks to Sen. Obama's campaign, especially if his proposals are going to affect them the most.

Therein lies the fallacy.

His proposals will not affect the most wealthy, even though his campaign is pushing that thought. The most wealthy in this nation hold investment real estate. And they use 1031 tax-deferred exchanges to avoid capital gains. You cannot do that with stocks and bonds, nor jewelry, nor precious metals, etc. So the proposals to increase taxes on capital gains and increase income taxes means little, even though it sounds powerful to people who don't understand the tax system, and have a chip on their shoulder when it comes to people who are more well off.

Now, if the proposal from ANY candidate were to tax "assets," . . . . those donations would dry up and look like the desert in the U.S. southwest. Because people who use real estate to build wealth are working to avoid paying income taxes. And anyone can do it. You buy a property, let it appreciate for a few years, and continue to pay down the mortgage. As your equity grows, you can refinance the property, essentially making a loan to yourself that you never have to pay back. It is not taxable, because it is equity from your property -- not income. And you don't have to pay it back because your tenants make the payments for you with their monthly checks they send.

Most Americans rely on their income. But few jump into investment real estate -- despite the ease of entry -- because of irrational fear or belief by the media that the real estate market is upside down. The residential side (for a home in which to live) is hurting. But the investment side is humming right along.

Food for thought.