As the media and the incoming president continue their lockstep doom and gloom scenarios about real estate, the vultures are coming out. The fly-by-night gurus who hawk books with get-rich-quick schemes.
True, there are opportunities galore out there. But buying a book and following some of these strategies is a recipe for disaster unless you know what you're doing.
"Lock and Reassign" is the new catch phrase. Well, it isn't new, but it is what unsophisticated, first-time investors are latching on to as real opportunity. Only, while the get-rich-quick books and DVDs are still pushing flip straegies, those days are dead (hopefully). Essentially, the phrase means to lock in control of the property, then find another buyer -- reassign it -- before your original transaction closes. In theory and practice, you have two transactions, perhaps in a single day. Buy it cheap, resell it at a higher price. Pocket the difference.
Here's the other problem with that "great" approach. You are subjecting yourself to short-term capitals gains taxes -- the taxes that President-elect Obama says he is going to raise.
I will say this once more . . .
THE PATH TO WEALTH IS NOT TO FLIP. THAT ONLY PUTS SOME EXTRA CASH IN YOUR POCKET FOR THE SHORT TERM.
THE PATH TO WEALTH IS TO BUY AND HOLD, TAKING ADVANTAGE OF SEVERAL KEY ELEMENTS:
-- Income: Your renters (Office, Multifamily, Single Family, Warehouse, etc.) pay your bills for you.
-- Leverage: The bank does the heavy lifting
-- Appreciation: Investment properties will continue to appreciate
-- Tax Advantages: Deductions, depreciation/Cost-recovery
-- Hedge Against Inflation: Wealth forced upon property owner
-- Pull Money Out/Refinance: Tax free loan you never have to pay back (buy more property, take a trip, etc) because your tenants pay the note via their rent payments
-- Manageable, Controllable Risk: Which means no “flipping” (flipping is a way to part a fool from his money)
-- Mailbox Money: The investor uses low-cost, professional management to oversee the investment, and receives a check once a month or once a quarter. A truly passive investment that grows in equity and appreciation.
-- Group Ownership – Less upfront investment per person (100% Of Investment Goes Toward Property)
-- 1031 Tax Deferred Exchange: Trade up to larger properties with larger gross and net incomes, and pay NO Capital Gains Taxes indefinitely.
AFTER TAX RETURNS is what investors should be considering, but too many new investors aren't being made aware.
Right now, cash is king. Residential properties can be picked up for a song. Banks are finally starting to loosen up and shed inventory that has been forclosed. REOs ("Real Estate Owned" by the banks) have opportunity. And they can be found in neighborhoods of all income levels.
BUT, and this is a BIG BUT . . . investors need to think outside the box. There are plenty of investment opportunities besides single family residences, which continue to drop in price and value. It is definitely a good time to get in, but investors should not limit themselves to this single type of real estate. There are fantastic opportunities on multifamily, particularly in campus areas, small offices and more.
Tomorrow, I am going to write about cost segregation. I covered it in a rather simple way in an earlier post last year. I plan to go into far more detail about how this tool speeds up depreciation and puts additional after tax dollars in commercial/investment property owners' pockets every year.