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.

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.

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.

'Lovely Listing' Illustrates The WRONG Kind Of Photos To Market Property

A fellow blogger clued me in about this website. While it is not commercial/investment in nature in relation to real estate, it still is hilarious to scroll through. Called Lovely Listing, it is a collection of . . . unusual . . . photographs taken from actual real estate listings.

A handful are Photo Shopped -- contrived, if you will, just to be sillier than usual. But the vast majority are REAL, and some of the worst examples of photos being used to "promote" residential property.

As a real estate agent, I look at some of these and wonder . . . "WHAT WERE THEY THINKING???"

I throw this out mostly for humor. Just because . . .

What do YOU think??????

hat-tip to Lucy

Analysts Worried About Ford, GM

Okay, not to be alarmist, but here is another reason why all those people who feel safe with their investments in blue-chip carmakers might want to rethink things:

Granted, predicting the outcome of a coin flip is a 50-50 proposition. But General Motors and Ford have been in dire financial straits for several years. Now, financial analysts are predicting the two companies could be bankrupt within five years.

I would like to see this analysis restated a few months after the presidential election in November. The economy generally improves after a presidential election. The key is going to be oil prices, not the overall general economy.

Now why do I bring all this up? Because there are so many people who fear commercial/investment real estate, but seem content with their Ford and GM pension funds, if they are current or former employees, or shareholder investments. I am all in favor of supporting my employer if there is stock to be owned, but to keep all your eggs in one basket is a big risk.

Also, money in these pension funds, now held by corporations on shaky financial ground, often are sitting in self-directed IRAs. And the IRAs, at the direction of the individual investor, are invested in the corporate stock. These same funds can be invested in income-producing real estate complete with a plethora of tax advantages.

If people will keep an open mind. Bottom line: Now is not the time to be invested in American automobile stocks, IMHO. It is a buyers market for certain types of real estate, especially for first-time investors. THAT is where people should be moving money. It has nowhere to go but up.

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.

Why?

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.

Avoiding The Latest Capital Gains Tax Proposal

Okay, a lesson in economics and tax policy.

Presumptive presidential nominee (for the democrats) Sen. Barack Obama, has proposed significant increases in the capital gains tax. Specifically, he would bump the tax 20-28 percent on people with incomes over $250,000. He has already said he plans to increase income taxes on higher income earners, but this discussion is about "capital gains."

This is a spike on whatever capital gains you receive in a given year. It could be on stocks, bonds, or whatever. Even the sale of real estate, though if you work with an experienced real estate investment adviser, these proposals should not affect you.

My personal belief is that if Mr. Obama wants to increase revenue, he should decrease the capital gains tax rate, not increase it. He disagrees, suggesting that rich people had no problem with a 28 percent rate when Bill Clinton was in the White House. Actually, he is wrong. And "rich people" is not defined as "the working poor" but most everyone else these days when you look at demographers, incomes and tax rates. But I digress.

There were complaints about capital gains taxes under Bill Clinton. And when he finally lowered it from 28 percent, under ever-increasing pressure from the republican-dominated Congress in 1997, investment capital tripled. Capital increased, and so did revenue to the government.

CNN Money reports Sen. Obama's proposal this way:

"Barack Obama has made one part of his plan for the capital gains tax perfectly clear: He wants to raise the rate above 15% for high-income investors.

"But to what level: 20%? 23%? 27%? All Obama has said is that it would be at least 20% and less than 28%.

"The choice the presumptive Democratic nominee for president makes will matter to investors and to federal coffers. It's one of the many crucial tax details he and his advisers have yet to settle as they campaign against Republican rival John McCain.

"One reason Obama says he wants to raise the rate is to establish more fairness in the tax system. A low rate directly benefits high-income taxpayers the most since they hold more taxable investments than everyone else."

Okay, I'm not going to suggest whom you vote for. I do not do that in this forum.

SO WHAT DOES THIS ALL MEAN????

As an investor, or even as an aspiring investor, there is a way to defer capital gains altogether, indefinitely, whether you have a $75,000 annual income or a $1 million or more annual income. It is NOT a loophole, it is not a trick, it is not a fly-by-night accounting scam from a book written by people who are now in prison for practicing what they preach.

It's called investment real estate. Which I hope is why you are reading this blog. Its not a flip, where you get a chunk of change for profit (then have to pay taxes on it), and you don't have to own a giant apartment complex or pieces of downtown Cleveland or Atlanta.

When you take advantage of rule 1031 of the Internal Revenue Service Code, you have done something for yourself, your children and your grandchildren. An IRS 1031 tax-deferred exchange enables you to exchange one like/kind property for another. As you move up in value, as long as you indicate it is part of a 1031 exchange, you pay no capital gains tax.

Not just in theory, but in reality, investors will take a $20,000 initial investment (leverating the rest through bank loan) and put it in some piece of property. Perhaps it is 20 percent down on a $200,000 twin single. After five years, they put it up for sale. During that time their equity in the property has risen above the $20,000, plus the property has appreciated. Concurrent with the marketing of the property, the investor is looking for a replacement property and finds it in a 12-unit apartment building for $600,000. The sale is made, the exchange is announced to the IRS, and the equity is now moved into the larger property.

Another five years passes, the investor purchases a seven suite office building for 1.3 million. The apartment building sells for $800,000 or better due to some improvements made on the structure. During that time the investor's equity in the 12-unit apartment building rose as she paid down her debt.

In a little over 10 years, the initial $20,000 has parlayed itself into a $1.2 million investment portfolio. And during that time, not a dime in capital gains taxes was paid because the investor utilized IRS Code 1031.

If you want to take advantage of this opportunities -- carved into the tax code since the 1920s (it is set in stone and isn't going anywhere) -- BE SURE that you are using a real estate investment adviser who understands investment real estate. Who understands before-tax and after-tax income, who understands tax-deferred exchanges.

But most of all, understand that people who dabble in real estate lose tens of thousands of dollars every year and don't even know it. They think their flip made them a nice chunk of change, but in reality had they held the property for a while, they would have been building wealth instead of putting a little bit more cash in their pocket for the short term.

Sen. Obama and others have played with capital gains taxes for decades. But no one tries to touch tax-deferred exchanges.

Why? Because the investor class in this nation utilize it every day. But you don't have to be "ultra wealthy" (whatever that is) to exploit this rule yourself. It is there for everyone to use.

And if you don't utilize tax deferred exchanges, you really can't call yourself an investor. You're just playing in a minefield.