Bank short sales of residential property are everywhere today. Some investors who have purchased a DVD from middle-of-the-night infomercials are pondering when to swoop in and pick up a discounted property.
Granted I am biased that buyers should use an experienced real estate agent who understands investment real estate. I am concerned about people jumping in, planning to get their feet wet, and instead winding up to their neck in basement water.
Check out this piece from Minnesota. It talks of poor maintenance by institutionally-owned residential real estate. I do not know of similar situations in this part of Ohio, but it could be coming. Cleveland has a huge crime problem due to street after street of empty homes. In southwest Florida, one out of every four homes in Lee County is vacant.
Just be careful about the properties you want to invest in. I prefer multi-family properties, for if a renter leaves, only 1/4 or 1/6 of your property is temporarily vacant. But if your house renter leaves, an owner has no income from that property until a new resident moves in. And yet, there are going to be some great properties in many urban and suburban areas that can be picked up for a song for the next 24 months. But if buyers are smart, they will hold them and not try to flip them in two or three years.
Tuesday, January 15, 2008
Inflation Up In 2007; Commercial/Investment Owners Performance Still Strong
I have said in previous posts that holding investment real estate is a hedge against inflation. Well, the Department of Labor is reporting today that wholesale inflation last year shot up by the largest amount in 26 years.
The story notes that the 6.3 percent increase in the Producer Price Index, which measures cost pressures before they reach the consumer, followed a much more moderate 1.1 percent increase in 2006. Read the entire story here.
To review a bit, investing in and holding commercial real estate is a hedge against inflation. While the media is obssessed with the decline in residential property values, commercial property is holding its own, and in many cases, still appreciating. Holding investment property gives you income to cover the mortgage used, if necessary, to purchase the property. But more so, an investment property's appreciation is truly "wealth forced upon the property owner." As it becomes more valuable, the property owner can make tax-free loans to him or herself for pretty much any use, including acquisition of additional property.
Keep in mind that the lending problems you are hearing about on the television news each night have to do with residential paper. What is of concern is traditional lenders, so heavily invested in the housing market, may struggle a bit. And we will have to watch and wonder whether we want to run our commercial loans through these same investment houses as we monitor their turmoil.
The story notes that the 6.3 percent increase in the Producer Price Index, which measures cost pressures before they reach the consumer, followed a much more moderate 1.1 percent increase in 2006. Read the entire story here.
To review a bit, investing in and holding commercial real estate is a hedge against inflation. While the media is obssessed with the decline in residential property values, commercial property is holding its own, and in many cases, still appreciating. Holding investment property gives you income to cover the mortgage used, if necessary, to purchase the property. But more so, an investment property's appreciation is truly "wealth forced upon the property owner." As it becomes more valuable, the property owner can make tax-free loans to him or herself for pretty much any use, including acquisition of additional property.
Keep in mind that the lending problems you are hearing about on the television news each night have to do with residential paper. What is of concern is traditional lenders, so heavily invested in the housing market, may struggle a bit. And we will have to watch and wonder whether we want to run our commercial loans through these same investment houses as we monitor their turmoil.
Monday, January 14, 2008
Definition For The Day
Family Limited Partnership -- A Family Limited Partnership is a limited partnership whose interests are owned by members of the same family. By this arrangement, gift and estate taxes may be reduced , though owners will not enjoy the freedom of ownership or transferability of other ownership vehicles.
So here is an example. A family owns an office building worth $10 million if sold as one unit. A family limited partnership is formed to own the building. Each of 10 family members own a 10 percent interest. Because of restrictions imposed by the partnership, the sale of a single unit to an outsider would bring no more than $500,000. When a family member died, the unit was valued at $500,000. This amount is less than the federal estate tax exemption, so there is no estate tax. Had there not been a family limited partnership, the share would have been valued at $1 million, and the estate tax would have been about $150,000.
So here is an example. A family owns an office building worth $10 million if sold as one unit. A family limited partnership is formed to own the building. Each of 10 family members own a 10 percent interest. Because of restrictions imposed by the partnership, the sale of a single unit to an outsider would bring no more than $500,000. When a family member died, the unit was valued at $500,000. This amount is less than the federal estate tax exemption, so there is no estate tax. Had there not been a family limited partnership, the share would have been valued at $1 million, and the estate tax would have been about $150,000.
Saturday, January 5, 2008
Last To Be Paid or First To Be Paid? You Choose
Let's repeat the lesson:
If you are a shareholder in a company, if there is a profit, you are the LAST person to be paid, assuming there is money left over after all bills and other debts have been covered.
When you own investment real estate, you are the FIRST person to be paid.
Why repeat the lesson? This week several analysts reported that banks will be forced to slash dividends in 2008. Many bank shareholders use these dividends as income. In fact, numerous companies are feeling a pinch on the revenue front these day.
So which makes more sense? Be last in line to be paid, or first in line? Which would you choose?
Thus endeth the lesson.
If you are a shareholder in a company, if there is a profit, you are the LAST person to be paid, assuming there is money left over after all bills and other debts have been covered.
When you own investment real estate, you are the FIRST person to be paid.
Why repeat the lesson? This week several analysts reported that banks will be forced to slash dividends in 2008. Many bank shareholders use these dividends as income. In fact, numerous companies are feeling a pinch on the revenue front these day.
So which makes more sense? Be last in line to be paid, or first in line? Which would you choose?
Thus endeth the lesson.
Wednesday, January 2, 2008
Federal Reserve Hints At 'Substantial' Rate Cuts
The Fed hinted at further rate cuts, which will be a further boost to investors. A rate cut is certain at the Federal Reserve's meeting, scheduled for the end of January. The question is how much? The story is at CNN money.
Investing 101
For those who wonder how to invest in real estate -- the roads are many. You don't always need a huge down payment, there are syndication opportunities, and your investment can be passive rather than active. Intrigued?
More importantly, profits come in many forms:
- Converting the use of a property: Purchase apartments and convert them to condos if the apartments have low rent yields.
- Pick the property up below market value: If you take your time, you can find office buildings, apartment buildings and warehouses that are priced below market value. Why would they be priced this way? Simply put, there are always owners who need to get out of their property and raise cash quickly. Sometimes a property is in foreclosure and the lender (bank or private lender) will take less than market value just to move the property. This is an investor's opportunity.
- Creating new value in a neighborhood: Sometimes it makes sense to pick up a property in an area that is slated for renovation and re-development. If you can get it bought right, you will have a gem when the neighborhood property values rebound due to re-development.
- Cash flow is king: With an investment property, your tenants or residents pay your note for you. By paying down the mortgage, and increasing your equity, and exploiting (and I use that word on purpose) a plethora of tax advantages, an investors' returns frequently are greater than that of the stock market.
More tomorrow . . .
More importantly, profits come in many forms:
- Converting the use of a property: Purchase apartments and convert them to condos if the apartments have low rent yields.
- Pick the property up below market value: If you take your time, you can find office buildings, apartment buildings and warehouses that are priced below market value. Why would they be priced this way? Simply put, there are always owners who need to get out of their property and raise cash quickly. Sometimes a property is in foreclosure and the lender (bank or private lender) will take less than market value just to move the property. This is an investor's opportunity.
- Creating new value in a neighborhood: Sometimes it makes sense to pick up a property in an area that is slated for renovation and re-development. If you can get it bought right, you will have a gem when the neighborhood property values rebound due to re-development.
- Cash flow is king: With an investment property, your tenants or residents pay your note for you. By paying down the mortgage, and increasing your equity, and exploiting (and I use that word on purpose) a plethora of tax advantages, an investors' returns frequently are greater than that of the stock market.
More tomorrow . . .
Happy New Year!
Happy New Year! To my friends and readers, old and new, I hope 2008 is a prosperous year for you and yours!
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