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Real Estate and Other Investments

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MISCELLANEOUS TOPICS
 Real Estate and REITs
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Real Estate Investments Types
   Direct Real Estate Investments
       As the investor, you hold the title to the property
       Your home
       Your vacation home
       Rental property – whole course unto itself!
       Undeveloped land
         Can be tremendous gains but this type of investment
          poses enormous risks
         All the money is riding on a single parcel of land
         Plus there is no cash flow and you still have to pay the
          property taxes
         And there is often no guarantee that you will be able to
          develop the land
                                                            3


Real Estate Investments Types
                                              (continued)

   Indirect Real Estate Investments
     Real Estate Investment Trusts (REITs)
     Real Estate Syndicates or Limited Partnerships
        Hurt by 1986 Tax Reform Bill
        Passive versus active income
     Tax Credits
        Low-income housing, etc.
     Equity Sharing
        You put up the down payment for someone else and
         then share in the appreciation
     First and Second Mortgages
        Not an “equity” position – you are a “loaner”
                                                                4


Investing in Commercial Property
   Most common investment of this type is a
    duplex or small apartment building
     Also includes hotels, office buildings, stores, and
      many other types of commercial establishments
     Do not be surprised if you are looking at negative
      cash flow for several years
     Rule of Thumb: Price = 7 to 10 times Rent
       In San Diego? Ha! Ha! Ha! Ha! Ha!
          For over 20 years, prices had become untouchable –
            simply insane
          But the recent turmoil has changed the investing
            landscape for real estate
       I think the South Bay is where the great bargains
        are now if you are so inclined
                                                        5


Investing in “Fixer-Uppers”
   Concentrate on smaller properties first
     Two to four units and live in one of them
   Look for low down payments and seller
    financing of rundown properties
     Banks usually do not want to loan to distressed
      properties, however…
 Banks are normally all too happy to finance a
  rundown foreclosure on their books
 Avoid property managers
     Nobody cares about your property as much as
      you do (but there are always exceptions)
                                                               6


Investing in “Fixer-Uppers”
                                                 (continued)

   Most Importantly,
     Are you savvy dealing with repairs? …and…
     Are you savvy dealing with renters?
     Fixing a tenant is just as important as fixing a
      toilet
        One bad tenant can set you back thousands
   Make improvements that add perceived value
     Example: Install a white picket fence
   Investing in Fixer-Uppers, Jay P. DeCima
                                                                   7


Real Estate Investment Trusts
   Real Estate Investment Trusts (REITs)
     “Pass-through” investments – kinda’ like a mutual fund
        By law, must distribute 95% of their earnings to
         shareholders
     Examples:
        Shopping centers
        Office buildings, warehouses, etc.
        Apartment complexes
     Management fees typically range between 1% and
      2% per year
     Long-term return – 7% to 8%
                    Example: Realty Income Corporation, symbol O
Advantages of                                                 8




Real Estate Investments
 A hedge against inflation
 Financial leverage
     The use of borrowed funds for investment
      purposes allows you to acquire a more expensive
      property than you could own on your own
   For Real Estate Partnerships / REITs
     Easy entry – REITs are easily liquidated
     Limited financial liability (limited partners, REITs)
     No management concerns
   You can’t check the price of your real estate
    investments every day on the Internet
     One of the major problems with stocks
Disadvantages of                                           9




Real Estate Investments
   Liquidity may be poor
     It may be hard to sell the property (or your share
      of the property if a partnership)
     Not a problem for REITs – buy/sell like a stock
   Normally there is a lack of diversification
     REITs & partnerships offer diversification
 Passive tax shelter for real estate syndicates
 Management or tenant problems
 Property values can decline
     Oh, yes, they can!
                                                          10


Your Home as an Investment
   A major asset of most households
   Possible hedge against inflation
     Traditionally, a home produces an after-inflation
      return of about 2.5 percent a year (San Diego?)
   Tax advantages
     $250,000 capital gains tax-free for single people
     $500,000 capital gains tax-free for married folks
   But it is a home first, an investment second
     In my humble opinion…
“But my house is the best                                     11




investment I have ever made!”
 “Of course, it is pretty much the only
  investment that I have ever made,
 Except for that penny stock my brother-in-
  law, the ex-stockbroker, conned me into
  buying…
     But that stuff is worthless now
   And those gold coins I bought back when
    the first Gulf War started back in ’91
     What did I do with those things, anyway?”

 Bottom Line: A House is a Home First, an Investment Second
                                                          12


“But what about San Diego?!”
  Prices in San Diego have gone down in the
   past
  They are going down as we speak
      How far before we hit bottom, no one knows
    But if you plan on staying here, by all means,
     buy whatever you can afford
      San Ysidro and National City are two of the best
       values in the region, by the way
      Imperial Beach is also a great beach value
    But don’t expect what happened the past few
     years to repeat itself for quite some time…
Sign seen over a desk in a San   13



Diego office, circa 1993

 “Please, God, let there
  be another real estate
 boom and I promise I
  won’t piss it all away
       this time!”
                                                          14


The “Perfect Investment”
   “C’mon, Paiano – Admit it!
     Real estate is the ‘Perfect Investment’
     Look at what has happened in the past five years”
   Beware the Permanent Trend          (Andrew Tobias)
     Real estate goes up and down in cycles
     Ask those who bought in 1990 and sold in 1994
        And those who bought in early 2006 and are still
         trying to unload that “flipper condo”
     But if you plan to hold for the long-term, you should
      do well
   By the way, there is no “Perfect Investment”
     Folks were saying the same things back in 1999
      about stocks
                                                              15


The “Perfect Investment”
                                                (continued)

   “But what about Leverage?! Huh? What
    about the ability to make money with other
    people’s money?”
     We have already discussed leverage, haven’t we?
   “But isn’t that what makes real estate such a
    great investment?”
     Well, yes. But there are pitfalls. Just as with
      margining stocks, leveraging real estate magnifies
      your gains and magnifies your losses.

                                             Worksheet
                                                                       16


Real Estate and Capital Gains
   “Wait a minute. Did you say that there are
    no capital gains taxes on real estate?”
     Currently, as the law stands now, as long as the
      real estate is your primary residence for 2 out
      of the last 5 years, you pay no capital gains on
      the first…
        $250,000 if you are single
        $500,000 if you are married
     By the way, capital losses on your primary
      residence are not tax-deductible
        Example: Buy your home for $200,000. Sell it for $700,000.
            If you are married, then you pay no capital gains taxes!
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Speaking of Info-mercials
   Have you seen the ads?
     “Start your real estate empire with No Money
      Down!”
     “You, too, can take advantage of the tremendous
      opportunities now in the wide-open Real Estate
      Foreclosure Market!”
     “Just buy our Guaranteed, Sure-Fire Real
      Estate Investment Kit for $395”
     “You will be on your way toward Riches beyond
      your Wildest Dreams!”
                                  No comment necessary.
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My Advice on Real Estate
   Buy a house
     Make it your home
   After you have digested that purchase
     Then look for some rental property
     But learn as much as you can from folks who are
      already doing it
       Maybe even work for a property manager for a
        spell to get the feel for what you will need to be
        able to do

				
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