Transcript MISCELLANEOUS TOPICS Real Estate and REITs Real Estate Investments Types  Direct Real Estate Investments      As the investor, you hold the title to the.

MISCELLANEOUS TOPICS
Real Estate and REITs
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Real Estate Investments Types
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Direct Real Estate Investments
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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
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Real Estate Investments Types
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(continued)
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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”
Investing in Commercial Property
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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
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Investing in “Fixer-Uppers”
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Concentrate on smaller properties first
 Two to four units and live in one of them
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Look for low down payments and seller
financing of rundown properties
 Banks usually do not want to loan to distressed
properties, however…
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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)
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Investing in “Fixer-Uppers”
(continued)
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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
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Make improvements that add perceived value
 Example: Install a white picket fence
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Investing in Fixer-Uppers, Jay P. DeCima
Real Estate Investment Trusts
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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
Real Estate Investments
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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
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For Real Estate Partnerships / REITs
 Easy entry – REITs are easily liquidated
 Limited financial liability (limited partners, REITs)
 No management concerns
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You can’t check the price of your real estate
investments every day on the Internet
 One of the major problems with stocks
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Disadvantages of
Real Estate Investments
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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
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Normally there is a lack of diversification
 REITs & partnerships offer diversification
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Passive tax shelter for real estate syndicates
Management or tenant problems
Property values can decline
 Oh, yes, they can!
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Your Home as an Investment
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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?)
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Tax advantages
 $250,000 capital gains tax-free for single people
 $500,000 capital gains tax-free for married folks
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But it is a home first, an investment second
 In my humble opinion…
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“But my house is the best
investment I have ever made!”
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“Of course, it is pretty much the only
investment that I have ever made,
Except for that penny stock my brother-inlaw, the ex-stockbroker, conned me into
buying…
 But that stuff is worthless now
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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
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“But what about San Diego?!”
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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
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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
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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
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!”
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The “Perfect Investment”
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“C’mon, Paiano – Admit it!
 Real estate is the ‘Perfect Investment’
 Look at what has happened in the past five years”
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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
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By the way, there is no “Perfect Investment”
 Folks were saying the same things back in 1999
about stocks
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The “Perfect Investment”
(continued)
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“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?
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“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
Real Estate and Capital Gains
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“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
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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.
My Advice on Real Estate
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Buy a house
 Make it your home
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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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