Archives for November 2012

More Property Investing Mistakes To Avoid

Tips For Safer Investing

To augment my first list of top ten property investing mistakes, here are another ten traps to always be on the lookout to avoid:

1) Choosing a loan based on the interest rate only.

Interest is one of the least important criteria because it could vary over the life of the loan. Learn to select a loan with terms that are immediately crucial for you, and which give you the best cash flow from your property.

2) Not figuring in hidden costs.

Hidden costs are mostly related to closing costs on acquisition of investment property, such as mortgage tax, mortgage insurance and additional escrow for taxes a lender may require. In addition, if you’re purchasing an investment condominium or cooperative unit, be sure to calculate in hidden costs such as association or board dues, as well as any new association tax levies.

3) Purchasinging an investment property to obtain a tax loss.

The use of tax losses through negative gearing can help high income individuals offset the tax burden from other income. However, the ultimate aim should be to gain capital growth. Let a CPA or other tax professional guide you before you begin your search for a negative cash flow investment property.

4) Not claiming depreciation.

As mentioned above, consult your tax advisor regarding how best to depreciate your investment property. Different types of properties can call for different depreciation schedules that will benefit you most.

5) Inadequate property insurance.

Insurance premiums on investment property are tax deductible. Policies should be reviewed yearly to make sure you don’t underinsure your investment (especially if you’ve made significant repairs or renovatiuons to the building since you bought it).

6) Paying too much for the property.

Many times an investor may get too emotionally attached to a property, develop a “gotta have it” fixation, and then overpay for it. In addition, sometimes purchasers will act too quickly, feeling they need to “nail down” the deal in order to secure the property for themselves – especially if there’s a hint of competition for the building. When this happens, investors tend to waive house inspections, or not seek other opinions as to valuation prior to bidding on the property. Big mistake. Stay unemotional! Always do your homework, get to know the area you’re buying in, as well as what comparable sales of like properties have been going for in recent sales data.

7) Not researching the local rental market properly.

If you set your rents too high, you can lose out on potential tenants, and create a higher vacancy rate for yourself. On the other side of the equation, if you set your rents too low, you’ll be artificially limiting your overall cash flow and net income.

8) Being your own property manager.

Unless you’ve had some really good experience doing property management, consider utilizing the services of a pro, at least inmitially. Then, if you feel up to easing yourself into the role once you get to see how they do it, go ahead and try. Property managers earn every penny they cost, and the benefits will truly be seen in your increased cash flow.

9) Allowing bad tenants to become deadbeats.

If you allow a bad tenant to get behind in their rent, the whole stack of cards can cave in. It’s amazing how quickly one tenant in arrears can quickly become two or more who owe you. And it can be a very long and costly process to collect back rent. Especially if you have to end up hiring an attorney to start an eviction proceeding. Very long. Very, very costly. ‘Nuff said.

10) Skimping on simple property maintenance.

Never count on your tenants to bring up any problems the building is showing. And the reason is simple: they don’t want you around. So don’t count on them to call you when there’s a mnor, constant drip from a water pipe. Or when cracks develop on the walkway leading to their unit. Or when their light starts to flicker, indicating a potential for a fire. Tenants call in emergencies – burst pipes, no heat, or an actual fire that just started. It’s up to you (or your property manager) to make regular, routine inspections of all units as well as the grounds. If not, you’re asking for all sorts of trouble – especially since you have legal liability to properly maintain the property. So don’t skimp on doing regular preventative maintenance. It will halp your cash flow in the long run.

photos courtesy of kristinandcory.com, davidcares.com, reliancecpa.com. karlymoore.wordpress.com, wilmothpropertyservices.com, propertymanagementinsider.com

Fiscal Cliff Notes

The Genie prognosticates…

In the aftermath of the Presidential election, so much has been commented about on television and written about in articles throughout the world about the proverbial fiscal cliff we’re about to hit here in this country. And property investors need to develop alternate plans as a means of grappling with this uncertainty. You’ll want to be prepared with several real estate investment strategies in place as we approach the end of this year.

At the time of this writing, it appears to be a 50-50 coin toss as to which way Congress is going to go regarding avoiding the fiscal cliff. With all the rhetoric coming out of Washington post-election about how conciliatory each side is going to be, it’s hard to take both parties seriously, and hard to believe that some compromise will come to fruition.

So my gut feel is some form of agreement will not occur by January 1st. It is possible all involved will come to an agreement on a further extension of time beyond January 1st for a short period to allow for more discussion on the matter, but buying time only prolongs the pain. We live in a time of extremes in Congress, when both political parties here in this country seem unable or unwilling to reach agreements. The concept of compromise is all but gone. This has been demonstrated numerous times over the past several years. So with recent history at our backs, it’s hard not to be pessimistic about a solution be worked out by the end of the year.

The sequestration effect

Without a new deal struck, and sequestration taking effect, property investors need to create a proper plan for this horrible eventuality. In this scenario, let’s see what will happen to your property investments in the short-term and long-term, then determine some proper real estate investment strategies moving forward.

Sequestration calls for deep cuts in government spending to all sectors, most noticeably in defense spending. These cuts will take place over the next ten years. Job creation will be severely affected, and so the overall drag on the economy will be a major hit.

World-wide repercussions

In addition, there will be repercussions seen across the world as Europe still struggles to climb out of its recession, and China is just starting one of their own. The psychological effect on the entire U.S. economy will be severe over the next year should sequestration occur. People, afraid for their jobs and having very little job safety, combined with little job creation in this country, will ratchet up saving for the proverbial rainy day. That means they will stop buying frivolous goods and services.

Effects on residential and commercial markets

With that, the small brief expansion of the economy that we saw this year will come to a grinding halt. The residential real estate market slowdown (and any appreciation that occurred over the past year) will come to a halt. Commercial property will also be adversely affected – probably more so than residential markets, as businesses struggle to either stay put, or end up contracting.

With very little expansion by the business sector, office vacancy rates will increase. So too vacancy rates in retail outlets, shopping centers and malls. Look for overall contraction in the commercial real estate investment market over the next year if sequestration occurs.

However, residential rental real estate, at least for property investors, should remain strong. House prices will at best struggle to stay level, and they will most probably contract somewhat as the sequestration puts an overall drag on the economy. However, as we’ve seen over the last several years, as the economy got worse, rental property cash flows went up.

Increased rentals

The reason was simple: buyers sat on the sidelines, preferring to rent instead of purchase. The increased demand for rentals increased the average rents in almost all areas of the United States over the last two years. This trend would absolutely continue with sequestration, as the economy continued to contract. So if you’re already holding rental property, you would want to continue holding it for the short term. You could expect cash flows to increase in the likelihood of this scenario.

In addition, if sequestration does take effect, property investing for the mid-to long-term will require more patience and fortitude. For one, you’ll definitely want to plan for longer-term acquisitions and hold onto your existing properties longer. You will not be able to rely on property appreciation to provide much in the way of returns on investment. Instead you’ll look for cash flow (and strictly cash flow) on your properties. In addition, flipping properties will be much more difficult as more people stay on the sidelines because they lack jobs or are fearful of losing their jobs.

If a compromise is reached

But what if Congress is able to reach some sort of compromise by the end of the year? What will the overall economic landscape look like then, how will it affect the property investor, and what real estate investment strategies should youy implement in this case? Well, for one, financial markets love stability. So if a deal is struck, even one with higher tax rates, Wall Street will invariably fall in line, calm down and stabilize as markets become less volatile. This will then have a ripple effect going overseas as European markets are subdued by the lack of volatility in the US market.

In the short term, things may get jumpy in the first quarter of the new year if an agreement is reached, but for the remainder of 2013 however, things should settle down and remain pretty much as they were this past year. That means: slow growth overall. Especially in residential real estate, and certainly in commercial real estate niche markets.

Increasing market valuations

Overall market values should slowly creep up over the course of the next year given this compromise scenario, and you can look for greater returns on your investment when you look to sell. Keep in mind that the rental market will soon be peaking as the economy stabilizes. So the best thing to do in a compromise scenario is try to quickly acquire more rental property before prices spike next year. Also, assuming the fiscal cliff is averted by the end of the year, look to possibly sell off some of your poor performing investment properties by mid-next year.

Mid to long term planning

In addition, mid-to long-term planning for property investors should include thinking about how to weed out poor performing properties and at the same time acquire better properties (even though appreciation will make it more expensive for you to do so). With the fiscal cliff averted, it will signal not just more stability in the financial markets, as well as an improvement in the overall U.S. economy, but an overall optimism from U.S. residents over what Congress and the president can accomplish together. This feeling of stability should translate into a very positive psychological feeling for most home buyers in this country. More home buyers will come off the sidelines over the next several years as this feeling pervades the economy. Look for appreciation to continue in the mid-to long-term (5 to 10 years).

Plan for both scenarios

So whether sequestration or compromise occurs, property investors will need to plan now for one of the two scenarios occuring, by creating several real estate investment strategies. With sequestration, make preparations for quick acquisitions and then the holding of rental property for the long-term. In the case of a compromise being worked out and disaster being averted by the end of this year, look to sell off some of your weaker properties and then acquire better properties for long-term growth next year. Also in this positive scenario, if you’re a property flipper, expect a very hot economy over the next few years. Either way, you’ll want to properly prepare as any good property investor should.

photos courtesy of appliedrationality.blogspot.com, womanaroundtown.com, csbaonline.org, cnn.com, qz.com, capoliticalreview.com, seattlemediamaven.com, money.cnn.com, theatlanticcities.com

The State Of The Current Commercial Real Estate Investing Market

And the survey says…

Commercial property’s steady recovery should continue well into 2013. This conclusion is part of a recent survey by financial services giant Jones Lang LaSalle. Their survey is an analysis comprised of responses from almost 500 real estate development pros.

Spurred by the Fed’s actions to pump money into the U.S. economy, as well as keeping interest rates low, thus making it easier for lenders to offer mortgages, commercial property investors have been taking advantage of the looser credit available, to invest in many forms of commercial real estate over this past year.

Signs of a healthier economy

Commercial tenants overall have been fiscally healthier, yielding less vacancy rates for property holders. In addition, growth is expected next year by companies who rent space, and both tenancy rates as well as overall rents will be on the increase, supporting a truly growing commercial real estate investing sector.

While there is still a preference for commercial property investors to buy in prime locations in large U.S. cities, secondary markets are also showing signs of increase as well. These markets include smaller cities, as well as suburban markets. And they are projected to continue increasing in popularity amongst investors in the coming year as well.

The most popular segments

In terms of types of commercial sector demand, the most popular by far has been multifamily housing. Forty-three percent of survey respondents felt this was their number one choice of investment. This includes not just multifamily houses, but apartment buildings as well. Due to the overall growth in the residential housing market this past year, tenancy rates have been on the rise, while vacancy rates have shrunk. Overall, this type of commercial real estate investing vehicle is now considered extremely stable and low risk.

The next greatest sector is the office building market. Twenty-seven percent of respondents felt this sector was their best bet for profits. However, office rental success was pegged largely to area. That is, for example, higher growth industries, like technology, were experiencing greater demand in Silicon Valley. So choosing the right area to invest was more important for continued growth here.

Industrial property investment ranked third among all sectors (at 14%), while retail came in fourth (at 12 %). Lastly, the hotel sector was seen as the most volatile of all markets, as hotel chains experience high debt ratios amid increased competition and a tighter marketplace.

Future concerns

The main factor most respondents of the survey were concerned about for the future remained the overall state of the U.S. economy. They were also concerned with the lack of job growth domestically, as well as the European debt crisis. All three elements could adversely affect the commercial real estaste investing market in the coming year.

photos courtesy of browninsuranceservices.com, mycancuntv.com, indiapropertyexpert.com, dcmud.blogspot.com, luxist.com, beverlyhillshotel.com

Political Property Investing

Will election night become election odyssey?

Tuesday’s election could be a potential windfall for property investors – if the stars align properly, that is. According to John Heilemann’s political article in New York magazine ( “The Zombie Election,” 11/5/12) in which he lays out four doomsday scenarios in Tuesday’s upcoming election for President, one is especially intriguing for real estate investors. The four scenarios he lays out include:

1) The Romney squeaker scenario, where he wins both the popular vote, and the electoral college.

2) The reverse Gore scenario, where Romney wins the popular vote (like Gore in 2000) but loses the electoral college to Obama.

3) The Recount (or recounts) scenario, which could make the 2000 Florida recount look like a day in the park by comparison

4) The Tie goes to Romney scenario, in which the electoral college is actually tied, and the states would have an equal weight in deciding the election – 50 total votes, based on each states’ Congressional majority (yes, Romney would most definitely win in this , the remotest of the scenarios).

The scenario to watch for

However, the one scenario that really would affect property investors, is The Recount (or recounts) outcome. In this remote, but plausible scenario, Heilemann presages a repeat of the 2000 election fiasco (where Florida recounted on their own terms, and the Supreme Court had to ultimately hear arguments as to “hanging chads.”) This naturally held up the process for over a full month before a winner could be decided. Well now, races are so close in several key swing states, that the possibility exists for recounts to be asked by the losing party – but in multiple states, thereby holding up the final decision of a President–elect for at least a month, or maybe two.

Of course, there will be court challenges, a closer examination of some states new voter registration laws, as well as potential new judicial rulings on the constitutionality of some of these registration requirements. Translated: a mess to be unraveled, taking an inordinate amount of time. Time in which the presidential election would remain in the balance, undecided. And this, of course, would create great uncertainty in financial markets.

Uncertainty = death

And if there’s one thing Wall Street does not like, it’s political uncertainty. An extended period of waiting could throw the stock market into a selling frenzy. The result of stocks taking big dips could be erosion of consumer confidence – which the real estate market has been helping to slowly build back up this entire year. Without consumer confidence, buyers sit on the sidelines, and everyone waits again. Meanwhile, house prices stagnate or deflate.

Add in one more key ingredient to this little doomsday scenario: the coming sequestration by the federal government if no deal is reached by Congress and the President to prevent severe automatic cuts to the federal budget – including deep cuts to the defense budget, for example. This “fiscal cliff” could easily be reached without a President-elect being chosen by mid-December. It’s a truly ugly thought…

The net effect for property investors

As house prices deflate after a year of building back up, consumer confidence drops, buyers sit on the sidelines, Wall Street tanks, and the federally mandated Draconian sequestration occurs, property investors should have a plan to make lemonade out of these potential lemons.

And the best lemonade a property investor could make in the event of this scenario, is to be ready to hunker down, hold properties, do not sell, and if possible, buy as the market begins to depress yet again. The window may be a short one though – say December through January – the normally slow house buying period anyway. But the double whammy of seasonality coupled with this Armeggedon of Presidential-elect deadlock due to all the recounts that may take place could be quite a boon for property investors savvy enough to plan for this remote eventuality. So on Tuesday, get ready for a potentially long and bumpy night into day(s) – or weeks – or months.

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