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I’ve been investing in real estate for 24 years. I’ve seen the ups and downs of the market and I’ve made some bad investments, but most of them have turned out great – as long as I was prepared to stay through the bad times.
There’s been a lot of talk lately about the real estate bubble bursting. What if real estate values go down where you live? In today’s email, I’m going to cover three possible strategies for a real estate downturn.
Strategy #1: Don’t Sell.
How serious is the problem really? Let’s say that the home you live in, the property you are renting out or the property you bought as a fix and flip goes down in value. Well, if you weren’t planning to sell right away, would it matter? Hang on until the market comes back. Historically, in the bigger picture, a real estate market will ALWAYS come back.
Of course, this sounds really simplistic. Don’t sell. Wouldn’t it be nice if everything was that simple? Maybe it really is, though. If you’ve followed the Tax Loopholes strategies for making sure you have enough cash for your debt (as outlined in The Insider’s Guide to Making Money in Real Estate and The Insider’s Guide to Real Estate Investing Loopholes.) A lot of people forget that when the emotions run high though.
In the late 1980′s and early 1990′s, the real estate market really started crashing in Phoenix. In 1995, I got a new tax client. She was a real estate broker in Phoenix. The market was recovering well by that time in Phoenix. But, the broker said she’d never own real estate investment property again. She said she’d lost a ton of money in the downturn. Her story, as it unfolded, was that she owned a number of single family residences that were rented for a positive cash flow. The market turned down and suddenly she was upside down on some of the houses. She panicked and sold all of them. In some cases, she needed to actually come up with money to close the deal.
The part that I didn’t understand was why she felt the need to sell. The properties had a positive cash flow. By selling, she locked in the loss. At that point, someone bought the properties and waited out the downturn to take advantage of the upswing. Why couldn’t she have done the same thing? She was afraid that the market would get worse. She was afraid that her tenants might move out and even though there are generally more renters when a market turns down, she was afraid she couldn’t get more tenants. Basically, she was afraid and made an emotional decision.
The market has been running hot in many areas and actually over-heated in other markets. Phoenix is one of those markets. My husband and I are putting more cash away in case the market turns down and we need to wait a little bit for it to settle. We also want to make sure we have plenty of options when the deals start showing up. But, we are not panicking and selling. If we sell, it’s part of a well-thought-out plan.
Strategy #2: Run Your Investments Like a Business.
I’m going to talk about some strategies that are worst case only. Remember that real estate is nothing more than a product. If you’re good at a business and know how to thoroughly research a product and its market, you can sell toasters or you can sell a house. It’s all the same. Of course, not too many people rent toasters and toasters don’t appreciate and that’s why real estate is such an easy business for so many people to jump into. That’s also why there are so many catastrophic failures. It’s too easy to make money in real estate, if the market is going hot, even if the investor does everything wrong. They have forgotten (or never knew) the fundamentals of business.
One of the fundamentals of business is to look for a way to create more value in what you’re selling. Remember if you’re renting a property, lease optioning it, doing a rent to own or straight out selling – regardless of what you’re doing, you’re selling something. And, if no one is buying (and in this sense, it includes renting as well) ask yourself why? Is there a way to add more value by making it more desirable for the buyer/renter? Some ideas might include changing the property, adding additional features that no one else has or making more favorable terms for a potential buyer.
One more comment on the people who say the end is coming for real estate. In a lot of cases, the doomsayers who happen to have money as well, are people who’ve gotten lucky. They’re now afraid that they can never recreate that wealth and so they’re just plain afraid of everything.
They realize, at some level, they had nothing to do with the wealth they’ve gotten and so they’re afraid they will lose it. Having strong business skills means you have the ability to look at any market in any climate and figure out what to do next, without panicking.
Strategy #3 Keep Your Eyes On the Real Goal.
No matter what type of business or investments you have, you need to have fundamental skills. That’s what Strategy #2 was all about.
Face it, I’m a CPA and Tax Strategist. For me, one of the biggest benefits of investing in real estate is all the great loopholes that you get. And, you’ll get those loopholes no matter what happens with the market. Of course, I don’t want you to do anything just for the write-offs. You have to make money to, at least in the long run.
Are you sure you’re getting all the tax loopholes for your investments? How about your business structures – are they set up correctly and are you operating them in the best way possible? And, probably the biggest problem of all facing real estate investors, are you accounting for your real estate correctly? If you don’t do the accounting right, you’re going to miss the tax write offs.
It’s possible to take advantage of just one of these strategies, but realistically, you need to have all parts of the Tax Loophole’s Real Estate Tax Loopholes Package to take advantage of everything that makes up a strong real estate investment strategy.
- Diane Kennedy
* Visit her website for more information.
If you do any property investing at all, this FREE newsletter published by the Creative Investor is a must. There is a wealth of information about markets across the country as well as available properties from motivated sellers and hard money lenders for tough situations or people who have trouble getting financing.
This month is a featured article on how to sell your home in 2006 and the careful planning required to do it. It says:
“If you plan to sell your home in 2006, now is the time to get busy. This year is proving to be a far more difficult year than was record-setting 2005. Most communities are now in a ‘buyer’s market’, with more homes listed for sale than there are qualified buyers actively in the marketplace.
“The nationwide volume of home sales is down slightly, but median prices are holding steady, according to recent reports from the National Association of Realtors.
“HOW TO GET YOUR HOME SOLD IN 2006. There is still plenty of time to sell your home this year. But careful planning is required.
“The first step is to be a ‘motivated seller’ who really wants to sell. With a glut of homes now listed for sale in most price ranges, this is not a good time to ‘test the market’. If you are not a serious home seller who will be realistic about your home’s asking price, don’t waste your time in today’s difficult market… Read More”
- The Creative Investor
Sunday, September 17, the San Francisco Chronicle contained an article that, after weaving its way through the fact that we are in a slowing real estate market (that is, a more normal market), staff writer, Carol Lloyd, wraps up the article by saying, that instead of doing expensive remodels, it is more helpful to stage the home instead. We have long been proponents of staging for all our properties in any market.
The article went on to make the point that people want to do their own upgrades in styles that suit their tastes, therefore, instead of spending tons of money to remodel, stage the home instead. These properties show better and are more likely to sell first.
Read the entire article here.
- Mick Orton
Compared to last month’s figures, this report show sales doing a little better and mortgage rates are down again. Here are the numbers.
- Mick Orton
Calif. median home price – August 06: $576,360 (Source: C.A.R.)
(note: compared to $567,360 last month)
Calif. highest median home price by C.A.R. region August 06:Santa Barbara So. Coast $1,190,000 (Source: C.A.R.)
(note: compared to $1,075,000 last month)
Calif. lowest median home price by C.A.R. region August 06:High Desert $332,900 (Source: C.A.R.)
(note: compared to $333,330 last month)
Calif. First-time Buyer Affordability Index – Second Quarter 06:23 percent (Source: C.A.R.)
Mortgage rates – week ending 9/21:
- 30-yr. fixed: 6.4%; Fees/points: 0.5%
(note: compared to 6.48% last report and points are 0.1% higher)
- 15-yr. fixed: 6.06%; Fees/points: 0.5%
(note: compared to 6.18% last report and points are 0.1% higher)
- 1-yr. adjustable: 5.54%; Fees/points: 0.8%
(note: compared to 5.60% last report and points are 0.1% higher)
- California Association of Realtors & Freddie Mac
Foster Weeks does a weekly mortgage update.
“…And now while a nice orderly slowdown that feels like a cool breeze is what the Fed desired with their string of seventeen rate hikes, concerns are now mounting about the severity of the slowdown. The Fed has had a history of always going too far, not being patient enough and sending the economy into recession. It will be interesting to see how things play out going forward, and next weeks reports will be especially important…read on…”
- Foster Weeks
The following is an editorial.
If you enjoy getting frequent market updates, go to MarketWatch from Dow Jones and sign up for their free e-mail newsletter update. You will get anywhere from 2-3 updates a morning about everything from interest rate updates to housing reports. The reports can be very informative or confusing or even crazy making, depending on how you read them!
My question is this; how often are these economists really right? Their track record is never given as to how often they are right in their predictions. For example, this morning ‘s report was “U.S. NEW-HOME SALES SHOW UNEXPECTED AUGUST PICKUP”. Unexpected is the key word here. Google information on housing reports and you will see that everyone recently has been banking on a bursting housing market bubble. Another report I got today was “U.S. durable-goods orders unexpectedly fall 0.5%“. Another unexpectedly! So whose expectations were these, theirs or ours?
My point is that the economy is so big and complex that nobody can really predict with any accuracy what is going to go on. And this seems to be what news has become; not what happened and when it happened, but rather predicting what is going to happen! It appears to be the new phenomenon. Take a look at news headlines and you will see that this often is the case anymore.
As Donald Trump points out, lots of people are out there telling you how to make money in real estate, but how many of them are actually doing it? He makes a good point. Many of these people make their money selling books and tapes or giving lectures telling other people how to make money buying and selling real estate, but how many of them have really done it??? The same question should be put to the experts. Let’s see their credentials BEFORE they are allowed to tell us what is or is not going to happen!
Has life become so uncertain that we need to have someone look at their crystal ball and tell us what the future will bring before we get out of bed in the morning???
Look at our past posts and you will see that we are bullish on real estate for long term investment and building wealth. These up and down changes are just market fluctuations that happen all the time. If we knew what caused them with any certainty then we would probably be consultants to the Wall Street Journal or some other publication and do better than the so-called “experts” they quote in their columns. In fact, moisten a finger and put it in the air yourself to make a prediction… you’ll probably do better than these guys!
In closing, make your own reality. Be positive about our economy and invest for your future. Stick to the basics, watch the people who are making money and do what they do. Chances are you will make out just fine.
- Mick Orton
This article is provided by our friends at Quantum Advisors.
- Mick Orton
As your real estate experts, we are very in tune with the concerns, problems, and issues that real estate owners face in today’s real estate market. One of these concerns is that the market has been very good to them, but now they need to find an efficient way to capitalize on their gains. Many owners/investors, CPA’s, attorneys, financial advisors, and real estate professionals are quick to say:
- “I’d like to sell my property but I don’t want to pay taxes.”
- “I’d like to get rid of the management responsibilities of my property but I don’t want to pay taxes.”
- “I can’t find a good property to 1031 exchange into, and I don’t want to pay taxes on an outright sale.”
- “I’d like to diversify my wealth into other investments, but I don’t want to pay taxes.”
- “I’d like to get more income from my assets but I don’t want to pay taxes.”
- “I’m nervous about meeting all of the strict requirements of a 1031 exchange to avoid taxes.”
- “I’d like to plan my estate properly and I don’t want to pay estate taxes.”
- “If I do a 1031 exchange, my new property will have the same very low basis.”
- “I was never told I would have to “recapture” the depreciation I deducted in all past years.”
- “I really want to sell my business but I don’t want to pay too much in taxes.”
- “I would like to protect my assets from creditors and lawsuits.”
- “I’d like to give money to charity, but I want my assets to pass to my children.”
- “I’d like to eliminate the liability of owning property but I don’t want to pay taxes.”
- “The Solution: Creative Strategies To Eliminate Current Taxation – And Help You Reach Your Financial Goals!
If you could “create” your own strategy to minimize taxation on your assets, especially real estate, you’d probably try to include these provisions in your plan:
- Ability to avoid current taxation on the sale of your property.
- No limit to the amount of current taxable gain you can avoid.
- No limit to the amount of depreciation recapture you can avoid.
- No requirement to immediately reinvest back into property.
- No requirement to reinvest in equal value property.
- Ability to receive needed income from your assets, when you need it, on a tax-advantaged basis.
- Ability to defer the income from your assets until you actually need the income.
- Ability to diversify your assets to minimize risk.
- Increase your basis on new properties to reduce future taxable gain, increase depreciation deductions.
- Ability to protect your assets against creditors and lawsuit judgments.
- Ability to pass on any amount of assets to your heir’s estate tax free.
- Access to funds for emergencies and opportunities.
- Deduct suspended carryover losses upon sale of the property while all current taxation is avoided.
- Ability to sell property without increasing the asking price to cover taxes that will have to be paid.
A Private Annuity Trust, properly implemented, will let you achieve all these objectives!
The power of the Private Annuity Trust is that it is a very conservative tax strategy that will help you defer the taxes you have to pay on sales of your appreciated assets, over your lifetime.
The choice is yours:
You can pay the taxes you owe immediately.
You can pay the taxes you owe over a lifetime – it’s like a 0% interest loan from the IRS!
The Private Annuity Trust structure allows you to pay tax on your real estate gains over your entire lifetime. It is very important to remember that you are avoiding current taxable gains by deferring the payment on the entire gain over your lifetime! Unlike other tax deferral strategies, like 1031 exchanges, a Private Annuity Trust can be used with primary residence sales. Our next issue will detail the taxes saved, and the lifetime income created in a residential sale example.
For more information, or for a FREE, 10 page Tax Savings Analysis on your property, contact Gary Katz at QFN – 800-224-1053 – or email Gary@QAplan.com.
QFN is a full service financial advisory practice in Sacramento, CA that helps business owners, real estate owners, professionals, high net worth families, and individuals planning for success create, protect, manage, and distribute their wealth. Our comprehensive asset protection strategies help clients retain more of their resources, to better build their financial security, and insulate them from potential liability. Our comprehensive wealth building planning strategies help clients increase their opportunities for financial success, and make sure that all assets are used to maximum advantage, for today, and for future generations. www.QAPlan.com
- Betsy Hartwell – Quantum Advisors
*This is the second in a series of articles – to be continued…
Part 1 may be read here.
This weekend’s news was all about lagging housing sales. MarketWatch is reporting, “U.S. existing-home sales prices fall for first time in 11 years.” It was also on the radio this morning as well as the Sunday evening news yesterday! So it must be true.
We went back and put together statistics for each month for all the years we had on file and are currently collecting data that we do not have for as many years as we can. The San Francisco MLS only has statistics going back to 2000 or so when the system was switched over. Historical information earlier than that is not available at this time.
What we found was that the San Francisco real estate market slowdown really became apparent in January of 2006. As for the assertion from the media making comparisons to August reaching an 11 year low… this is typically a vacation time and is slow EVERY year at this time. Look at the numbers. Here are our monthly comparisons:
As you can see from the numbers we, indeed, have been off. However, let’s see what September statistics report since the Fed has frozen rate hikes for the moment. What we are seeing in the marketplace is very encouraging!
- Mick Orton
Avram Goldman, President and COO of Coldwell Banker, San Francisco Bay Area said in his latest weekly report:
“The fall market is still hibernating although the bears are starting to rustle. Open house activity continues to be active in most markets particularly with homes that are being held open for the first time i.e. the 50 groups through a new Albany listing and the 35 groups through an El Cerrito new listing. Listing inventories are rising once more.
“Fewer multiple offers were reported this week, although some markets continue to be strong with multiples—-Palo Alto (60%), San Francisco (avg. 40%), San Mateo (45%) and Los Altos (60%). It is the same story that homes priced well and prepared extraordinarily sell quickly—a $3 mil. listing in Marin had 8 offers, a Danville listing for $1.879 mil. received 8 offers and a Berkeley listing at $1.295 had 7 offers and went well over. Those priced over market and not prepared are sitting.
“Price reductions abound as sellers are seeking price points that buyers are willing to pay. Buyers are cautious and have some resistance to moving too quickly. The continual negative press doesn’t help. There does seem to be more buzz in the air. The feeling is as sellers become more realistic and buyers begin to see inventory moving the market should kick up a notch. Lower interest rates could be a stimulus. There is no guarantee these rates will stay at current levels.
“Here are the numbers for the week: 12 offices reported increasing inventories, 15 steady and 4 decreasing—5 offices showed sales increasing, 17 steady and 9 decreasing.”
- Avram Goldman
* For an e-mail alert when this report is updated, send a note to info@SFResidence.com with “weekly market report” in the subject line.
Recently we became aware of SocketSite, a San Francisco real estate blog. The topic this morning was “deceptive practices of Realtors”. It was put forth that instead of reducing the prices on listings, agents are pulling the property from the MLS and relisting it at the reduced price leading people to believe that the home sold for over the asking price, when in reality it may have sold for less than the original listing price.
Of course, I had to put in our two cents worth by commenting the following:
“What people here are saying here has some truth… from the BUYERS point of view. However, having worked with a Realtor, I see the other side, the SELLER’S side, more clearly.
“Imagine you’re trying to sell your property now after witnessing a frenetic market like we had a couple of years ago. You want the best price and expect it. Your Realtor suggests you put it on at $1,995,000. You insist that it is worth $2,500,000. It sits on the market for 3 months before reality sets in and the price is reduced to $1,995,000 which generates multiple offers and goes over the reduced listing price.
“If the price is only reduced in MLS, it creates the impression that there is something wrong with the property. (What problems made them lower the price $500,000?) And even with the new price, the listing becomes stale. Many Realtors may not see it again, or forget about this listing which is not serving the best interest of the SELLERS.
“Finally, don’t forget, if the property had been withdrawn and placed with another broker, it would have shown up as a new listing anyway at the reduced price.”
The bottom line here is that statistics may lie, or at least not tell the “whole” truth. When responding to a request for a CMA (comparative market analysis), the Realtor will bring a list of sold homes that compare to yours in order to suggest a listing price that is realistic in that day’s market.
It is our practice (and most Realtors in the City will agree) that we NEVER tell the prospective seller that the house will go a certain percentage OVER the listing price! The statistics from the MLS are just that… statistics and should not be counted on.
We’d love to hear your comments.
- Mick Orton
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