Commercial Real Estate

Investing

Investments

Investing means to lay out money in expectation of profit.  This is measured in business by ROI, return on investment.  With real estate investment we use cap rate and, the degree of capitalization of the investment.  Net CAP rate takes into account the expenses involved in operating the investment.  Ten percent was the benchmark at one time, and now it seems to vary from 3% to 7%.  To calculate divide the annual income minus expenses by the cost of the property for the percentage.  Multi family can be purchased as either operational, for refurbishment to rent or sell, or for conversion to condominiums.  Rehabbing is a big part of the market, particularly with single family housing.  Some of it coming through foreclosure, sheriff sales, and HUD sales.  There is a lot of investing that is done with second homes and recreational property.  Quite often there is not the intent to add value, but what has proved in the past to be quite lucrative, which is holding for three to five years and profit from the accrued price.  Ten years in many areas has yielded an almost 100% increase. One of the great features of investment property is the annual tax break based on depreciation.  This often allows an investment with a bad cap rate to not hurt the pocket as much.  When the investment is sold the IRS rules allow it to reclaim all the depreciation.  This is a big tax hit that is usually paid at the capital gains rate.  The normal approach to delaying the IRS is using a rule 1031 exchange.  This allows  for leveraging one or several properties into something greater and delaying the capital gains hit even until death when depending on trust, or probate, etc the basis can change. Leveraging is using the increase in equity due to appreciation to invest in a larger investment. Tennants-in-Common A popular choice for 1031 replacement properties is the Tenants-in-Common (TIC) ownership program.  This provides buyers with monthly rental income, advantage of a triple net lease (NNN), with the appreciation advantages of multi-tenant property.  Buyers can own an interest in several properties and have the advantages of divsification that is not possible with single properties.  Diversification:  Normally entrance into the whole building, income-producing real estate market begins at about $1 million, preventing many 1031 exchange owners from participating in this market. But a TIC ownership allows the average buyer to participate with others in ownership of larger properties through a minimum purchase as low as $150,000. Whole property purchases are also available.   Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC (Tenants-in-Common) owners in any one property.   The quality of the tenants attracted to these larger projects is much better than the smaller individually owned . NNN Lease Partner:  The company generally contracts with the same lessee.  The TIC owner saves the time and headaches of  the day to day property management and sublet responsibility.  The tenants in common receive 6% of thier investment in the monthly rental payments.  The lessee makes the payments whether the building is making money or not.  He has the incentive to do well as he is able to pocket the excess after all maintenance, tax, etc.  Fixed annual rent with automatic increases each year.  All debt expense is carried by the lessee. Financing:  Due to the nature of a 1031 the funds from your exchanged property are held by the qualified intermediary.  The TIC debt structure generally allows the debt financing to be assumed. Assumption usually occurs without the need for qualification or loan assumption fees, and no closing costs..   Speed and Simplicity:  1031 rules allow 45 days after the sale of the relinquished property to identify  the replacement property.  Identification can follow the 3 property rule, 200% rule, or the 95% rule.  Closing must be within 180 days of the sale of the relinquished property.  If not capital gains tax is due.  Due diligence of  the buyer should consume more time than any normal red tape of property transfer.  TIC owners:  The individual Tenants-in-Common receive deeded interest.  If the individual TIC needs to sell, the leassee normally assists.  On a decision requiring unanimous vote, such as a sale decision, a 60% - 75% (depending on your TIC agreement) vote by the TIC owners will be sufficient to initiate the impasse resolution procedure. This procedure allows the TIC owners with 60% - 75% (depending on your TIC agreement) or more of the property to make an offer to buyout the dissenting owner with 25% or less of the property. The dissenting TIC owners can either: (1) accept this offer, (2) buy out the 60% - 75% (depending on your TIC agreement) TIC owners at the same price per percentage ownership, or (3) change their dissenting vote to a consenting vote. REAL ESTATE REMAINS A STRONG INVESTMENT  By            Opportunities to make big, quick profits in residential real estate tend to come and go in cycles.  When a local market is hot, families may find it possible to buy a house at an attractive price, fix it up, and watch its value rise in just a few years.           When the same local market is at the low end of the appreciation cycle, reaping a profit on the family home can take a good deal more time but the reward can be just as satisfying if price and location and carefully considered.           Even in uncertain economic times like these, history shows that real estate is one of the soundest investments a family can make.  During the Great Depression of the 1930s when the stock market plummeted as much as 89 percent, housing prices dropped only 39 percent.  According to most of the research on housing trends, prices continually stay at the same level as, and most often appreciate faster than, the rate of inflation. Housing prices actually rose an average of 10 percent during the recessions of the mid-1970’s and early 1980s.           CENTURY 21 statisticians report that the rate of home appreciation since 1990 has been around five percent nationally, with inflation hovering around four percent.  Homeowners, obviously, are still staying ahead in the real estate game on average.           And, with mortgage interest rates the lowest they’ve been in two decades, real estate today is a more attractive investment than it’s been in years.           First-time buyers are the big winners in this environment.  Drawing up a budget can help you and your family decide on what you can afford.  Once you’ve determined a price and picked your desired community, shop around to find the best house you can buy for your money.  This strategy can help you realize greater appreciation two or three years down the road.           This is also a good time to purchase a second or vacation home.   A bargain cabin in the woods today might bring an excellent return when housing prices move upward.  Affordable second-home prices also allow you to purchase a vacation home that can serve as a stepping-stone to a larger retreat in the future.           But appreciation isn’t the only advantage to buying a home.  The federal government thinks home ownership is so important to the future of our country that it allows mortgage interest to remain the last substantial tax shelter for families.  Owners can also take deductions on their property taxes.  And, the profit on the sale of your home remains tax free as long s you buy a house for a greater or equal price.             So before you decide that this is not a good time to invest in residential property, re-examine the financial benefits of owning your own home and put them to work for you.   Dwight Puntigan Your Professional REALTOR of CHOICE. Century 21 Premier Lifestyles 1529 Old Highway 94 South St. Charles, Mo. 63303 Phone:  636-947-6100  FAX:  636-947-6108  Cell:  636-219-6242