InvestorLoft Real Estate Investing Blog

What does the index rise mean for real estate?

This week marked the release of the latest S&P/Case Shiller Price Index Report. For the first time in 20 years, there was an overall 0.5% increase in the index, possibly indicating that the real estate market on a whole is seeing signs of recovery.

“This is much more important than an up day on the stock market. It may mean that we may have changed direction,” Robert Shiller, a co-developer of the Case Shiller index told Reuters Television.

It is “a pretty significant indicator that we might be at or near a bottom,” said index co-developer economist Karl Case of the self named index.

Many of InvestorLoft’s active markets are listed in the recent report. Here’s a rundown of key metropolitan areas that our member may find of interest:

Increasingly, Self-Directed IRA (SDIRA) owners are looking at alternatives to traditional stocks and bonds for their retirement accounts. Growing investor sophistication is driving many in the direction of Real Estate, Private Stock, non-public Hedge Funds and other investments traditionally excluded from their current retirement portfolios. Alternative investment transactions through a SDIRA, may provide greater transparency and control over retirement assets. Additionally, a Traditional SDIRA allows taxes on assets held inside the IRA account to be deferred or postponed until the money is withdrawn from the account, presumably after the age of 59 ½. Alternative investments may allow account owners to take a proactive approach to improving investment returns because they choose asset classes that are not correlated to their current portfolios.

When working with SDIRA’s, it is important to be familiar with the prohibited transaction and disqualified person sections of the Internal Revenue Code (IRC). Failing to understand Prohibited Transactions, or to find an advisor or professional that does, may lead to the disqualification of your SDIRA, resulting in possible taxes and penalties. This article will outline the importance of disqualified person(s), prohibited transaction(s), and common scenarios SDIRA owners should avoid with their SDIRA.

The prohibited transactions rules are intended to ensure that the assets of a plan are invested in a manner that benefits the SDIRA itself and not the SDIRA owner. This is intended to prevent a person, such as the IRA holder, from using the assets of their SDIRA for personal benefit. It is incredibly important that the IRA holder not engage in any ‘transaction’ with his or her IRA. Consequently, transactions involving the SDIRA must be “arms-length” and free from any direct exploitation by the SDIRA owner.

Disqualified Person(s)
An IRA owner may not invest in property that he/she, a relative, or his/her business, already owns. Prohibited transactions are transactions that occur between the SDIRA and disqualified person(s). The following are, generally, considered disqualified persons.

• The IRA holder
• The IRA holder’s spouse
• The IRA holder’s ancestors and lineal descendants
• Spouses of the IRA holder’s lineal descendants
• Investment managers and advisors
• Anyone providing services to the plan (IRA), e.g., the IRA trustee or custodian
• Any corporation, partnership, trust, or estate in which the IRA holder has a 50% or greater interest

Prohibited Transactions
Understanding what constitutes a prohibited transaction is very important when it comes to making investments within a SDIRA. A prohibited transaction can bring into question the tax-deferred status of the account, resulting in the disqualification of the SDIRA and severe tax and penalties. Prohibited transactions fall into two general categories: Prohibited Investments and Prohibited Transactions. The Internal Revenue Code (IRC) defines a prohibited transaction to include any direct or indirect:

• Sale or exchange, or leasing, of any property between a plan and a disqualified person;
• Lending of money or other extension of credit between a plan and a disqualified person;
• Furnishing of goods, services, or facilities between a plan and a disqualified person;
• Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan in his own interest or for his own account, or
• Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
• Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving income or assets of the plan.

Often, SDIRA custodians communicate to the SDIRA holders that they should consider their SDIRA separately from themselves as individuals. It is important to understand that for purposes of the IRS code you and your SDIRA are separate entities whose interests are not related. Understanding this nuance will reduce the number of potential issues that may arise when you make investments using your SDIRA.

Common Prohibited Transactions

• Borrowing money from an SDIRA
• Using the SDIRA as security for a loan
• Selling personal assets to the SDIRA
• Buying property in the SDIRA for personal use
• Purchasing property from a disqualified relative i.e. Spouse, Children, Parents of the SDIRA holder.
• Issuing a mortgage on a disqualified relative’s residence

Penalties
When an IRA is involved in a transaction that is considered ‘prohibited’, the IRA loses its tax-exempt status and the IRA holder is deemed to have received a distribution on the first day of the tax year in which the prohibited transaction occurred. The value of the IRA is treated as if was distributed to the IRA holder and must be included in the IRA holder’s income for that year. Unless the IRA holder has reached age 59½ or is disabled, this distribution is subject to the 10 percent penalty tax on early distributions. These are hefty penalties that can rapidly diminish the benefits of the self-directed IRA.

Conclusion
Individuals who consider making, or have made, alternative asset investments in their SDIRA must be vigilant and responsible for each action they take. Becoming aware of the prohibited transaction and disqualified person rules will help them avoid tax consequences by not tripping over these fundamental rules. Individuals should contact a knowledgeable self-directed IRA custodian, attorney, CPA, or financial advisor, with a track record of working with SDIRA’s, for more details.

TommyJoe A. Valenzuela (“TJ”) is VP of sales and marketing for TAS (Trust Administration Services) online at www.trustlynk.com and a division of First Regional Bank. He has 15+ years experience in the financial services industry, implementing marketing strategies to benefit real estate professionals, attorneys and others and speaking at industry conferences on taxable investment strategies, retirement plan investing, etc. Trust administers more than $1.3 billion in assets, including those invested in real estate, tax liens, and private equities.

The content in this blog is not affiliated with nor is it endorsed by InvestorLoft.com and contributors receive no compensation for submitted articles. All articles submitted to InvestorLoft are subject to editorial review. Please seek the advice of qualified real estate, tax and financial professionals before investing in any project or opportunity. InvestorLoft does not provide tax or legal advice and any and all content herein is provided for informational and educational purposes only.

As big believers in quantitative data, InvestorLoft consistently tracks the numbers behind our site’s listings. We want our members to have access to the most timely data possible to help with their investment property purchase decisions, so we’ll be publishing quarterly results like those in this blog. Forbes.com and Forbes Magazine recently utilized our data in their article The Landlord Game, and we’re now passing on an enhanced version of that data to you! The following numbers were derived by analyzing all of the listings on InvestorLoft and then crunching those numbers a few different ways and under different scenarios (varying down payment amounts, types of residence, etc.).

Note on Cap Rate calculations:
The following is the method by which our cap rate calculations have been derived:

CR = ((income – expNotMtg)/PP)*100)
Cap Rate = ((income less expenses not including mortgage)/Purchase Price)*100

All results were multiplied by 90% to account for the following variances and arrive at more conservative figures:

Rent:

• Seller entered rent as the first value. If there is none, then we used median rent derived from between 1-5 miles averages.

Expenses:

• Some listings do not have HOA or taxes – the system does not currently estimate these numbers, so the cap rate would be very high in that case. Thus, we estimate numbers for insurance fees, and property management (based on the rent val) in the expenses.

Top Cities Nationwide for Cap Rate – National Totals
(includes both single-family and condo/town homes – multifamily excluded)

Top Cities Nationwide for Cap Rate – Single Family

Top Cities Nationwide for Cap Rate – Condo/Town home

Top Cities Nationwide for Cash Flow – National Totals
(sorted assuming 30% down payment)

Top Cities Nationwide for Cash Flow - Single Family
(sorted assuming 30% down payment)

Top Cities Nationwide for Cash Flow - Condo/Town home
(sorted assuming 30% down payment)

Share this post with your clients and colleagues and look for our Q3 data to be released in October.

While the vast majority of what we hear these days about real estate in the news is “doom and gloom,” there’s definitely an upside that few are talking about. We’ve entered an era where America is on sale – we haven’t seen such a favorable buyer’s market in years. Property prices in many areas are below market rate, rents in those areas are above market rate, and non-traditional financing is become more and more prevalent and the options for investors to access quality rental/investment property are abundant. So tell me – why isn’t the majority of the media talking about the sunny side to the foreclosure across the street?

Fear.

Fear sells. Fear motivates. Fear is what we thrive on.

The most powerful thing we can do is tap into that fear that everyone’s trying to instill in us and glean powerful information from it.

If a city is experiencing a higher than normal foreclosure rate and population statistics are remaining constant – wouldn’t that mean that there’s a steady demand for rental property from displaced homeowners?

If inventory is plentiful and driving prices down yet vacancy rates in the area remain low and constant - wouldn’t that indicate an opportunity to access prime rental property at reasonable prices with a steady flow of at-market rent rates and tenant supply?

If credit is tight and traditional loans are harder to come by – wouldn’t that lend a look at less traditional financing methods like self-directed IRAs? The power to become a cash buyer is within your reach if you know where to look.

There’s a silver lining to every gloomy cloud in the sky and the real estate market is no different. Our CEO, Wally Charnoff, was recently interviewed by Jonathan Burton at MarketWatch about this exact subject. Have a look at the video and see what Jonathan and Wally found to chat about.

Looking for rental property?

So, you’re thinking about getting into investment property. If that’s the case, there are a few basic questions you need to ask yourself before you get started. The first one is simple: are you most interested in appreciation on the property or cash flow? If your answer is cash flow, read on.

The concept behind cash flow properties is simple: take in more in rent than you spend to own the property. There is no getting around the fact that, in order to purchase a property that is going to generate cash in your pocket every month, you’re going to have to look at a lot of places and do a lot of research. You could go take a seminar from a “guru” who will tell you that you can get property that generates tons of cash for no money down to make you rich. If this the case, don’t you think he would be running around buying properties instead of giving seminars? Save that money for your down payment.

First, you have to decide what kind of property you want to buy. If you want to enter the rental market game for as little money as possible, mobile homes are worth a look. However, you should keep in mind this isn’t going to yield the most stable pool of renters. Maybe you’ve found a house or condo that you want to rent for a few years then move into when your kids are all off to college. Do you want a single-family detached home, a few condos or town homes, or a multi-unit building? Once you’ve weighed the different options and decided, it’s time to get busy with your research.

Who’s going to manage the property? If you are going to use a property management service, the property can essentially be anywhere. This might be an option if you live in an area with a unstable renter base, for instance, such as if industry is leaving the area and taking jobs with it. If you are going to save money and manage the property yourself, your purchase should probably be local … and you have to be honest with yourself as to whether you can really handle it. If you are a busy executive that works long hours, you may be able to handle one or two properties, but if you add any more you may rethink it. If you’re buying several units and your research shows that you can make a living off the cash, you can do it full time. But don’t underestimate the rigors of property management. When a tenant’s toilet breaks, she’s going to want it fixed today, NOT when you get back from vacation. Weigh the cost benefits. Is the standard 8-10% property management fee worth you having both the benefit of monthly cash flow AND your freedom?

There is usually going to be a trade-off between appreciation and cash flow. An executive home in a nice neighborhood may appreciate rapidly but not generate as much money per month because of the higher mortgage. Conversely, multi-unit structures that generate a lot of rental income every month may not be in the nicest part of town, and therefore appreciate less. And remember the lessons learned from recent market cycles: appreciation is never guaranteed.

Once you’ve decided what you’re going to buy, partner with a real estate agent that specializes in rental and income property. Insist upon seeing the records for any property for at least the past two years before you buy. Look at capital expenditures, rental income, maintenance costs, association fees and any other expenses. A positive balance sheet should ideally be accompanied by reliable, existing tenants.

Investment property can be an excellent way to make money every month from rental income, but don’t kid yourself. There are a lot of factors to consider. Are you cut out to be a landlord? Are you in a position to weather inevitable vacancy rates? Are you able to financially handle major problems like a new HVAC unit or replacing a roof? If so, don’t skimp on the research: start building your rental property portfolio the right way. Patient research, due diligence, the assistance of an experienced local real estate professional are all key to your success. It’s more than just finding what looks like a great buy and closing the sale: it’s everything beyond the sale that determines the cash flow potential of a rental.

Here is the second part to How to Get Your Listings Noticed – Part 1 – more strategies to assist the real estate investor with setting their properties apart from the crowd and encourage a quicker sale.

3. Use Creative Financing: One of the best ways to offer the home improvements after the sale mentioned in #2 is through an FHA 203K Rehab loan or a USDA Rural Housing Rehab loan. Buyer can finance anywhere from $5,000 to $35,000 on top of the loan amount to pay for improvements. For energy improvement-type repairs, FHA offers an Energy Efficiency program for these repairs too. A good loan officer who knows the ins-and-outs of these programs can help you strategize listing offers that will appeal to buyers.

4. Sell the Payment – Not the Price: Again, your loan officer can be invaluable to you here. Buyers get intimidated by prices of homes. $150,000 sounds like a whole lot of money, whereas $1200 a month can seem much more manageable. Check out the temporary or permanent rate buy-down options available to you. “Seller will reduce your first year’s payment to only $1050 a month AND pay all your closing costs too!”

In your “call for more details” disclaimer – direct them to your loan officer with the questions and REQUIRE that the financing be done by him/her to get the special deal. As soon as you say “pay all your closing costs” and you allow ANY loan officer to do the loan – figure the costs will probably double or triple. If they want the special deal, they can use your loan officer (again, builders do this all the time) and you can retain control of the transaction.

Do These 4 Strategies Work?

It depends on what you mean by “Do they work?” If you try these strategies and the home doesn’t sell right away, does that mean the strategy failed? Not necessarily. Yes, it would be nice if the free bottle of wine or the offer to throw in a new fence was able to close the deal from the get-go, but that is not what the strategy is intended to do.

These four strategies can only help you get the home noticed by potential buyers. They cannot sell the home for you. Nobody is going to buy the home because you give them a bottle of wine or free tickets to a hot concert. But it’s possible that someone who likes wine or concerts will become interested in buying your home – and they maybe wouldn’t have ever considered your home unless you had offered the giveaway.

If you try using these strategies, the measure of its success or failure is: Did more people notice the home? If your open house was better attended because you offered free pony rides for the kids – then that was a success. Just because the home didn’t sell doesn’t make it less of a success.

Why Do People Buy?

Someone will buy your home when they believe your home offers them the best value for their money, based on their individual needs. You cannot dictate what their needs are – that is beyond your control. The only things you can control as a seller is making sure your home’s offering is competitive with other offerings in your area AND reaching out to as many potential buyers as possible.

Again, the more potential buyers you can get to consider your home, the better your chances are. And then it will be up to the buyer to determine if your home meets their needs. Your pricing and the condition of your home will play a big role in their decision, but they wouldn’t ever have that decision to make if they had never considered your home in the first place.

Get them to consider it – that’s the ONLY way to have a shot at selling them your home.

Glenn Leach is a mortgage loan officer in Puyallup, Washington. You can read more articles and ideas at www.credittothewise.com.

The content in this blog is not affiliated with nor is it endorsed by InvestorLoft.com and contributors receive no compensation for submitted articles. All articles submitted to InvestorLoft are subject to editorial review. Please seek the advice of qualified real estate, tax and financial professionals before investing in any project or opportunity. InvestorLoft does not provide tax or legal advice and any and all content herein is provided for informational and educational purposes only.