InvestorLoft Real Estate Investing Blog

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.

Good decisions outweigh bad markets with SDIRAs

All our lives we, as investors, have been told to put money away for those rainy days. Today, investors are on the seemingly neverending search for solid investment ideas that produce sound returns with balanced risk. Consequently, advisors are looking for council on a lesser-known and often misunderstood category:alternative assets.

Alternative assets include a wide-ranging group, such as partnerships and private equity. But the largest segment of alternative investments has been and continues to be real estate. In fact, almost 60 percent of alternative asset investments are in this category. Investors can invest in condos, rental properties, raw land, commercial buildings and other types of real estate from within a Self-Directed IRA (SDIRA).

Most Americans already have real estate investments, i.e., their home, and most (given the opportunity) may prefer to invest in asset-backed investments over paper-backed investments. Many investors are wondering if today’s retreating real estate market means that the good times are over for real estate, or whether new opportunities will emerge from the wreckage. I believe that it’s the latter. Real estate advisors, with whom my company works, suggest that falling real estate prices, combined with increasing inventory, may create new investment opportunities. As prices begin to fall back to earth, the pendulum may swing past center to create oversold conditions, providing opportunities to buy real estate at low prices. Some areas in the United States may already be starting to enter this situation. Consequently, many typical real estate investors are being squeezed out of the market due to the current credit crisis.

This has created a unique opportunity for cash-rich retirement plan investors who are in a position to purchase real estate outright. Who are these cash-rich investors? Baby boomers. 2007 marked the beginning of the wave of more than 78 million baby boomers that will begin to retire over the next two decades. This group controls more than $14 trillion in retirement plan assets, which will transition from employer-based plans to individual retirement accounts. Many baby boomers have already begun to shift away from traditional equity investments to those that generate income. When you add the factors noted above with the possibility of real estate appreciation, it is easy to see why retirement accounts that invest in real estate are growing in popularity.

Just because you can invest in real estate in your IRA does not automatically make it the best decision for all account holders. Opponents of using a self-directed IRA to invest in real estate suggest that there are specific tax implications foregone by choosing real estate as an investment. First, profits personally made in real estate, if long-term, are taxed at the capital gains rate of 15 percent. When a SDIRA sells a piece of real estate, there are no taxes due at the time of sale. However, depending on the type of SDIRA, when the owner takes a distribution from a retirement account, the proceeds will either be taxed at the person’s ordinary income rate (for a traditional SDIRA) or will, potentially, be tax-free under a Roth SDIRA.

This is an important issue because ordinary income tax rates are typically higher than long-term capital gains rates. SDIRA investors cannot depreciate property or write-off interest from their mortgage on their personal tax return.

In general, real estate investors experience increased return potential because of their use of leverage and its favorable tax treatment. Most real estate investment experts advocate the use of leverage to build wealth. Most SDIRAs do not use leverage to buy real estate, although it is permissible. Without the use of leverage, real estate begins to look more like income-producing bonds with equity upside. The lack of leverage may also reduce one component of risk for investors as well since the rental income is not being immediately used for debt service. If a property goes unrented the account holder owns the property outright and may not be subject to foreclosure proceedings, as with most current leveraged properties. Consequently, the methodology for buying real estate inside a tax-deferred retirement account may differ over time from real estate purchased outside the account.

Prohibited Transactions

Investing in real estate with an IRA requires that advisors and their clients be knowledgeable about prohibited transactions and what constitutes them. A prohibited transaction can jeopardize the tax-deferred status (and tax-free status if a ROTH) of the account, and can result in serious tax consequences. Another important issue for real estate concerns the access and use of property held inside the SDIRA. In such situations, neither the account holder nor their family members (ancestral & lineal) may have personal use of said property. To do so would result in an immediate prohibited transaction.

Partnerships

For an advisor who is seeking a niche, SDIRAs might be the answer. It takes time to develop expertise in this area and an advisor who invests time in understanding real estate investments with SDIRAs can create a competitive advantage.

Today, many advisors are partnering with those who have alternative products in which to invest, whether they are real estate-related or other private offerings. These partnerships provide the advisor with the ability to meet the changing demands of their clients. Advisors are learning to work more closely with clients who may have a property or real estate professional already in mind. As investors’ needs change, alternative assets and self-directed retirement accounts will become important tools for advisors to help clients diversify and grow their retirement wealth. Those advisors that are prepared for this change will be at the forefront of the financial services industry for years to come.

TJ Valenzuela is with TAS (Trust Administration Services), a leading personal management provider of self-directed IRA retirement accounts, retirement planning services, and custody accounts at www.trustlynk.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.

Self-directed IRAs can build your nest egg

Many investors have become disenchanted with recent stock market volatility, stories of corporate scandal and corruption. In addition to impacting retirement account values, these events have also strained investor confidence. It is no wonder then that more and more investors are pushing their advisors to offer Self-Directed IRAs (SDIRAs) that allow them to invest in alternative assets which they believe will provide greater diversification and control over their retirement nest eggs.

Factors
While the list of alternative investments includes a wide-ranging group of assets–including private equities, hedge funds and mortgages–one area that has captured the greatest level of interest is real estate.

Typically, real estate comprises 60% of clients alternative asset investments. Some real estate advisors suggest that falling prices combined with increasing inventory is creating new investment opportunities. As prices begin to fall, the pendulum may swing past center to create oversold conditions, providing opportunities to buy real estate at low prices. Some areas in the U.S. may already be starting to experience this phenomenon.

Another factor to consider is that many real estate investors are being squeezed out of the market due to the current credit crisis. This has created a unique opportunity for cash-rich retirement plan investors. These investors are either purchasing the real estate outright, through a partnership, or LLC. It is estimated that the first of more than 78 million baby boomers will begin to retire this year. This group controls more than $14 trillion dollars in retirement plan assets. These assets are being rolled-over from employer-based plans to individual retirement accounts. Many baby boomers have already begun to shift away from traditional equity investments to those that generate income, such as, income-producing property. Add these factors with the possibility of equity appreciation, and it is clear why real estate is growing in popularity.

Opponents of using the SDIRA to invest in real estate focus on key concepts which they believe have a profound effect on individual financial strategies. Before engaging in any transaction prudent investors are wise to consider them. First, profits personally made in real estate, if long-term, are taxed at the capital gains rate of 15%. When a SDIRA sells a piece of real estate there are no taxes due at the time of sale. However, when the owner takes a distribution from their retirement account, the proceeds will either be taxed at their ordinary income rate (for a traditional SDIRA) or are tax-free under the Roth SDIRA.

Additionally, SDIRA investors cannot depreciate property or write off interest from their mortgage on their personal tax return. Another important issue concerns the access and use of property held inside the SDIRA. Neither the account holder nor his or her family members may have personal use of said property; doing so would result in a prohibited transaction. SDIRA firms, such as Trust Administration Services can help educate investors about how to use a self-directed retirement account to invest in alternative investments and other investments.

Taking the First Steps
Any investor that has been intimately involved in a real estate transaction is already familiar with the basic requirements of buying real estate in a SDIRA. There are other issues which must also be considered, such as ensuring the proposed investment is not a prohibited transaction. This is why choosing the right self-directed retirement plan custodian is important. Important factors to consider when selecting a self-directed IRA custodian include experience, a consistent service record, organizational structure and wealth o expertise.

After the proper SDIRA custodian has been selected, the investor should request and complete the appropriate forms for their Traditional, Roth, SEP, Simple, Individual 401(k) or other qualified plan(s). The SDIRA advisor will guide the individual through this process.  Once the account is established, the SDIRA custodian will forward the transfer form to the resigning custodian, whether that is a brokerage firm, mutual fund, insurance company, bank or trust company. Upon receipt the prior custodian will transfer the assets to the new SDIRA. A high-quality SDIRA advisor will make the process seamless for investors.

Cost
The fees associated with maintaining a SDIRA vary among firms and is one of the most important distinguishing factors. Most SDIRA firms choose to charge based on a percentage of assets, while a minority employ a transaction-based fee schedule, which is typically kinder to larger retirement accounts. When considering alternative investments, which have longer time horizons with potentially higher returns, the percentage of assets fee approach may not be as beneficial to the SDIRA account owner. Consequently, each account holder should consider his or her specific situation before determining which is best.

Summary
Ongoing market volatility, combined with the need of baby boomers to generate income, and retire securely, is causing investors of all shapes and sizes to take a hard look at their investment allocations to ensure there is a proper mix of opportunity and risk. As investors needs change, alternative assets and self-directed retirement accounts will become important tools to diversify and grow retirement wealth.

TommyJoe A. Valenzuela is Vice President of Sales and Marketing for TAS (Trust Administration Services), a division of First Regional Bank and online at www.trustlynk.com. He has over fifteen years experience in the financial services industry. He is a guest speaker at industry conferences, addressing topics such as taxable investment strategies and retirement plan investing.

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.

The Key to Unlocking REO and Foreclosure Values

On a cozy side street in the suburbs outside of Chicago, a white house with black shutters and roof is tucked back on a side street of Naperville, Il. A neighborhood of homes built when luxury and coziness blended together in new subdivisions during the 1960s, Greenwich Court seems like a time capsule from better years.

But even this gem in the western reaches of Chicago’s urban sprawl hasn’t been immune to the current financial hardships. The homes are beautiful, well cared for with beautiful lots, but two of the eight along the lane have been touched by the housing bubble bust.

While one of the two foreclosed, the second had a Cinderella-like ending. David Field, business owner and managing broker for Home Field Realtors in Naperville, noticed the house when relocating back to Illinois from Seattle. “Every 15 to 20 days the price would drop again,” Field said. “I thought it was definitely going to be a short sale.” A four bedroom, 2,800 square-foot gem, Field decided he didn’t want to wait any longer. He arranged a showing with the listing broker, Jean-Paul Eskenazi.

A casualty of a drawn out divorce and on the market for over a year, the house was quickly headed towards foreclosure. The owners had relocated, the husband to France and the wife to Florida. With a notice of default filed with the Illinois courts, Field had 90 days to negotiate and keep the property out of foreclosure and out of the hands of the bank.

The Illinois courts give homeowners 90 days to bring mortgages up to date with back-owed payments, then three to seven months grace period for the mortgage balance to be paid in full. “David had to decide if he thought it was worth it to pay part of the old owners’ closing costs to get the house,” said Field’s lawyer, Mark Rodriguez. “In his mind, it was.” They liked the home and didn’t want to see it torn down by an investor for new construction.

“I wanted to make sure that everyone got the deal they wanted. And I knew, after being in the business for five years, I was going to have to negotiate (and) not give up,” Field said. A tidy $425,000 later, the home was his – at 22.7% under the starting list price.

While the property needed a number of repairs after a year of vacancy, the Fields are happy with their new home sweet home. “Our children have a good home to grow up in, and with a little bit of work it is a really beautiful house,” Field says. Looks like this Cinderella house found her Prince Charming.

The main role that a title company plays in a 1031 exchange is that they are the last line of defense for the client. Often clients don’t know about 1031 and if their escrow officer does not bring it up, then they most likely will be looking at a tax liability. Escrow officers can be heroes to their clients just by simply asking if their client is going to be doing a 1031 exchange. Escrow officers that are not familiar with 1031 could be costing their clients money that they could be deferring and using to purchase higher valued assets.

In the 1031 arena, there is little to no question that if you are not working with a 1031 exchange group, you are doing yourself a disservice as an investor. It is imperative that you are working with a group that has loads of escrow experience and their specialty is 1031 exchanges.

With that being said, you also want to make sure the group you are working with is part of a larger entity with money in the back and a diversified transaction portfolio. Why? Because when investors are looking to employ a 1031 exchange close title on a sale property, they must place the money with a qualified intermediary such as a bank or title company. You want this company to have money in the bank, and a company like ours (Fidelity National Title) has over $2.8 billion in reserve.

Having the right title company in place will help you succeed in a 1031 Exchange transaction. Plus, since hiring an in-house consulting can cost a fortune, having a good partner such as an experienced title company in the deal can make all the difference.

For more on the Fidelity National Title “Difference” go to www.fntarizona.com or send an email to
info-fntarizona@fnf.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.