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M ISCELLANEOUS T OPICS. Real Estate and REITs. Real Estate Investments Types. Direct Real Estate Investments As the investor, you hold the title to the property Your home Your vacation home Rental property – whole course unto itself! Undeveloped land

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MISCELLANEOUS TOPICS

Real Estate and REITs


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Real Estate Investments Types

  • Direct Real Estate Investments

    • As the investor, you hold the title to the property

    • Your home

    • Your vacation home

    • Rental property – whole course unto itself!

    • Undeveloped land

      • Can be tremendous gains but this type of investment poses enormous risks

      • All the money is riding on a single parcel of land

      • Plus there is no cash flow and you still have to pay the property taxes

      • And there is often no guarantee that you will be able to develop the land


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Real Estate Investments Types

(continued)

  • Indirect Real Estate Investments

    • Real Estate Investment Trusts (REITs)

    • Real Estate Syndicates or Limited Partnerships

      • Hurt by 1986 Tax Reform Bill

      • Passive versus active income

    • Tax Credits

      • Low-income housing, etc.

    • Equity Sharing

      • You put up the down payment for someone else and then share in the appreciation

    • First and Second Mortgages

      • Not an “equity” position – you are a “loaner”


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Investing in Commercial Property

  • Most common investment of this type is a duplex or small apartment building

    • Also includes hotels, office buildings, stores, and many other types of commercial establishments

    • Do not be surprised if you are looking at negative cash flow for several years

    • Rule of Thumb: Price = 7 to 10 times Rent

      • In San Diego? Ha! Ha! Ha! Ha! Ha!

        • For over 20 years, prices had become untouchable – simply insane

        • But the recent turmoil has changed the investing landscape for real estate

      • I think the South Bay is where the great bargains are now if you are so inclined


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Investing in “Fixer-Uppers”

  • Concentrate on smaller properties first

    • Two to four units and live in one of them

  • Look for low down payments and seller financing of rundown properties

    • Banks usually do not want to loan to distressed properties, however…

  • Banks are all too happy to finance a rundown foreclosure on their books

  • Avoid property managers

    • Nobody cares about your property as much as you do(but there are always exceptions)


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Investing in “Fixer-Uppers”

(continued)

  • Most Importantly,

    • Are you savvy dealing with repairs? …and…

    • Are you savvy dealing with renters?

    • Fixing a tenant is just as important as fixing a toilet

      • One bad tenant can set you back thousands

  • Make improvements that add perceived value

    • Example: Install a white picket fence

  • Investing in Fixer-Uppers,Jay P. DeCima


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Real Estate Investment Trusts

  • Real Estate Investment Trusts (REITs)

    • “Pass-through” investments – kinda’ like a mutual fund

      • By law, must distribute 95% of their earnings to shareholders

    • Examples:

      • Shopping centers

      • Office buildings, warehouses, etc.

      • Apartment complexes

    • Management fees typically range between 1% and 2% per year

    • Long-term return – 7% to 8%

Example: Realty Income Corporation, symbol O


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Advantages of Real Estate Investments

  • A hedge against inflation

  • Financial leverage

    • The use of borrowed funds for investment purposes allows you to acquire a more expensive property than you could own on your own

  • For Real Estate Partnerships / REITs

    • Easy entry – REITs are easily liquidated

    • Limited financial liability (limited partners, REITs)

    • No management concerns

  • You can’t check the price of your real estate investments every day on the Internet

    • One of the major problems with stocks


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Disadvantages of Real Estate Investments

  • Liquidity may be poor

    • It may be hard to sell the property (or your share of the property if a partnership)

    • Not a problem for REITs – buy/sell like a stock

  • Normally there is a lack of diversification

    • REITs & partnerships offer diversification

  • Passive tax shelter for real estate syndicates

  • Management or tenant problems

  • Property values can decline

    • Oh, yes, they can!


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Your Home as an Investment

  • A major asset of most households

  • Possible hedge against inflation

    • Traditionally, a home produces an after-inflation return of about 2.5 percent a year (San Diego?)

  • Tax advantages

    • $250,000 capital gains tax-free for single people

    • $500,000 capital gains tax-free for married folks

  • But it is a home first, an investment second

    • In my humble opinion…


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“But my house is the best investment I have ever made!”

  • “Of course, it is pretty much the only investment that I have ever made,

  • Except for that penny stock my brother-in-law, the ex-stockbroker, conned me into buying…

    • But that stuff is worthless now

  • And those gold coins I bought back when the first Gulf War started back in ’91

    • What did I do with those things, anyway?”

Bottom Line: A House is a Home First, an Investment Second


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But what about San Diego?!”

  • Prices in San Diego have gone down in the past

  • They are going down as we speak

    • How far before we hit bottom, no one knows

  • But if you plan on staying here, by all means, buy whatever you can afford

    • San Ysidro and National City are two of the best values in the region, by the way

    • Imperial Beach is also a great beach value

  • But don’t expect what happened the past few years to repeat itself for quite some time…


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Sign seen over a desk in a San Diego office, circa 1993

“Please, God, let there be another real estate boom and I promise I won’t piss it all away this time!”


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The “Perfect Investment”

  • “C’mon, Paiano – Admit it!

    • Real estate is the ‘Perfect Investment’

    • Look at what has happened in the past five years”

  • Beware the Permanent Trend(Andrew Tobias)

    • Real estate goes up and down in cycles

    • Ask those who bought in 1990 and sold in 1994

      • And those who bought in early 2006 and are still trying to unload that “flipper condo”

    • But if you plan to hold for the long-term, you should do well

  • By the way, there is no “Perfect Investment”

    • Folks were saying the same things back in 1999 about stocks


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The “Perfect Investment”

(continued)

  • “But what about Leverage?! Huh? What about the ability to make money with other people’s money?”

    • We have already discussed leverage, haven’t we?

  • “But isn’t that what makes real estate such a great investment?”

    • Well, yes. But there are pitfalls. Just as with margining stocks, leveraging real estate magnifies your gains and magnifies your losses.


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Real Estate and Capital Gains

  • “Wait a minute. Did you say that there are no capital gains taxes on real estate?”

    • Currently, as the law stands now, as long as the real estate is your primary residence for 2 out of the last 5 years, you pay no capital gains on the first…

      • $250,000 if you are single

      • $500,000 if you are married

    • By the way, capital losses on your primary residence are not tax-deductible

Example: Buy your home for $200,000. Sell it for $700,000. If you are married, then you pay no capital gains taxes!


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Speaking of Info-mercials

  • Have you seen the ads?

    • “Start your real estate empire with No Money Down!”

    • “You, too, can take advantage of the tremendous opportunities now in the wide-open Real Estate Foreclosure Market!”

    • “Just buy our Guaranteed, Sure-Fire Real Estate Investment Kit for $395”

    • “You will be on your way toward Riches beyond your Wildest Dreams!”

No comment necessary.


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My Advice on Real Estate

  • Buy a house

    • Make it your home

  • After you have digested that purchase

    • Then look for some rental property

    • But learn as much as you can from folks who are already doing it

      • Maybe even work for a property manager for a spell to get the feel for what you will need to be able to do


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