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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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Real Estate and REITs

real estate investments types
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
real estate investments types3
Real Estate Investments Types


  • 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”
investing in commercial property
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
investing in fixer uppers
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)
investing in fixer uppers6
Investing in “Fixer-Uppers”


  • 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
real estate investment trusts
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

advantages of real estate investments
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
disadvantages of real estate investments
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!
your home as an investment
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…
but my house is the best investment i have ever made
“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

but what about san diego
“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…
sign seen over a desk in a san diego office circa 1993
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!”

the perfect investment
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
the perfect investment15
The “Perfect Investment”


  • “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.
real estate and capital gains
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!

speaking of info mercials
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.

my advice on real estate
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