Real Estate Investment Tips, Risk Assessment and Strategy

Three Tips to Help You Avoid Stepping Face First into Real Estate Risk

Limiting risk in real-estate investments substantially increases your chances of earning high returns.  A solid risk assessment prevents you from getting burned, losing your initial investment or much worse. Investors pick real estate for three main reasons: Earn positive cash flow, take advantage of tax benefits or gain the satisfaction of impacting the lives of others. No matter which combination of these reasons attracted you to the idea of investing in real estate, the following three tips can help you reduce risk and maximize your benefits.

1. The first tip is simple, but often disregarded: Avoid speculation. In my book, “Standing in the Rain,” I describe speculation as “financial Russian roulette.” The odds can appear to be in your favor and the risk can often be downplayed in relation to the potential reward. Investors are seduced by speculation. They succumb to hearsay and promises of quick returns with little effort.  Speculation is a short-term investment ploy and it minimizes real estate’s incredible potential as a long-term investment.  Long-term investors look to retain their real-estate assets despite modest market fluctuations, short-term speculative investors become finicky when their asset does anything besides rise in value. Speculation is usually fueled by misinformation, greed or pseudo demand, and it does not have its place in the real-estate market. Forget about all things “get rich quick.” Wise real-estate investing requires thorough due diligence and I suggest you never let anyone convince you otherwise.
2. Do your best to ensure positive cash flow. Being ill-prepared for a property that swallows cash every month can quickly reduce the amount of capital you have to work. Remember, cash is king, queen, prince and duke of Real Estate City. When possible, consider the benefits of a substantial down payment.  It gives you instant equity, helps reduce your interest rate and lowers your monthly payments.  Predicting constant appreciation is never easy. But, with experience or the assistance of a seasoned professional, you can take the necessary steps in an educated attempt to ensure positive cash flow. Lack of due diligence places a painful strain on your cash flow and forces you to sell your investment property before the benefits are realized.
3. Narrow your focus. Which is the better choice for you, commercial or residential real estate?  Investing in real estate carries a great potential for creating substantial wealth. Such wealth rarely comes without making a number of difficult decisions. Before investing, consider your options. Ask yourself if you are qualified, or even willing, to handle evictions, time management, repairs, reinvesting money back into the property, documentation and necessary inspections. Real estate can be mostly “hands off.” You can hire professionals to handle every part of the process, but the appeal of real-estate investing is often its “hands-on” nature. Narrowing your focus and choosing which type of real estate you want to invest in requires your careful consideration.

In “Real Estate Risk and Retirement Planning Part One,” I have included a section that details different options you have when investing in real estate. Watch for “Real Estate Risk and Retirement Planning Part Two” it in the next few weeks.  I will discuss market trends and weeding through cumbersome rules and regulations.

All My Best,

Thomas J. Powell

Reflections on the Holiday

This time last year, the dark clouds of a choking economy surrounded the eye of the 2008 holiday season. This year appears to bring more of the same. However, while it may be easy to get lost in the depths of these challenging times, there are still countless reasons in our lives to give thanks. In a time when our newspaper headlines read like obituaries, I thought it would be fitting to shine light on some of the positive notes I have noticed in the first 11 months of the year.

Our economy, with its two left feet, continues to stumble over a variety of problems on a national scale. However, on a local level, there are plenty of highlights to brighten up our communities if we would only take the time to recognize them. As winter sets in and the time for counting our blessings approaches, I have made a conscious effort to embrace, as the old adage goes, an “attitude of gratitude.”

Here in Northern Nevada, I have recognized substantial progress and I believe a lot of it is worth noting. For instance, our community should be thankful for the success that our new downtown ballpark has brought. Many Renoites were concerned about the extraordinary amount of effort it would take to ensure the Reno Aces had their own baseball field this past season. But, thanks to the support of local businesses and patrons, many now view the venture as a tremendous success. Let us all look forward to many more successful seasons for our brand new baseball stadium and all it brings to the vibrant downtown area.

The Legends at Sparks Marina project really found its footing in 2009. The new shops, restaurants and weekly events continue to provide a much-needed dimension to the area.

The Grand Sierra Resort has embraced fine dining and Chef Charlie Palmer now oversees Fin Fish, Briscola and Charlie Palmer Steak—all of which are frequently filled with patrons. Briscola deserves a special recognition for replacing Dolce, which was not performing, and bringing truly some of the best Italian food I have ever tasted to our area. At the Atlantis, the spa underwent expansive renovations and made some exceptional improvements. I have visited spas all over the country and I really feel that we now have something special with the Atlantis Spa. They employ one of the most courteous staffs I have encountered. Plus, the Atlantis Spa caters to the community by offering special discounts to locals.

From a business standpoint, I would like to express my thankfulness to all of the support from clients and friends of ELP Capital, Inc. 2009 brought about a number of challenging obstacles and our team has remained focused on moving forward. Recently, through working with our talented investment group, we were able to invest in 96 finished lots in Sparks. We partnered with local builders to put people back to work and also to provide opportunities for people to own houses at prices that have never been seen in that specific area. A special thanks goes out to all of our investors who have stuck beside us through these difficult times. We continue to appreciate all of the developers and joint ventures that help us uncover opportunities and keep us all looking forward. Here is to solid returns in the future.

I am thankful that our Powell Perspective is now in its ninth month of publication and reaches over 7,000 readers. I believe we have the pieces in place to double, triple and quadruple our readership in 2010. Thank you for your continued support and for providing the feedback necessary to make improvements to our newsletter and its accompanying videos.

Earlier this year I was able to release “Standing in the Rain: Understanding, surviving and thriving in the worst financial storm since the Great Depression.” It has been well received in a number of circles and I would like to thank everyone who took the time to read it.

To all of my friends and family, 2009 would never have been the same without you. You all continue to bring excitement into my life. Happy Holidays everyone.

-Tom

 

Real Estate, Retirement and the IRA

Retirement Planning Meets Real Estate (And Really Hit it Off) You are never too young to start saving for retirement. On the other hand, only your specific life circumstances determine if you’re too old. Although earlier is best when it comes to retirement planning, later is still better than never. Whenever you choose to start, it is important to know your options and limitations.

It is difficult to find an employer that offers a consistent pension plan.  Those approaching retirement rely primarily on IRAs to assist in saving for retirement. However, most people never take control of their retirement accounts and passivity can be costly for your nest egg. The majority of IRA money in our country is invested in stocks, bonds and mutual funds. According to MSNMoney.com, about 97 percent of IRA money is dedicated to these traditional investments. That means only 3 percent of our IRA money is dedicated to alternative investments, such as real estate, that have the ability to produce higher returns.

The rules governing allowable investments by IRAs only exclude three classes of investments: collectibles (such as artwork, gems, antiques and most coins), life-insurance and S corporations. All other types of investments are permitted, which makes for seemingly endless investment options. One trend that is beginning to gain popularity is using IRA money to invest in real estate.

Investing in real estate through an IRA widens the range of alternative investments available for individuals planning their retirement. Introducing real estate into your retirement portfolio has obvious benefits. For one, it can act as a means to diversify your portfolio, which can help to hedge against the volatility in the stock market or government-backed investments. Also, for those who are experienced in real-estate investing, or those who seek help from a professional who is, real-estate investments have the potential to protect against principal loss. Real estate can also generate better-than-market-rate returns through income production and capital gains. With the help of a Registered Investment Advisor, your income and capital gains could also be stuffed back into your IRA either tax-deferred (as with a traditional IRA) or tax-free (as with a Roth IRA).

Arguably, the easiest way to incorporate real estate into your retirement plans is to have your IRA purchase the asset and you treat it strictly as an investment. This means you cannot use the property for personal reasons, which excludes the options of purchasing and frequenting a vacation home or purchasing property from relatives. There are no complex issues involved when you treat the asset only as an investment as long as your IRA pays cash for it. But, this is not a feasible option for everyone.

If you have to leverage a mortgage, things get a bit more complicated. For instance, you cannot personally guarantee a loan for your IRA. Also, your IRA will pay tax on something called Unrelated Debt Financed Income, which is the income that can be attributed to the leveraged portion of the loan. If you are not well-versed in real-estate investing, you can run into some major tax complications when trying to use your retirement accounts to purchase real estate. I highly recommend seeking the help of a professional for two specific reasons. First, a professional helps eliminate headaches and complexity. Second, he or she can help to ensure that your retirement account has the best chance to bloom and remain fruitful throughout your entire retirement.

To help simplify the complex process of introducing real-estate investments into your retirement plans, I have uploaded an e-book that you can download for free at www.ThePowellPerspective.com. Inside the “Real Estate Risk and Retirement Planning Pt. 1” e-book you will find:

– How to decide if real-estate investments are right for you right now

– Helpful guidance for introducing real-estate investments into your retirement plans

– How to navigate the different options you have when it comes to real-estate investing

– The importance of holding a diversified retirement portfolio

– How to use real-estate investments as a hedge against inflation 

I have compiled information from a variety of sources to create an e-book that can help readers take the unknown out of a complex topic. It is my hope with this two-part e-book, that readers will find the information they need to take control of their retirement planning and stop putting it off. Retirement can be filled with relaxation, travel and free time to complete a number of your life goals. There is no reason to be worried about your finances later on in life when you can easily take the right steps toward financial security today.

All My Best,

Thomas J. Powell

For the free eBook, please visit www.ThePowellPerspective.com