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 

Real Estate Wrap-Up and the RIA

Residential Real Estate  

There are dozens of reasons why the residential real estate market bubbled and exploded, causing the ensuing credit crisis and economic strife. The popularity of loans requiring no documentation, the easy access to sub-prime loans and the Federal Reserve’s decision to keep interest rates low all intertwined to fuel the housing crisis. The housing bubble was also inflated by Wall Street’s ability to package and sell mortgages in large pools. Now, after struggling to repair the housing market for more than a year, we are seeing improvements that are unveiling extraordinary investment opportunities in residential real estate.

It appears we have hit the bottom of the housing market trough. Housing prices found some stabilization, although the prices are still close to the lowest they have been all decade. But, the collapse took years to build and expecting a complete turnaround in 2009 is unrealistic. The real promise in housing is in the future. Getting your money into the market now is optimal because of low prices and reasonable mortgage rates. Plus, there will continue to be tax relief with the recent Obama-endorsed home-buyers’ tax credit extension—which is planned to be available for repeat buyers who have lived in their prior residence for at least five years.

The United States should see a gradual increase in home sales throughout 2010, but the residential market will most likely not witness a return to “normalcy” until 2011. According to Steve Bergsman, author of “After the Fall, Opportunities and Strategies for Real Estate Investing in the Coming Decade,” “When a bubble market bursts, left behind is a lot of carnage and it takes about three years for the markets just to get a handle on the mess.”[1]

The three-year anniversary of the housing collapse is fast approaching and a number of high-profile reports have been published this month that suggest the residential housing market is already improving. The Case-Shiller index, which tracks variations in the values of houses in 20 U.S. metropolitan areas, showed an increase of 2.9 percent in the second quarter of 2009. In the first quarter it was down 7.9 percent. Two reports released by the Commerce Department last week suggest that while the overall economy continues on a wobbly path toward recovery, the housing industry is experiencing a number of positive signs. For example, “The supply of new homes was at 7.5 months in September, down from 9.5 months in May.”

While residential inventory appears to be slimming, foreclosure rates continue to mount in multiple areas across the country. With a significant number of Option ARMs set to reset over the next several months, many cities will continue to experience record-setting foreclosure levels.  

However, foreclosures are increasing in different cities than those affected in the last quarters of 2008.  Rates appear to be easing in the cities that were hit hardest by the housing collapse and rising in major metro areas in other states. This suggests that the cities previously overrun with foreclosures have found ways to combat the problem and are gradually making progress.

A continuing stream of foreclosures may keep the residential inventory plump, and prices could remain stable over the next couple quarters. But, as inventory shrinks, so too will the abundance of quality investment opportunities. With the residential real estate market now hovering around the bottom, now is the right time to invest.

Commercial Real Estate: No Reason to Panic

While it appears that we have already witnessed the worst of the residential real-estate collapse, we are preparing for the brunt of the crash in commercial real estate. The commercial real-estate industry has taken the place of residential real estate as the breeding ground for widespread fear. Daily reports suggest the commercial real estate storm will be more severe than the one that struck residential housing. Instead of causing another shipwreck, our economy’s commercial woes may prove to be more of an anchor that puts an imposing drag on our recovery.

The combination of job losses, store closings, rising vacancies and drastic cost-cutting measures puts commercial real estate in a serious bind. However, knowing their mortgages will soon come due or reset, owners and managers of office buildings, shopping centers, hotels and apartment complexes have had ample time to prepare for upcoming obstacles.

 Owners of commercial real estate are not backed into a corner. Banks prefer options that keep mortgage payments flowing. Therefore, banks are willing to work with borrowers to find solutions, even though bundled commercial mortgages will add to the difficulty of negotiations. Securing loan payments is not entirely the responsibility of banks or those who hold investments in pools of bundled loans. The owners of commercial buildings originally took on the responsibility and many of them are actively working to find solutions to keep their properties operating. Many property owners will continue to make their payments either because they have adapted their strategies to fit the difficult times, or because they have explored creative ways to bring in extra income. Of course, some number of defaults will be inevitable. Some of those property owners who are unable to acquire loan restructuring or extensions will view a loan default as their best option.

As with the residential real estate debacle, the government is sure to intervene in an attempt to keep our economy from falling into another dark hole. For example, the already-in-place Term Asset-Backed Securities Loan Facility (TALF) supports the issuance of asset-backed securities in order to help small businesses meet their credit needs. The TALF is one of a handful of sluggish government efforts that was created to help provide a crutch for the commercial real-estate industry.

Commercial real estate will continue to tug on recovery efforts, but it is not likely to cause the amount of damage we witnessed during the residential collapse. The time to invest is not when everyone shows interest in an asset. A staple to wise investing has always been buying low and selling high. The commercial real estate market has produced sound investments in the past and will once again flourish. Getting into the market in times of success is more costly, the opportunities are scarcer and the rewards are not as fruitful. The best time to invest is when the masses are fearful, and the masses are easily spooked by commercial real estate right now.

The Benefits of Hiring Professionals

As is the case when taking on any money-making venture, the waters are difficult to navigate alone. We all want to make investments that are conducive to both our current financial situation and our future goals. Investing with a Registered Investment Advisor (RIA) helps eliminate the series of headaches that come with making sound investment decisions.

Hiring a RIA has a number of benefits. For instance, a RIA can take on the following responsibilities:

• Provide objective investment and financial advice
• Set achievable financial and personal goals
• Take into account all of the factors that influence your current financial situation (your assets, liabilities, income, insurance, taxes, etc.) and provide a comprehensive analysis of where improvements can be made. Also, this helps to guide your investment plans and retirement goals
• Provide consistent investment consultation based on your fluctuating savings, investment selections and asset allocation

Before hiring a RIA, you should also be able to answer the following questions:

• What services do you need? Can your potential RIA deliver these services or are there any limitations on what they can deliver?
• What experience does the RIA have in dealing with investors in your situation?
• Has the RIA ever been disciplined by a government regulator for unethical behavior?
• What services are you paying for and how much do those services cost?
• How does the RIA plan on getting paid and are you comfortable with this payment method?
• RIAs are required to register with either the SEC or their state securities agency, depending on their size. It is imperative to ask for proof of their registration

There are a number of professionals who can provide guidance for your investment strategies. Hiring a RIA can help to take the frustration out of the investment process and help you avoid many of the common roadblocks. The true value of a RIA is their ability to thoroughly understand your overall financial goals and provide professional investment advice that is consistent with those goals.

 All My Best,

Thomas J. Powell

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[1] Bergsman, Steve. After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade. Wiley, 2009.