Give or take, regular folks lost in the range of 37-45% of what they’d built up in their Qualified Plans — IRA’s and 401’s. One wonders how many thousands of retirement dates have either been postponed or simply cancelled ’till further notice? Most aren’t aware of the option on their menu allowing them to take control of their Plans.

It’s a matter of some mildly irritating paperwork to convert your IRA/401(k) into what’s known as a ‘Self-Directed’ entity. As that title implies, you would be in charge of where your capital is invested. You would be subject to what’s known as a Custodian, but they’re there simply to keep you between the lines so to speak.

Bottom line?

You have the opportunity to begin recouping your losses in a systematic ‘big picture’ way. You can direct your plan to acquire a rental home which will be located in a proven growth region. It will produce steady cash flow, and grow in value over time. It’ll require a 30-35% down payment, which is a very conservative approach.

If it only appreciates 2% annually, it means your invested capital will have been growing at a 6% annual rate as a direct positive result of leverage. Also, the cash flow will be relatively reliable year in and year out. Then there’s the long term principal pay down of the loan balance accruing to the increase in equity — your equity.

Do you know of a stock generating  2-5% ‘dividends’ every year? Or growing your capital at 6% annually? No? Didn’t think so.

The key question is where should this real estate be located? I can give you solid suggestions. Call me at 619 889-7100. Have a good one.

One of the most often asked questions I hear is related to depreciation rules. Individuals or couples earning over $150,000 annually are barred by IRS regulations from taking any excess depreciation against their ‘ordinary’ (read: job) income. For many this is a very unhappy surprise, as it could mean the tax savings loss of nearly $10,000 yearly.

Ouch!

Let me put some salve on that wound for ya. If you were never allowed to apply any depreciation leftover from sheltering any cash flow generated by the property itself, the amount ‘recaptured’ will be considerably less than it would’ve been. If you consider that the rate for recapture is generally 25% vs 15% for most capital gains, this isn’t an insignificant factor.

Furthermore, that very same tax shelter (depreciation) you were barred from using, will eventually act as a shield to capital gains taxes. This will offer multiple tax benefits both immediate and long term in nature.

So don’t be too upset when you learn you ‘make too much’ from your job. Ultimately you’ll come out way ahead, especially as it relates to the bigger picture of tax sheltered retirement income. Remember, that’s the ultimate goal, right?

Right.

Where should your real estate investment dollars be headed now? Call me to find out. I’m at 619 889-7100. Have a good one.

When enjoying burgers at your neighbor’s BBQ this weekend it’s even money you’ll hear somebody talk about tax shelter. Happens to me all the time. They’ll rhapsodize about how cool it is to see their tax bill melt away due to their investment home’s depreciation. Little do they know they’re missin’ the boat on the best way to benefit from that level of tax savings. It’s all in the application.

You have two choices — get a large tax refund each year — OR, get it in every paycheck during the year. What? You can do that? Yes, you surely can.

Here’s how.

Go to the powers that be at work, after you’ve spoken with your tax accountant. He’ll have told you the magic number you’ll need to know. Magic number? It’s the number of exemptions you’re gonna tell your boss you claim on your W-4 form. The accountant will look at your newly acquired depreciation, and let you know how many exemptions make sense.

The bottom line results will show up in both your periodic paychecks, and your tax return for the year.  Your ‘take home pay’ will increase, a good thing. Your tax refund will correspondingly shrink. What you’re doing, in a nutshell, is ceasing to loan Uncle Sam YOUR money every year at 0% interest. Instead, you’re allowing yourself the use of that money for every day living.

It’s one of the rare times in life when we can have our cake and eat it too.

Let’s talk about your retirement. Where are the best places to invest? I can tell ya. 619 889-7100. Have a good one.

Whether you’re an experienced real estate investor or figuring out how to invest second home or duplex, this factor remains the most crucial, especially when outside forces rear their ugly heads. The violation of this one principle is akin to driving a race car without seat belts.

It’s generous cash reserves.

A second home investment can hit what should be just an unscheduled bump in the road, but instead turns into an ugly fall with a bad ending cuz the investor was workin’ the high wire without a net. That’s only impressive when ya don’t fall.

Abundant, and ACCESSIBLE reserves are not, repeat — are not a luxury. How crucial is a hefty cash reserve in my experience? As a real estate investment broker working all over the country, I refuse to take on a new client without cash reserves at a level allowing me to sleep like baby.

Have enough for a down payment and closing costs? Cool, you’re most of the way there. Now build up more cash reserves than you think you might need. You can thank me later.

Give me a buzz at 619 889-7100 and we’ll look into your situation together. Have a good one.

Let’s get the biggest misunderstanding out of the way first. Leverage is not primarily about the size of a down payment on a piece of real estate investment property. People who don’t understand what leverage is really all about, are often doomed to failure without even knowing why their money is gone.

In real life, a real estate investor can have better leverage with a 30% down payment than the guy who put just 20% down. Don’t fret, I know I’m probably movin’ your food dish a bit. Here’s the real definition the astute investor employs when applying leverage.

It ain’t rocket science, OK?

There is positive and negative leverage. It all hinges on the relationship between the investment’s return and the cost of the borrowed money used to acquire it. If your loan’s interest rate is 6% and your return is 9%, you have positive leverage. If, on the other hand your return is 5%, you have negative leverage.

Negative leverage is a loser from Day 1, regardless of the down payment.

More simply put, you can’t survive when the return is less than the cost of your borrow capital. Seems like something Captain Obvious might say, but ignore it at your peril. It never fails, which is why it’s called a principle in the first place.

Now ya know.

Call me at 619 889-7100 and find out what makes sense for you, and what’s possible. Have a good one.

As the second post in a short series on answers to questions you may not have known to ask, this piece will address how you might take a capital gain, sans taxes, while simultaneously shedding a loser property or two. Pretty cool, eh? It’s about doing things on Purpose, with a Plan. Retirements don’t happen — they’re a result of solid planning, hard work, and time.

Depreciation unused due to IRS regulations, doesn’t go away. It can be used for other reasons, one of which is to offset capital losses. If the real estate investor who’s been denied use of this annual tax shelter also owns property which has lost value to the point of capital loss, there’s an opportunity to turn that loss into a smile.

Combine the unused depreciation, if it’s insufficient to cover the entire gain, with the sale of a ‘loser’ property. The capital gain of the the ‘winner’ property will then be offset by the sum of the unused depreciation and the capital loss incurred by selling the poorly performing property.

This will kill two birds with one stone.

First, it allows you to take a profit sans capital gains taxation, always a cool move. Second, it rids you of a non-performing real estate investment, putting an end to ongoing monthly losses and possibly even more value decreases.

Oh, and there’s a bonus benefit.

You’ll be able to acquire new income property with the proceeds from the sale of your good property, which will include a far higher basis for tax shelter than you left. In other words, you’ve surgically removed a time sucking loser of an investment from your life — you’ve increased your annual tax shelter big time — and you’ve simultaneously lowered whatever capital gain you will face in the future, due to your brand new basis.

Life is best when lived on Purpose with a Plan.

The whole idea is to grow your investment capital. Everything else is secondary. Sounds simple doesn’t it? It is. Of course, you have to be brutally objective. Your money doesn’t know where it is, or in what it’s invested. It goes where you put it. If you own units in San Diego with net equity of at least $60K — it’s time to get outa Dodge.  Growth is a fact of life in regions nearby — many of them west of the Mississippi. Your stagnant equity will more likely than not, be able to grow in the first year — really. You’ll finally have an excuse to hire professional management — no more silly calls

Those who exchange out of their San Diego investments this year and move to regions like Idaho (Boise), and Texas will be far better off than those who decide to do nothing. In just the time it’s going to take for San Diego to get back to normal, you will have had years of solid measurable growth.

Just how much growth are you willing to bypass? How many no-growth years can you take before your retirement income is permanently reduced? What are your reasons for staying in San Diego while your equity is stagnating? Honest answers to those questions will go a long way to predicting your future.

Contact me for the best regions in which to invest.

The age in which we live is often referred to as the Information Age. It’s an apt description. This is the first in a short series on answers for which many real estate investors don’t have the questions. We’ll begin with a little known IRS rule, along with a pretty cool alternative use for depreciation.

First, understand the nature of depreciation  – it’s a paper loss, not a real one. However, the benefits are as real as it gets. There’s a dark cloud to that silver lining though.

As long as your job income (Ordinary Income in IRS-Speak) is under $100,000 a year you’re fine. You can apply up to $25,000 a year of your depreciation against your ordinary income. But as soon as your ordinary income exceeds $100,000 the code begins decreasing that $25,000/yr — until ya make $150,000 or more, than it’s disallowed altogether as a tax shelter against job income.

Yeah, right when you need it the most, they take it away from ya. Figures, right? There’s some good news though. Here comes an answer to a question my experience has shown most folks don’t know to ask.

If your depreciation exists, but you’re barred from using it, what happens to it? Simple — it sits on the shelf gathering dust. It doesn’t disappear though — it’s waiting to get back in the game. The question is when — and more importantly, why and how?

Let’s say it’s time to move a property to greener pastures, as the market is speaking to you. It’s grown in value nicely, so there will be a capital gain. (Here it comes.) The unused depreciation can be used as a tool to ‘offset’ that capital gain, or part of it if there’s not enough. This results in tremendously beneficial consequences for your next property(s), as your ‘basis’ is affected in a very positive way.

But that’s another post altogether. Suffice to say, the ability to take unused paper losses to offset real capital gains is a powerful tool to have at your disposal. I’ve made use of this strategy countless times, and it never fails to put smiles on faces all around.

Contact me to find out just how you might be able to apply this to your retirement plan. Have a good one.

We’ll begin by figuring just what a ‘cap rate’ really is. Start with the Net Operating Income (NOI) of an income property. That’s the money you have left over after all vacancies and operating expenses have been accounted for. You then take the price of the property and divide it into the NOI. (NOI/Price) The resulting number will be in the form of a percentage. An example might be .0712 — 7.12%. Price: $100,000  NOI: $7,120

Put in even simpler terms, 7.12% would be the before tax return if you were to pay cash for the $100,000 example property.

See? It’s not all that complicated. Here’s where the problem comes in though.

Real estate investors will obviously be attracted to the highest cap rates. Duh. Not only due to the superior return, but because of the inverse relationship between the cap rate and the price. The higher the cap rate, the lower the price. Seems pretty nice, doesn’t it? You find two properties to which you’re attracted — one sports a rate of 7.3%, the other 10.1%. But in reality, which is the better property when all factors are completely analyzed?

And there’s the rub.

There’s an inherent conflict between the relatively high cap rates and their respective locations. Think about it a second. Two duplexes pretty much equal in every way, except for price and cap rate. Where might you suspect each one is located? Wouldn’t you expect the lower priced duplex to be in a riskier and/or downright inferior neighborhood? Sure you would. That’s why it’s priced lower while generating the same income. Makes sense, right?

The ugly secret to the alluring high cap rate property, is that it’s almost always located in areas you simply shouldn’t be buying. The tenant quality will be lower. The expenses will be higher. If there’s any appreciation it will be less than superior neighborhoods nearby. It will be far more management intensive.

The final downside? In the end, many investors sadly learn the 10% cap rate they thought they’d acquired was, in reality roughly equivalent to the better located duplex they turned down in the first place. Paradoxically, it almost always pays to avoid high cap rate neighborhoods.

Contact me to find out where you can acquire reasonably high cap rates in excellent neighborhoods. Have a good one.

What does the real estate investor avoid like the plague? Well yeah, losing money for sure. But in the bigger picture, they look at regions first, then areas within those regions, then further, finally looking into particular neighborhoods and specific properties. Everything is relative — even more so now that the small investor can live in San Diego and invest in just about any other state they choose. It’s a new world, and there are many options available today, that seemed like a pipe dream just a short while ago.

So what does the investor endeavor to avoid?

1. Older Properties — If there’s a choice, they much prefer the younger property over the older one. Operating expenses are lower, amenities are often more attractive, rent usually is higher, and the list goes on. Experienced investors look to the day they may wish to sell a potential investment. If a property is old today, it’s only gonna be older in five years. This commonly puts that property on the B-List of, you guessed it, experienced investors.

2. Poor Price/Rent Ratio — Whether the agenda is capital growth or cash flow, the first information an investor will wanna see is the relationship between the price and the Gross Schedule Income. If annual income from a rental is equal to the other properties on the investors menu, yet it’s priced much higher, why would they buy it? For a lower price, and a smaller down payment they get the same income? Again, all other things being equal, which one would you choose?

3. Future Local Economic Conditions — Most folks already know that San Diego has one of the highest costs of living in the country. This isn’t gonna change. Regardless of any recovery, the cost of living won’t change. In fact, it will, more likely than not, rise. When properties in competing regions can be acquired for WAY less, but generate the same income, the decision becomes relatively easy.

Contact me to find out where to acquire income property in proven growth regions.