Karen
Lee Bertiger
CRB, CRS, e-PRO, GRI, RECS
FLORIDA LIC. REAL ESTATE BROKER
ARIZONA LIC. REAL ESTATE BROKER
INVESTMENT/INCOME REAL ESTATE
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Celebrating 25+ Years Career Experience in Investment Real Estate in 2008 With
30+ Years As An Investor
©2003-2008 Karen Lee Bertiger. ALL RIGHTS RESERVED
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real estate tax planning depends on your individual facts and circumstances. You
should always consult with your own tax advisor to determine if the ideas and
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INVESTMENT PROPERTY AND INCOME
PROPERTY ARE TWO DIFFERENT THINGS
Income properties are real estate investments, but not all real estate
investments are income properties. Any type of real estate can be
purchased as an investment -- raw land, apartments, condos, houses, warehouses,
offices and retail, etc. Income property is a real estate investment which
includes improvements that create rental income which covers operating expenses,
financing costs and produces positive cash flow on the capital
invested. Income property can be purchased with a relatively high amount of
leverage, generally non-recourse, and still produce a current cash-on-cash
return.
Due to the large amount of capital flowing into real estate income properties
over the past few years, I believe that asking prices (those based on pro
forma figures instead of actual operations) for most income
properties have been exaggerated beyond the point that any serious individual
investor would consider, particularly now with so many risks that are
difficult to quantify. For instance, I have seen a broker advertise as a
"wonderful investment" a property that doesn't produce enough income
before
expenses to cover its property taxes! Everybody thinks they're an expert, I
guess, but that just causes me to make a mental note of the broker's name and
company as someone who absolutely knows nothing about investment income
property. Many newcomers to the real estate investment industry would be willing to consider
such a property without a second thought! There's more to making a great real estate investment than
the numbers, as many newbies are finding out the hard way. They may have
absolutely no understanding of hidden risks in the market, and many seem to be
relying totally on the "greater fool" theory as an exit strategy. That is not an
investment; it is gambling. We are now seeing many new real estate "investors"
in the market with an ignorance that could send them to jail! For instance, it's fraud to represent to a lender that
you intend to reside in a residential property to obtain more favorable
loan terms and to do so in a serial fashion. Although these people may brag about
all of the money they are making, I prefer that my clients and customers
understand the risks in this current market place, where "investors" may be
contributing to a climate in the single family markets that are inflating
appraisals. This could have a very negative effect on totally honest borrowers
and investment property owners, particularly in single family homes.
Theoretically, an income property investor should actually have income to pay
expenses (unless there are very high vacancy rates.)
Transaction costs are
high in many jurisdictions, making it less likely that some of these investors
will get out of bad investments unscathed as interest rates rise. In many
instances, as the market cycle changes, the only people making out like bandits
are the mortgage brokers and the real estate licensees. Buying and
flipping income properties at higher valuations may have fewer competitors but
the mistakes made are high dollar value as well. Your first criteria in making any
real estate investment should be how and when you will receive return OF your
capital. Then you should know what the actual return ON your capital will be.
Determine your risk tolerance and whether you have the required expertise to
handle a direct real estate investment. You may be better suited to
tenants-in-common ownership with a group of people you trust where you can hire
an expert real estate asset manager and property manager. Or you may be better
suited to group investments such as private REITs and publicly traded REITs.
However, keep in mind that there are high front loaded transaction costs in many
private REITs; some charge up front fees as high as 16% of your initial
investment. Personally, I do not believe that a private real estate
investment issuer/sponsor should take huge up front fees; it's my philosophy to
charge for expenses to organize an investment vehicle, a 1/2% consulting fee and
an asset management fee that averages approximately 1.5% per annum. My own
capital is invested as well. My expertise is rewarded at investment disposition
with a modest disposition fee and the same investment return my investors
receive. An issuer/sponsor without an incentive to perform, in my opinion, will
not meet what I consider to be minimum standards for fiduciary performance.
Ideally, you should look for an issuer/ sponsor who will take their gain after
you have received return of and return on your investment. Keep them honest -
it's YOUR money. The best way to keep them honest is to carefully review the
structure of the investment. In my opinion a 16% up front load is ridiculous.
Would you give a stockbroker that kind of up-front payday?
My advice is simple - DON'T BUY AN INVESTMENT based only on projected yields
(pro forma),
future appreciation or potential tax savings. Verify all expenses incurred by
the present owner. Invest based upon your return on
investment after taxes and your risk tolerance. These differ for everyone.
Remember that CAP rates reflect the return during year one only. It is based on
the Net Operating Income divided by the price paid for the property. Different
investors may arrive at different cap rates for the same property based on
different analyses of the Net Operating Income. Some analyses may be more
accurate than others. One also needs to understand that these numbers are fudged
to a great extent by owners and brokers who may be looking for a greater fool. Maybe cash-flush REITs
can balance out the effects of a few purchases where they paid too much for an
income property. Smaller individual individual investors and business owners do
not have that luxury. Contrary to the crowd, I advise buying based only on
actual income and expenses, location and condition. Many property owners have come to believe
that they will easily find that greater fool to purchase their property. Real estate
investments are not like stock investments. All shares of a class of stock are
the same, selling for about the same market value. Each real estate parcel is
unique and could sell at different market values because of different factors.
Just a note -- REITs and
CMBS conduits as well as other mortgage conduits offered by quasi-governmental
agencies should be evaluated as SECURITIES, not real estate. However, as a
former NASD Broker Dealer for real estate securities, I can say unequivocally
that many people on Wall Street do not understand the fundamental economics of
the real estate industry, including the single family home markets around the
country. In my opinion, it is virtually impossible for a real estate bubble on the scale of the
stock market's recent bubble to exist nationwide because each market is distinct
in its local economy, jobs outlook and local government fiscal excess or
restraint. Realtors cannot conspire to artificially
inflate prices -- there are too many other checks and balances, including
appraisals, not to mention transaction fees which are certainly more than a
$9.95 stock trade. You can't live in a stock, unless you're living in an
apartment building owned by that stock issuer. Just be aware that REITs and other real
estate securities SHOULD be examined critically because, in my opinion, there
may be a bubble in many of these publicly traded real estate securities.
Although in recent years it has been possible to purchase negative
cash flow properties because of the capital appreciation potential, I believe
that the time has arrived where investment "income" property investors need to
re-balance their portfolios to weed out properties that will likely not
appreciate at such a high rate of return over the next few years. If you have a
negative cash flow property, now is the time to price it right and either sell
it or exchange it for a more suitable income producing property, or to refinance
your current balance at
current interest rates or for shorter periods of time to access unrecognized gains
without paying income taxes!
Call me! I can produce an investment income
analysis on any property for you that you can literally take to the bank. Direct
772-631-1605 or toll-free at 1-888-768-4454!