Posted on April 2, 2008 @ 12:32 am - Written by BawldGuy
Please forgive the title, but sometimes I grow weary of all the nay sayers out there, rooting for a complete collapse. Surely this correction, both for the national economy as a whole, and real estate housing specifically, have demonstrated unique qualities. Subprime is now part of the culture’s lexicon. The banking system has been tested mightily, as has the leadership of the Federal Reserve and its Chairman, Ben Bernanke.
I’ve never been one of those real estate cheerleader types. You know the ones, there’s never a bad time to buy real estate, yadda yadda. When the market’s sucky that’s what I call it. You can’t go through as many bad markets as I have and do otherwise.
Those who’ve been buying real estate investment property lately are gonna feel pretty good about themselves a few years down the road. Even back in the post recession years of ‘74-75, or after the S & L Crisis resolved itself, the perfect storm we see today never materialized. The missing link? The permanent loss of historically reliable investment regions like say, the entire west coast for instance. Or how ’bout the emergence of new ‘destination’ regions in Texas, (Dallas/Fort Worth) Idaho, (Boise) and Kansas City to name a few? But the real difference is the long term fixed interest rates available for investors.
Just to be consistent and on point for my San Diego readers — Get Outa Dodge — and get out now. 
Thanks — I needed that. Now back to our regularly scheduled post.
First Sam Zell says what I’ve been saying for months. The housing market isn’t nearly in as bad a shape as mainstream media wants us all to believe. In fact he said a recovery would begin this spring. I think he’s pretty aggressively optimistic to say that, but he’s the billionaire, so I’ll let time tell us if my 3rd to 4th quarter scenario is correct or not.
This was followed shortly thereafter by the markets in Texas I like so much experiencing incredible real estate growth, even more impressive population growth, and a precipitous drop in vacancy rates. Oh, and did I mention the simultaneous increase in apartment construction there? Oh yeah — good times.
This week two giants also decided it’s time to buy. As David Stejkowski duly noted, both Shorenstein and Blackstone have raised prodigious amounts of capital for the acquisition of billions in commercial real estate.
And here’s a gift for San Diego readers who are owners of local income property. Allow a short preface. Your properties are worth significantly less today than they were three years ago. Yet, if you had the choice, you wouldn’t buy your own property for even today’s value. I’ve asked that question of a couple dozen local real estate investors, and with two exceptions, they all admitted they wouldn’t think of buying their own properties again — even at today’s discounted values. 
Read this quote from Mr. Shorenstein and think of what you should be doing with your San Diego income property. (Hint: Get Outa Dodge)
Shorenstein, son of company founder Walter Shorenstein, told the New York Times in 1995: “If somebody is willing to pay a lot more than I would pay, then we’re a seller.”
That quote was taken out of an article published two days ago in the San Francisco Chronicle, entitled — Waiting for real estate bounce. Read the article to learn how Shorenstein is thinking about this market.
Bloomberg tells us about Blackstone’s $10.9 Billion in today’s update. Blackstone Group for those reading the name for the first time, is the world’s largest leveraged buyout fund.
So, there you have it. Sam Zell — Shorenstein Co. — Blackstone Group — all saying the window of opportunity is upon us.
Put that together with what Wall Street has been saying, especially today, and one could conclude the Bulls are about to make their final move against the staggering Bears. The jury is still, of course, out. But I’ve been saying in these pages for the last 90 days or so, that this is the final skirmish between the two. It appears to me the Bulls have the Bears in the corner hoping for a last minute miracle.
Finally, without wavering, I’ve been backing Fed Chairman Bernanke since Day 1. He’s made the correct moves, all the while listening to critics who wanted him to do their bidding on their schedule. He’s done it his way. We won’t know for awhile, but it’s my contention we may look back at the first 92 days of 2008 as the period the good guys triumphed, led by Bernanke.
I’d give you a much clearer picture, but since the crystal ball hasn’t come back from the shop, this’ll have to do. But, just before I put it in the shop, I looked to see what might be next for the general lending outlook.
BawldGuy Prediction: On or before July 4th, real estate loan underwriters and their bosses will have rolled the clock back to basic sanity. Meaning? Loan programs now unavailable will reappear. Virtually impossible underwriting requirements will quietly be retired. Lenders will wake up, realize it says L-E-N-D-E-R on their foreheads. The next thought will be how little they’ve been acting like a lender. Then they will find ways to lend.
Why?
BawldGuy Axiom: Lenders lend.
Posted on March 28, 2008 @ 11:00 pm - Written by BawldGuy
Greg Swann the owner/operator of BloodhoundBlog, one of the most influential real estate blogs in the country. Full disclosure — I’m a contributor there, and have been almost since Bloodhound started recruiting outside bloggers.
Greg had read a comment I’d made on another contributor’s post, and wanted to talk about it. He decided to post the interview on his blog, but let me put it here too.
I’ll be teaching at a conference put on by both Greg and Brian Brady (another BHB contributor) in Phoenix. It’s called Unchained and has already proven popular based on ticket sales. If you’re a real estate professional, agent/broker, mortgage broker, etc., I strongly recommend you consider attending. Most of these things aren’t worth much except for the exceptional networking opportunities. Unchained will definitely be different. Teaching and learning will be jam packed every day.
Back to the interview.
You can listen to the interview here — it’s short, lasting less than 7 minutes.
There are 3 choices at the end of the post allowing you to listen. They all work quickly and well. The ‘download’ option went directly to my iTunes app.
Meanwhile, have a great weekend, as I plan to sleep in big time.
Posted on March 27, 2008 @ 11:40 pm - Written by BawldGuy
Though we’ve been to Austin, Dallas/Fort Worth, Kansas City, Boise, Phoenix, Palo Alto, and the list goes on, we’ve pretty much ignored San Diego real estate investors for nearly five years. Our plan calls for reentry in April or May. And no, we’re not gonna be tellin’ folks to buy San Diego investment property. It hasn’t made sense for a few years now. In fact, we don’t think it will ever be wise to invest here again.
Why?
Here’s the short version.
Your half million dollar duplex has monthly rents these days of $1,800-2,500 or so. For easily less than half the value of your property,
you can own a duplex (and brand new, not ancient like yours) with monthly income of $2,000-2,400. Does yours offer 3 bedrooms and 2 baths? And an attached 2-Car garage? In a neighborhood you’d allow your 70-something mom live in by herself?
I’d put my mom into these properties to live alone. In Phoenix they started calling it BawldGuy’s Mom Rule. If I wouldn’t put Mom there, don’t tell me about the property. That policy cut out a whole lot of useless conversations.
If your small 1-4 unit residential income property has a net equity of $60-500,000 you’ll be able to move that equity, tax deferred no doubt, to areas in the country allowing for leverage San Diegans can only experience through time travel, or Grandpa’s stories. Your capital growth rate will soar. Oh, you’d rather have a whole bunch of cash flow? How ’bout doubling to quintupling your current cash flow?
San Diego income properties simply cannot compete with other regions. It’s not possible. And if your Plan calls for you to sell your San Diego stuff in the next 3-10 years, here’s something to think about.
If they’d be ah, ill advised to buy your property today, at it’s lowest value in quite some time, how silly is it gonna be for them to buy it in another decade? It’s ancient now, right? If it’s value goes up in the next 10 years do you believe they’ll pay even more? Really? It’s my professional opinion they won’t — even if they were all the colors of the rainbow.
The bottom line is this: We can get you Outa Dodge — significantly increase your capital growth rate and/or cash flow — plus your tax shelter — while dramatically improving your chances for a magnificently abundant retirement.
Let’s continue with an example of what’s possible.
Let’s use your duplex mentioned above, with loans totaling $250,000 — here’s what you can do.
Your net proceeds from a sale will be more than you might expect because of our new business model. Instead of having sales/closing costs of around $40,000 or so, they’ll be far less. Brown and Brown no longer takes a listing commission of 3%. Tell me that isn’t cool. More on the details later. (Or, here’s an idea — you can contact us and we’ll give you the scoop way before everyone else finds out.)
Even with the normal brokerage fees your net proceeds from a sale will be about $210,000 +/-. With that capital we can tax defer you into $1-1.5 Million of very well located property — brand new too. And that’s not all, not by a long shot. The problem is, most folks don’t know what to do, where to do it, or who can help them get it done. In what direction should they go?
You’ll increase your annual depreciation by over $40,000 — not an insignificant improvement.
The difference is we’ll take your equity from here to there for a whole bunch less — and with way better marketing. We suspect our new model will end up costing our San Diego sellers about 75-90% less on the listing side of the commission. There’s nothing we can do with the buyer’s agent’s cut.
I mentioned marketing. We think those who have been selling small income props have been getting short changed on the quality of marketing. This has resulted in most of these props not selling, or taking forever. We’re gonna change all that — or at least that’s what it says right here.
Back to saving money.
This will result in a savings of well over $10,000 per property at the half million price range.
We’re serious about this.
Are you serious about your retirement plans? Are you seriously counting on San Diego to yield the retirement income you’ll need? If you could safely double, triple, quintuple your retirement income — never mind, silly question.
What are you waiting for? Contact me — we’ll sit down and let you know what’s possible. Most San Diego property owners can make surprisingly significant improvements in their capital growth rate, cash flow, tax shelter, and retirement income.
We’ll be standing by — there’s a pretty convenient Contact BawldGuy button on the upper right side of this page. Says ‘Contact BawldGuy’ and everything.
It works too.
Posted on March 26, 2008 @ 11:42 pm - Written by BawldGuy
I recently posted on the subject of the ‘Professional Investor’ which garnered many questions. One commenter, Lee, asked a couple great questions which inspired me to expand on a subject she introduced with her questions. Thanks Lee.
Most real estate investors aren’t aware of the benefits of that designation on your tax return, or the unintended consequences of being declared a dealer. Ah, there’s the rub — most investors don’t know what a dealer in real estate is.
The IRS will, at their discretion, determine if a taxpayer is a dealer. Once they make that call the taxpayer will then be paying ordinary income tax rates instead of the much lower long term capital gains rates.
But what the heck is a dealer?!
Dealers buy and sell properties, generally for a profit. They do so as quickly as possible. They’re considered by the IRS as making their living this way. The key factor though is what they’re not — they’re not investors. 
You see, investors are long term while dealers are more the get in, get out ASAP variety. The IRS doesn’t want dealers to benefit from the much lower long term capital gains tax rate. In many cases it’s less than half the taxes of what a dealer would pay.
It gets better. The Internal Revenue Code doesn’t make it easy by providing a clear definition delineating the difference between the two. Nnooooo, they prefer the courts to decide, case by case, inch by inch what defines a dealer.
Internal Revenue Code § 1221 says a capital asset is, (in part) “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”
What that means to you is simple — if the property you buy is meant for your ‘trade or business’ and not for investment, you’re gonna be designated as a dealer — at least as far as that particular property is concerned. Your tax rate is then automatically derived from ordinary income tax rates which will almost always be double (usually more than double) the long term capital gains rate.
Paying 30-40% of your profits in taxes isn’t in most investors’ Purposeful Plans.
Also, if you’re a dealer, there will be no tax deferred exchanges for you. Not allowed. That tasty dish just ain’t on your menu. Also, the installment sale treatment is denied the dealer. That means if they carry a note for a part of the sales price it will be treated as if the note was cash. It will be taxed at ordinary rates too.
The investor opting for an installment sale is allowed to pay taxes as they receive the money over time, payable each tax year. There’s a specific formula, different for every property. Each dollar received can be looked at as one, two, or three different ways. Interest, return on capital, and/or return of capital.
Anyone wanna be a dealer?
Rehabbers are dealers — by definition. They buy property, as part of their trade or business, for the expressed purpose of adding value and selling as quickly as possible for a profit. If they could do it every month they would. They buy obvious fixers and proceed to make them pretty.
The IRS says investors buy and hold for appreciation, dividends, (cash flow) and interest. Dealers buy property to sell it for a quick profit.
How long you hold the property and how many properties you’ve been selling lately is what they want to know. The longer you hold the better you look. Don’t think their so called rules are anything but suggestions either, ‘cuz they’re not. If you’ve been buying and selling properties like a dealer, then sell one 14 months after buying it, you’re not in any way, shape, or form guaranteed investor status. In fact I’d bet good money they’re gonna call you a dealer. At that point you’re treated as guilty until you or your CPA or tax attorney prove you innocent. It’s not the hoped for end game — know what I mean, Verne?
The courts don’t make it any clearer either. They add their own brands of mud. Each court decision is yet another layer — and that doesn’t count the courts of appeal. I’ve been asked many, many times about specific cases, and have referred them to tax pros with intensive real estate training in what the Internal Tax Code and court rulings have said — lately. Geez.
Another factor is what the taxpayer does with the property. Did they rezone it? Make massive improvements meant to significantly improve value? Or God forbid, subdivide it? DEALER. Made a bunch of sales lately? Yer probably a dealer then too. (Not the case however, if they were held for say, 3 years or so.)
Purposeful Planning proactively avoids the road leading to Dealerville by preemptive strikes. There’s a river running through Dealerville. It’s the natural border separating the taxpayer from Investor City.
(Yeah, I know — way corny, but it works.) Crossing that river without a bridge isn’t recommended. The investor can be a dealer too, but by choice. They might be buying property to rehab and flip. If they held title to that property via an entity which clearly shows the IRS how to differentiate a dealer property from their bona fide investments — everyone’s happy. This is easily accomplished by employing your real estate attorney during the acquisition process, which we do as a matter of course.
This isn’t everything you need to know about being a dealer and/or an investor. But I’ll bet there’s all kinds of folks out there who just realized something chilling. This is another question they didn’t know to ask. That’s not a good thing.
It’s the answers to the questions we don’t know to ask that usually end up biting us where we sit.
And for the record? Real estate investors nearly always do far better over the long haul, (and usually the short haul too) than dealers.
Posted on March 20, 2008 @ 8:24 pm - Written by BawldGuy
Ever been to the gym for a workout and some guy with good intent tries to help you out? Has it occurred to you he doesn’t know any more about body building than your Aunt Fannie? We’ve all had that experience, if not at the gym, somewhere else with another subject. 
One of my all time favorite cousins is a nationally known and highly respected commercial photographer. One day he was taking some shots for a job while I was visiting. He nearly wet his pants when I tried to sound like I had the first clue about the ins and outs of what a professional photographer does and why.
After my third comment he was wiping tears while begging me to stop. I still say it wasn’t that funny.
When real estate investors do it though, it can be miles from funny when they act on their sometimes misunderstanding of various concepts. Here is one of My Greatest Hits — which if misapplied or misunderstood can have some fairly sour unintended consequences.
Adjusted Basis — Doesn’t this beg the question a bit? Wouldn’t it help to understand what a Basis is before we get into adjusting it?
First, you head over to the Basis Store. (Sorry, long day. ) 
When you invest in a real estate property — through a purchase, not an exchange — you establish your basis. Simply put, it’s what you paid for the property. It can get more complex than that, but suffice to say, your purchase price is your basis.
When you take depreciation (a phantom loss) it lowers your basis. When you add a physical improvement, a new roof for instance, you increase your basis. Upon the sale of that property your sales costs add to your basis. I won’t bore you with all the rest of the various potential basis adjustments here. Just understand when you improve a property your basis will probably rise, and when you take depreciation you lower it.
Why is it important to understand Adjusted Basis? Simple. Your capital gain/loss is calculated upon this concept. Many investors think they’re taxed based upon what they paid vs for how much they sold the property. In my experience, this gross misconception has been the catalyst for some very nasty surprises which usually come sans gift wrapping around April 15th. Once that horse is outa da barn, there’s no going back — a sale is a sale is a sale — and so are the taxes owed.
Here’s an example of a recent oops!
First, a couple quick definitions.
1. Depreciation — It’s a loss in the value of an asset, in this case real estate. However, since real estate historically rises in value, this loss is really not ‘real’ — it’s a phantom loss. The investor, with some limitations and/or exceptions, is allowed to take this phantom ‘loss’ against the income of the property and if there’s any left over, against his job income — which is called ‘ordinary’ income.
2. Recapture — When an investment property is sold, and the taxpayer has taken the allowed deductions against their ordinary income over the years the investment property was held, the accumulated amount of depreciation used (deducted) by the taxpayer will be ‘recaptured’ and taxed as ordinary income. (ouch!) Note: This tax rate is much higher than that applied to a long term capital gain.
An investor paid $300,000 10 years ago for a fourplex. During the holding period he took a total of $120,000 in depreciation. He made no improvements to the property, i.e. rooofs, additions, etc. However, three years ago he refinanced the property for $700,000 — as he wanted to invest in more property and didn’t realize at the time a tax deferred exchange was the better way to go.
He sold the property towards the end of last year for $900,000 — (why, is anyone’s guess, since he wasn’t executing a tax deferred exchange) then called me at the behest of his son the Business Major. Fortunately the escrow had just been opened. That fact, along with his call, saved him many sleepless nights. (The sales price reflected the recent decline in values.)
I’m gonna oversimplify this massively to get the point across — so no kibitzing. Capital gain is taxed at a lower rate than depreciation recapture, as mentioned above.
When you subtract the $120,000 he took in depreciation then add his sales costs of $70,000 — his adjusted basis is about $250,000 or so. What’s the big deal you might ask?
He sold it for $900,000 which leaves him a (over simplified) capital gain of $650,000 or so. The total taxes he’ll owe on his next tax return could easily be $100,000 — give or take a few grand.
His net proceeds from the sale will be a little over $155,000 +/-. Ah, but wait a minute. He now owes the $100,000 in taxes — so his real world net is less than $60,000 from the sale of a property that sold for triple the price he paid for it.
Since he wasn’t my client, I didn’t pry into what he had done with the $400,000 in cash he received from his refi. If he didn’t invest it as was represented and this poorly thought out sale had proceeded to close, 10 years of solid investment would have been poured down the virtual drain. Not a happy prospect.
Allow me to pause here and shine a bright light on one huge factor missing here: Nowhere could I find even a thread of any kind of Purposeful Planning. This is what happens when an investor just decides to buy and sell without a Plan. It can become a little hairy at times.
Fortunately he called our office before his sale closed. We advised his agent, using his CPA as a conduit, to turn the sale into a tax deferred exchange — which was done immediately. He’ll now totally avoid — ah, read defer — those taxes. To be fair to his agent, the guy begged his investor client to get tax advice, but the guy wouldn’t listen. We’ll never know why.
I’ve seen several cases where the net proceeds of a sale weren’t even enough to pay the capital gains taxes owed. Imagine being a real estate investor receiving that sorta surprise.
The moral of today’s story is this: It’s so often true — Buying low and selling high has no relationship to basis and adjusted basis. The government will almost always say your profit is far higher than what reality (and the net proceeds check from escrow) tells you.
Knowing your adjusted basis is always part of any Purposeful Plan. A tax bill should never be a surprise.
The government’s plan for your capital gain is already in place.