Should You Invest in Real Estate Now?
On Saturday I start a brand new seminar. Most of my seminars are about tax strategies. This one is part tax and part about creating passive income.
And, for once in my life, I’m not highlighting real estate as the best strategy for everyone. This isn’t going to be a post about why real estate is a bad investment or why anyone who invests in it is a loser. Real estate investing works, but it’s not the only game in town and I think we’ve lost sight of that.
Why invest in real estate? Most people I know are looking for passive income, appreciation with leverage, tax breaks, a place to park their wealth and a separate stream of income. It can also be used, just like any other business inventory item, as a commodity to create quick cash.
Real estate is down in value, which means there are great values, but it’s uncertain how quickly you could flip them. So, to be honest, I’m not sure the flip market is a good idea unless you really know what you’re doing and have the liquidity to carry a market timing issue. If you can buy cheap enough and there is a rental need, you can definitely make some money. For example, I was part of a teleseminar this past week by Matt Bowles of www.MaverickInvestmentGroup.com on the Brookhaven project in Mobile, Alabama. There is a waiting list of renters for properties right now. This could be a great time to invest in Alabama.
The tax breaks are difficult these days for real estate investors. The IRS is specifically targetting real estate professionals for audit and unfortunately, many taxpayers didn’t properly file their past tax returns. So, they’re falling into the IRS’s trap.
And finally, leverage. Loans are very hard to get these days. Even if you qualify, will the person you want to sell the house to be able to get a loan?
So, how did real estate do on the things you might be looking for: passive income: possibly, depends on the area, appreciation: not right now, not certain when it will turn, leverage: hard to get loans these days, place to park wealth: if you’ve got the liquidity to wait it out, this could be a good time for this strategy, and a separate stream of income: it would be different from your other income for sure, but the secret is to actually CREATE income.
Should you invest in real estate? It depends.
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Hi Diana:
I’m new to your blog, but I eagerly await your posts. I agree with you about real estate being in a state of flux. I own several duplexes in Lubbock, TX, and while 2 years ago, we had an over abundance of duplexes and apartments for rent and owning rental property was a scary proposition; this year has been better on occupancy rates. I attribute it to a few different factors: 1) Mortgages are harder to get since the subprime melt down, and 2) The occupancy rate is finally leveling out, after the over building of rental property. Either way, cashflow from rental property is still tight.
That’s why I was really hoping to get to go to your seminar Saturday. Alas, funds and other commitments are keeping me from going. I was wondering if you would do a video/audio CD/DVD of the seminar? From an entrepreneur stand point, it could be another stream of income for you, and you would be helping out other people who can not attend the actual event. Just a thought.
I’m wanting to find other streams of passive income too, so any suggestions you might want to share would be appreciated.
Teacup, glad you joined us!
Yes, we will make both audio and video available from the seminar.
I agree - tightening the lending requirements is going to further negatively impact the housing market. If no one can get a loan, houses won’t sell.
On the other hand, for people who have positioned themselves well for investing and have the means to carry for buy & hold, this is an excellent opportunity. Less competition in buying, better prices and more demand for the rental product.
Penny mades a good point, in that if you have posititoned yourself well, then this can be a good time for rental property owners. Fortunately, we have positioned ourselves well, and not cashed out any equity from our duplexes, so our expenses (P+I+M+I) are in line, and we are filling up vacancies quickly.
So I feel good about the rental property we own going forward.
But, and there always is a but, I feel with everything that is going on with IndyMac, Freddie Mac, and Fannie Mae, that loans for rental/investment property will get tighter also. Seems like I read somewhere that Freddie Mac was going to drop the total number of properties it would allow/finance from 10 to 4 starting August 1, 2008, per individual. Perhaps we will have to get more creative with our financing; i.e., owner financing, wrap around mortgages and land installment contracts, until all this blows over. I don’t know, just a guess. My brother-n-law just bought a duplex in Abilene, and he had to come up with 15% down, versus 5% or 10% down. That may have been due to his credit rating or other factors, but still, the more one has to come up with for a down payment, can knock some people out of the market.
I’m so glad to hear that you make both audio and video available from the seminar! Yea!!!! Would you please notify me when they are available. Thanks!
Hi teacup,
You are correct. Freddie Mac has several changes going into effect on August 1st. In addition to having a cap on the number of properties an investor may own (and still qualify for financing through Freddie) they will also require you to hold a property for 6 months prior to applying for refinancing. This is having one heck of an impact on people who hold properties in LLCs - they can’t get a loan unless the property is moved back to their personal names, but even then they have to wait another 6 months. If you search “trust sandwich” on our forum and blog you’ll find all kinds of threads and other references to what’s happening.
—
Megan Hughes
www.businessfirstformations.com
Last week, my business had its best month ever
Another option for investors is to consider commercial financing. When you think about it, RE investors have been fortunate so far to be able to take advantage of financing programs really designed for owner occupants. What other business can you get financing like that?
The qualifications for commercial financing aren’t a bad thing. You do see a little higher interests, higher down payments and lower terms/amortizations. But it isn’t a bad thing because it forces your business model to be more robust. A higher down payment means a) investors will scrutinize the numbers more rigidly, and b) be less likely to walk away due to the skin in the game, which is lower risk for lenders. And you can get the financing in the name of your LLC, usually with a personal guarantee. Bottom line, the moderately higher costs of commercial financing are just another cost of doing business that should be factored into your business model.
Develop a relationship with a local bank and a lot can happen.
Diane:
I was wondering if you had the audio and video available from the seminar you did July 19 - 20, 2008? Sorry to be a pest, but I’m really interested in getting them, as soon as possible.
Thanks,
TeaCup
Hi Diane,
I have money in a 401K at a previous employer. If I roll that into an LLC - IRA (self-directed IRA) would I then be able to have that LLC - IRA write a loan to another LLC that I use for real estate investing?
What I would do is to pay off the current loan on the house that I have invested in and pay my LLC - IRA the (market) interest rate that I am now paying to the bank (much better return than my money is getting in the 401K). I would also stop having to pay PMI. Lastly, I would still have the interest rate deduction for the real estate based IRA.
I will also have capital available for another LLC that I am considering starting. This would be a fairly small business and its primary expenses will be rent as well as inventory. Again, I would like for the LLC - IRA to make a loan for working capitol to this LLC at a market rate instead of investing directly in the new business, but I am open minded if there is a better way to construct this.
It would seem that making the loans to the other LLC’s would be a legitimate business for the LLC - IRA. I would have a tax deductible expense that really just pays into my own retirement account (which doesn’t pay taxes until I retire). I can control the rate of return to the LLC - IRA and I would be able to have access to these business’ income/profit now, without it being locked-up in the IRA.
Any thoughts on the viability of this would be appreciated. I just picked-up your “Tax Free Real Estate Investing” book and took a quick scan of it last night but I did not see anything referring to the loans aspect of this idea.
Thanks for you help Diane.
Will