Is It Time To Evaluate Your Investment Property

The New Year is fast approaching and I have to ask; Is it time to evaluate your investment property?

Many of our clients purchased their rental properties during the Great Recession.  They bought low and now may be the time to sell high.  Or is it?

The very first thing you need to know in order to make an intelligent decision is to get a comparative market analysis of your income property.  Listen, it doesn’t have to be detailed.   But if you can be plus or minus 3%-5% you can have a good idea as to how to measure your future options.

• Should I continue to hold because I’m making good money on my investment?
• Should I 1030 Exchange myself in to fewer but more valuable income properties?
• Should I sell, pay the tax and relax?

There are, of course, a few other options and variables not the least of which is “where are you in your life?”  What I am saying is that the real estate market in Kansas City has changed by leaps and bounds since 2009 and so may have your investment needs.

So, is it time to evaluate your investment properties?  If it is, give me a call at 913-568-1579.  I’d love to help.

Thinking 1031 Tax Deferred Exchange?

I just hung up the phone with Geoffrey Allison of Starker Services, a Qualified Intermediary (QI) that handles 1031 tax deferred exchanges here in the Kansas City area as well as the surrounding areas/states.  And of course the failure of Land America’s 1031 Exchange division came up.

What is funny to me is that I’ve had clients with over $100,000 going into a tax deferred exchange and they want to pick and choose their QI based on cost alone.  So they don’t use Starker Services and Geoff because they cost an extra $100 or so.  (That’s o.oo1 of the price for those of you keeping score.)

Did you know monies in held with a QI are unregulated?  Did you know that many QIs do business but very few do business right? Do you know who the hell is responsible for your $100,000 while it’s being held for those 45 days or so?

Listen, today more than ever we see why it’s important to do some checking and to be in business with the right people.  I had a guy not too long ago say he wouldn’t pay me a 6% commission (my minimum going rate)  that he’d never pay over 5%.  Fine.  That’s he prerogative and this is America.  But I would warn you that basing your entire investment decisions over pennies (comparatively speaking) is short-sighted and amateurish. 

Go ahead, use whatever QI for your tax deffered exchange that you like.  I’m sticking with my recommendation of Starker Services, Inc.  You can click the link to find out more about them.  If I was turning over a considerable amount of money I think I’d do that….

Will TICs Soon Be Fair Game For Real Estate Brokers?

I’m a big fan of the concept of TICs.  TICs are Tenants In Common.  Another term that may be used is Syndication.  But the IRS says Tenants In Common so that’s what we will use here.  The practice of TICs however isn’t so great.  At least from a real estate broker’s point of view.

The Problem
The IRS looks at TICs as real estate.  The SEC looks at TICs as securities of a whole.  Both want jurisdiction over the situation.  And therein lies the problem.   (This is a very brief synopsis.  For all the details of how TICs came to be, the road hazards and where we may be going please click this helpful link regarding Tentants In Common.) 

Most people selling TICs will not pay me a real estate commission because they feel that they would be violating SEC/NASD rules and regulations.  And if they take the stand that TICs are real estate and they are ruled to be wrong they open themselves up to massive litigation as well as myself. 

Why The Concerns?
It sort of peeves me that the SEC wants to keep real estate brokers out.  Really.  Who would know more about how to evaluate an income property?  A securities dealer or a real estate agent/broker who works with income properties?  Please. 

Solution
I have heard several times this week from several different sources that there could be a solution around the corner.  It seems the National Association of Realtors has finally been earning some of their money by trying to come to some sort of compromise on this situation with the SEC.  And at least one website is touting that the happening is just around the corner.  There will be an exemption for commercial real estate brokers.  Will I qualify?  I certainly hope so.  I’m not sure how they will regulate that since there is no separate commercial license from the residential license.  A real estate license is a real estate license.

Why This Matters To You
Some of you have tons of equity tied up in under-performing properties.  And perhaps you are approaching a time of your life when you’d like to make your “passive income” really passive.  By selling those 5 fourplexes in Olathe you can take the equity and 1031 tax defer it into a TIC.  The TIC would likely be a share of a warehouse or shopping center or oil and gas leases.  Or what if you identified a TIC as one of your three options.  An emergency back-up, if you will, in case the other two income properties don’t work out.  But you won’t hear too much about Tenants In Common until real estate agents start getting paid to tell you about them. 

Face it.  It’s free enterprise at work.  For better or worse.  After all, I study this stuff.  I evaluate the property.  I throw away the bad and bring you the good.  Think all TICs are the same?  Think again.  Why shouldn’t I get paid for my expertise just like if I helped you buy a small shopping center. 

Friday Meanderings

Here are some blog posts worth reading:

Investors vs. Speculators::Which One are You?

1031 Tax Deferred Exchanges-200% Rule

So You’ve Decided To Buy A Property With A Friend…

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I ran into this guy the other day at the post office. If you like to Bar-b-q you are going to want to check out this site. And you know we Kansas Citians love to BBQ. American Barbecue Systems.
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Isn’t it amazing how many different ways there are to say Bar-b-q. Let us list some:

• BBQ
• bar-b-q
• barbecue

I guess it’s appropriate since there are so many ways to BBQ. Memphis thinks thinks they are the best. (And they are good.) Carolina thinks they are the best. (I don’t care for vinegar and cabbage on my sandwich, thank you.) Texas…well Texas has a Texas sized ego about everything. But here in Kansas City, we have a little of each of those. We’re the Constantinople of BBQ.

And remember, grilling isn’t BBQ. It’s grilling. BBQ is low and slow.

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I’ve got a line on some pre-construction fourplexes out in Manhattan, KS if anyone wants any information.

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I’m noticing the rental market get stronger and stronger. My prediction from about 18 months ago is coming to fruition as lending standards are tightening and foreclosed homeowners are moving back into the rental market. Add to that slowing building and we should be nearing the bottom of the real estate cycle, here in Kansas City at any rate, in the next 12-24 months. Then things should slowly start to edge back up.

But we’re not too bad now, relative to the rest of the country. At least our appreciation is 2%-3% instead of depreciation!

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My son leaves for the South Pacific for 21 days on Tuesday. I’m so envious of his trip.

Building a Real Estate Portfolio: Learn to Fly

I remember that day very clearly. I waited with anticipation, and apprehension for 3:00 pm to arrive. I was so excited that I arrived 10 minutes early even though I only lived 4 minutes away. The date was July 23, 2002. 68402 was the Cessna 152 I was about to fly for my Private Pilot’s license exam. Aside from my wedding day and the birth of my children, NOTHING exceeds the sense of accomplishment I felt that day.

“Congratulations. You are now a private pilot.”

Those words still ring in my ear. It was the culmination of a lot of work. The direct result of careful planning, much study, learned execution and faith in the flight instructor I had hired to guide me through the process.

My instructor was Felicia Barton. I’ve since lost track of her. But I’ll never forget her. “Airspeed. Center line.” “Airspeed. Center line.” “Emergency. Where will you land?” Those words of hers ring through my ears to this very day with every flight I take. Even while driving my MINI. I purposely live close to small airports and watch as many approaches/take-offs as I can. I mentally fly every single day.

Why am I writing about flying?

Because it is really no different than what the newer real estate investor goes through when they are getting started. You step out on faith and the first thing you decide is that you are going to do it.

The next thing that any prudent flight student will do is carefully choose their flight instructor. Your life will literally be in that person’s hands for years and years to come. After all, it is the training that will come back when you need it most. Or it wont. It just depends on whether you had a great flight instructor…and whether or not you were a great student.

Little successes will build on top of other small successes. When that plane lifted off the ground for the very first time under my control Felicia took the wheel as I followed along. She was talking to the tower, adjusting the throttle. Following directions. Turning to 270. Adjust mixture level. Head on a swivel to look for traffic. Trim needs adjusting.

My head was swimming. Would I ever learn to do all of this? And all at the same time?

You never stop learning to fly. You never stop learning about real estate investing. To me, with my life experiences, they are practically the same. Both allow freedom. Both require planning. Both allow the chance to soar. Both can cause ruin.

Choose your path carefully. Plan. But step out. The sense of accomplishment in knowing that I can fly is unbelievable. Knowing that I am taking steps to have wealth that will allow me to retire comfortably and that I can leave for my kids will be like that July day. “Congratulations. You are a millionaire.”

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I was reading a website today out of California. It’s called The Money Alert. There are a couple of articles worth reading.

• An Even Exchange – An IRC 1031 exchange article
• Are REITS Right for Your Portfolio? – A Real Estate Investment Trust article

The site looks informative and discusses all manners of investing, not just real estate. Take a look and see what you think.

Real Estate Investing Tool: 1031 Exchange

A 1031 tax deferred exchange is an excellent tool for the real estate investor. And there are plenty of good sources to find out more about that tool without me rehashing the whole process in great detail.

Follow these two links to get more details and benefits of the 1031 exchange:

Jeff Brown’s Bawld Guy Talking
Starker Services, Inc.

This post, however, is here to talk about what the real estate investor can do to minimize his/her feelings of overwhelming pressure when they are in the middle of a 1031 exchange. And how a real estate agent working with investment properties can help to walk that exchanger through.

Click here to read the rest of this post…

Depreciation: You must Bifurcate!

Bifurcate depreciation? I first heard of the term when I attended one of Tom Lundstedt’s workshops on calculating the returns on investment property. (If you haven’t been, you should go. Or just order his CDs online. I don’t say this very often but he is worth every penny.) Anyway, it’s a $10 word to say separate.

I’ve referred to the 4 Benefits of owning rental property before but surprisingly I get very few comments or questions regarding depreciation. With tax season here, I thought I would hammer it home.

Pay very special attention to what I’m going to say next: Most rental property owners are improperly depreciating their income property because they are using a tax preparer who is unaware that you can bifurcate your depreciation. It may be costing you thousands!

There are 4 ways you should be breaking up the depreciation of your investment property;

1. Land – no depreciation permitted.
2. Building – depreciates over 27.5 years for residential or 39 years for commercial.
3. Land Improvements – depreciates over 15 years. (driveway, landscaping, stairs, exterior lighting, etc.)
4. Personal Property – depreciates over 5 years. (carpeting, appliances, etc.)

Hear Me! Most of you are only depreciating the Building! Stop doing that! We are entering the tax season and you need to know this so you can quiz your tax preparer. Still don’t believe me? Watch this example.

EXAMPLE 1: $200,000 duplex located in Overland Park, KS and the tax assessor says the land is worth $34,500. Depreciating the remaining number as the Building on your first year schedule will yield you a tax savings of $1,901. ($165,500 x 3.48% = $5759 x 33% tax bracket = $1,901)

EXAMPLE 2: $200,000 duplex located in Overland Park, KS and the tax assessor again says land is worth $34,500. A Cost Segregation Study shows you have a breakdown as follows;

• Building at $127,500.
• Land Improvements at $17,000.
• Personal Property at $21,000.

Now your formula works out to a tax savings of $3,131. That’s a $1,230 increase in saved taxes! ($127,500 x 3.48%) + ($17,000 x 5%) + ($21,000 x 20%) = $9,487 x 33% tax bracket = $3,131.

Please, I’m begging you (and I don’t generally do that unless you have KU basketball tickets I need) to do your homework on this and make sure your tax preparer does as well. After all, whether you depreciated your property correctly or incorrectly, you will have to pay the depreciation recapture when you sell. Unless, of course, you do a 1031 exchange. (So long as that is the smart thing to do. A whole other way to go is discussed here by my friend in San Diego.)