02/16/2010
01/25/2010
Real Estate & your IRA
Yes you can invest in real estate through your IRA, SEP, pension and profit sharing plan, etc. The steps to do so are actually as easy as 1,2,3...the rules, however, can be a little more complex. Here is the "how," the "rules" will have to wait for another time.
STEP 1: Research "self-directed IRA" on the web. Not all account holders allow non-traditional assets (i.e. real estate) to be held in a qualified retirement account. Most of the big national names do not, however, google "self-directed IRA" and you will have plenty to read. Of the big boys, I am told Charles Schwab may be the only one that allows it. I am familiar with Trust Administrative Services (www.trustlynk.com) and Entrust (www.entrust.com). This is not an endorsement, just a lead :)
STEP 2: Once you have selected an administrator and feel comfortable with their program, it is a simple matter to open an account and have all or a portion of your selected retirement account at another institution rolled over to the new self-directed account.
STEP 3: With the funds in the self-directed account, you can research and select "non-traditional" investments, such as real estate, private limited partnerships, trust deeds, etc., to invest in.
The primary advantage of a real estate investment in a retirement account is that the account may be the only source of sufficient liquid funds to invest in real estate; also, income, whether ordinary or capital gains, will accrue tax deferred in the account. The tax shelter protection of depreciation, however, is lost, since the tax deferred income cannot benefit from the paper loss from depreciation. I personally have a limited partnership investment in my self directed account and I recommend that, while this may not be the right investment for everybody, it is an alternative that should be considered.
01/18/2010
The ABCs of "Cap Rate"
"Cap Rate" is a term constantly used in commercial real estate investing. Those not in the trenches often don't know what a "cap rate is" and may not want to ask for fear of asking a "stupid question" (there is no such thing!) Here is the short version...
"Cap Rate" or "Capitalization Rate" is simply a way to measure and compare the investment returns from investment properties. Mathematically, it is Gross Revenue from the property minus Operating Expenses (which equals Net Operating Income) divided by the value or price of the property. For example:
Gross Revenue (rent etc) = $150,000
Operating Costs (taxes, insurance, maintenance, etc) = $50,000
Net Operating Income = $100,000
If the value or purchase price is $1,000,000 then the cap rate is 10% ($100,000 / $1,000,000) i.e. the property produces a 10% return before debt service and management expenses.
Changing the algebra, you can determine what the property is worth if you want it to generate a 12% return or "cap rate:" $833,333 ($100,000 / .12)
This measure, without consideration for debt or management expenses which are unique to each owner, allows for a standardized measure to compare the returns generated by various properties. It really is as simple as ABC.
01/16/2010
"Big" Reform
"Big" has become part of our daily lexicon, particularly in connection with the current efforts at health care and financial reform...big government, big business, too big to fail. The attack from the right seems to focus on the assumption that big government is bad and the counter from the left is that big government is a better protector of the masses than big business. I'm not so sure that big anything is better and I'm definitely not comfortable that corporate America will deliver any better social solutions than big government. Given what Wall Street has done to us, do you trust big insurance, big pharma or big medical to do any better with health care than big government. Would you rather deal with the mom & pop store down the street or Walmart...City Hall or the U.S. Congress?
The attached articles highlight the alarming abuses and arrogance of Wall Street in connection with our current financial crisis. I can only hope that the abuses of Wall Street can be corrected and solutions don't involve bigger, just more effective, government. The private sector can do many things better than the public, however there are limitations and risks. The invisible hand of Adam Smith will not solve all of society's woes. In searching for solutions, whether through public or private means, let's focus on effectiveness in achieving our collective goals, and recognize that bigger is not necessarily better.
Dealbook Column: What the Financial Crisis Commission Should Ask
Op-Ed Columnist: The Other Plot to Wreck America
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01/11/2010
The Real Numbers on Foreclosures
The residential meltdown and resulting foreclosures have played a large role in the Great Recession, at least in California and the rest of the sunbelt. As would be expected, there are a lot of numbers thrown around concerning the status of foreclosures in California: the number of "new notices of default," the number of new "notices of trustee sales," the number of homes actually foreclosed, etc. I would expect that as we exit this recession, these numbers should improve and according to many reports, there has been some improvement.
There is 1 set of numbers that doesn't seem to get much play...the number of active, pending foreclosures. An active, pending foreclosure is where the Notice of Trustee Sale (the last step before the property is actually auctioned off at the courthouse steps) has been recorded but a sale has not taken place. Under "normal" circumstances, the Trustee Sale would take place 21 days after the Notice is recorded. Even though the sale can be postponed for a number of reasons, there would not typically be an extended delay.
At the end of 2006, before the start of the recession, there were 8,500 pending foreclosure sales in California. By July 2008, well into the recession but before the real "meltdown" of 4Q08, the number climbed to 65,000, with 40,000 new notices being filed each month. The good news is that as of 12-31-09, new notices of sale have declined, but the number of pending sales is now 144,000! The number of sales getting resolved each month (sold to the bank, a 3rd party or cancelled) has recently been less than the number of new notices recorded! How can we possibly climb our way out of this mess without the lenders clearing up these "toxic assets" that we have heard so much about? I don't think we can.
The reason for this disconnect seems to be unknown to even the most knowledgeable pundits. The speculation includes: lenders want to control the supply of properties to avoid further drops in pricing, lenders can't keep up with the volume, the Feds are trying to protect the financial system and bolster the banks, etc. Whatever is happening on Wall Street or in Washington, I am going to keep my eyes on these numbers because I don't see how Main Street can begin to recover until the number of pending foreclosure sales starts to come down. I am inclined to error on the side of hoping it drops more quickly rather than continuing the pain for years to come.
