Distress Properties Are Easy Way to Start Solid Real Estate Portfolio
QUESTION: I am 48, my wife is 49, and we recently realized we don’t have many years left until retirement. Fortunately, we both have jobs that we greatly enjoy but they don’t pay very well.
We will get small pensions plus Social Security at retirement. Our two kids, ages 19 and 21, are both very smart and have college scholarships so that is not a problem unless they want to go on to graduate school in a few years. We have a nice home with about $120,000 equity, a few common stocks, but that is about all. Recently, we saw you on TV talking about buying distress properties. Do you think at our advanced ages it’s too late to start investing in real estate? If there is any hope for us, what kind of real estate do you recommend?
ANSWER: You seem to have done very well raising your family and it is never too late to get started investing in real estate. I’ve known people who waited until their 70s to buy their first investment property. My mother, at 87, wants me to find more rental houses for her to buy. Of course, I then will have the privilege of managing them for her since she is too busy traveling.
Perhaps you recall my writing about my friend Alice who bought her first apartment building at 73. She sold about three years later, after giving it a coat of paint and some minor fix up, for over a $100,000 net profit. Incidentally, Alice carried back a long-term mortgage for extra retirement income. You can do the same.
I recommend buying run-down distress or fix-up properties. They offer instant profit potential from upgrading, which increases their market value by more than the cost of improvements.
By improving properties, you will be performing valuable community service while improving your financial situation too. A home equity loan can provide the capital you need to get started. Further details are in my special report, “How to Acquire Foreclosure and Distress Property Bargains” available for $3.50 from Newspaperbooks, 64 E. Concord St., Orlando, Fla. 32801.
Use Power of Attorney in Multiple Ownership
Q: I am one of five owners of an apartment building that is now in the process of being sold. Since we all live in different cities, it won’t be easy getting us together to sign the necessary papers.
Just obtaining five signatures on the deed will be a real problem, since we were told all our signatures must be notarized. Any suggestions?
A: While it may seem like an inconvenience, having signatures on deeds notarized by a notary public minimizes the chances of a forged signature on a deed. But getting all five owners to sign the deed to the apartment house, with notarized signatures, won’t be simple. Nor will it be easy to get all five signatures on an acceptance of a purchase offer.
If all five owners have a person they trust, such as an attorney, they can each give this person their power of attorney to sign all necessary papers, including the deed. To simplify the sale closing, I suggest the five owners agree on who will hold their power of attorney. Ask your lawyer for further guidance.
Value From Inflation a Benefit of Investing
Q: We clip and save your articles but we especially enjoy the questions about property investing. My wife and I started buying rental houses and small apartment buildings about 12 years ago. Our major goal was tax shelter but we have enjoyed the extra benefit of inflationary rising property values.
As we often attend real estate seminars and the local investor club meetings, we frequently meet novice investors who seem to think today is not a good time to buy because property values aren’t rising as fast as they did in the past.
I wish you would emphasize that thanks to the depreciation deduction, it doesn’t matter if income property goes up in value. We have enjoyed the tax shelter, cash from refinancing and a little cash flow. Why don’t you emphasize increased market value from inflation is just an unexpected bonus for property investors?
A: Shame on me for failing to explain why it pays to buy income property, even if it is not going up in market value.
For example, suppose you buy a $100,000 investment property. Each year you can deduct depreciation, a non-cash expense for wear, tear and obsolescence of the building. (The land value is not depreciable.) Let’s suppose after a few years you have depreciated the property down to $80,000 and you decide to sell it for the same $100,000 price you paid. As you can see, you will have a $20,000 profit even when selling for just $100,000.
In the example above, you will have sheltered $20,000 of income such as rents or perhaps your job salary, or dividends and interest income from taxation. If the tax rate is reduced on long-term capital gains, owning depreciable real estate will become an even better investment. Of course, if the property’s market value goes up, that is an unexpected bonus.
No Special Tax Break on Land Investment
Q: I am considering investing in some vacant land that I think will go up in value as our suburban area grows. Are there any special tax breaks for investing in land?
A: No. You can’t depreciate land, only improvements such as fences. As you can see, land is not a great tax shelter investment. Your tax adviser can give you further details.
Older Fix-Up Home Best Bet for Profit
Q: My husband and I would like to both buy a home and make some money in real estate. Do you think we would make the biggest profit by buying a new or old house?
A: The best profit opportunities are in older homes that need some fix-up and can be purchased below market value.
For each $1 spent on upgrading, you can often raise the market value by $2 or more. By contrast, new homes are presumably in excellent condition and are being sold for full market value.
As a result, brand new houses don’t offer the profit potential of older “fixer” houses.
No Over-55 Tax Break on Investment Duplex
Q: I am 67 and my wife is 64. We plan to sell a duplex where we lived until about four years ago. Can we use that $125,000 tax exemption you often write about?
A: Sorry, the “over 55 rule” $125,000 home-sale tax exemption only applies to the sale of your principal residence. To qualify you must be 55 or older on the sale date, have owned and lived in your principal residence at least three of the five years before sale, and never have used this tax break before. Since you moved out of the duplex more than two years ago, it can’t qualify. Ask your tax adviser to explain further.
Property Management Can Be a Thankless Job
Q: I am a real estate salesman but am not very happy with the feast or famine cycles of my commission earnings. I recently took a college course on property management that I enjoyed very much.
The instructor invited me to come to work at his property management company as a property supervisor. Do you think the property management field offers better opportunities than real estate sales?
A: In my opinion, property management is the world’s most difficult and thankless job. The property manager is caught in the middle between the tenants who think rents are too high with services too few and the owners think the rents are too low and the operating expenses too high.
However, I greatly admire the successful property managers who can put up with this inherent conflict of their job. To make matters more difficult for property managers, they must be concerned about keeping the buildings they manage full and making sure the building managers do the best possible job while keeping their pay and benefits within reason.
As you know, professional property managers are usually compensated on a percentage basis. Fees range from a high of 10% of gross rent for single-family houses down to as low as 3% or 4% for managing large apartment complexes.
However, the property management business is very competitive, so don’t expect it will be any easier than selling real estate. But you may want to try property management because you may have the necessary skills to be successful in this very demanding job.
Can Deduct Deposit If Deal Was Investment
Q: We made a $2,000 earnest money deposit on the purchase of a four-plex. But we were unable to obtain a mortgage at an interest rate that will give us a positive cash flow. So we decided not to go through with the purchase. Can we deduct the $2,000 loss on our income tax returns?
A: If you were buying the four-plex as investment property and not partly as your personal residence, then your forfeited earnest money deposit is tax deductible as a business expense.
However, if you were going to live in one of the units, then that portion of your deposit loss is not tax deductible because deposits lost on the purchase of a personal residence are not tax deductible. Please consult your tax adviser for further details.
Offer Promissory Note for Sales Commission
Q: We are trying to sell a run-down apartment building located in an undesirable part of town. The only good things about it are that we inherited it and there is no mortgage. But we realize we will have to carry the first mortgage to get the place sold. A local slumlord has offered to take it off our hands but he will only pay a token 5% down payment.
We checked his credit report and financial statement to learn he has an excellent record of paying on time. However, the problem is we agreed to pay the realty agent a 6% sales commission. He says we will have to come up with the balance out of our pocket. Do you think we should accept this offer?
A: Sorry, I can’t advise on the wisdom of accepting a specific purchase offer.
However, I can advise that when you are short of cash to pay a real estate sales commission, most agents will gladly take a promissory note for the balance of the commission. For example, you might pay half the commission now and pay the balance over five years as you receive payments from your buyer.
Since the agent didn’t produce an all-cash offer, there is no reason the agent shouldn’t share in the cash shortfall.
Do Time-Shares Make Solid Investments?
Q: A friend recently told us about some time-shares he bought a few years ago in Hawaii. He uses these time-shares to trade for vacations at exotic resorts all over the world. What do you think of real estate time-share investments?
A: Time-shares are not real estate investments. There is virtually no resale market, so please don’t spend cash you will ever want to see again. Buyers of time-shares are purchasing future vacation time.
Please don’t confuse such purchases with solid real estate investments.
