Earned Income

Earned income is what most of us do every day. We trade time, energy, or brain power for money. We go to the job site, check into the office, go to the firehouse, or our shop and get to work. We get paid for what we produce or do. If we don’t produce or do, we don’t get paid. We work in order to get money.

Passive Income

Passive income isn’t generated directly from our work. Passive income is money working for us. Passive income is interest from a savings account, interest from a bond, a dividend from a stock, or cash flow from a real estate investment. Passive income is produced whether or not we take an action.

The trick to getting a huge passive income is accumulating lots of investments. A $300,000 investment earning 3% returns $9,000 to the investor. A $3,000,000 (million) investment returning 3% returns $90,000 to the investor.

If you would like to discuss opportunities to start accumulating investments using real estate, please call me at (925) 385-8798.

Triple Net Lease or NNN Lease

A triple net lease can also be referenced as a net, net, net (NNN) lease. This lease type is often found in leases for large office buildings, large industrial buildings, and in retail or storefront buildings.

In this lease structure the tenant pays a base rental rate. The base rent will be clearly delineated over the life of the lease. Often times the base rent will escalate at an agreed upon percentage rate or based upon inflation and linked to the Consumer Price Index (CPI).

As well as the base rental rate the tenant will pay the net expenses. The net expenses are taxes, insurance, and maintenance costs. These fees can be included in common area maintenance fees or CAM charges. These expenses are in addition to the base rental rate.

Landlord

A landlord generally likes this lease structure because it places some of the future price risk on the tenant. Taxes, insurance, and utility costs are, generally, going to increase over time. The expenses that could potentially damage a landlord’s income, are passed on to the tenant and help the landlord to plan future income.

Tenant

The tenant is taking on the additional risk of taxes, insurance, and maintenance with a triple net lease. In exchange for this risk, they will often be given a lower base rental rate. A commercial tenant may not be able to avoid this type of commercial lease. When comparing a triple net lease to a gross lease all triple net expenses need to be included.

Gross Lease

When all of the expenses associated with a property are included in the base rental rate of a commercial lease, you most likely have a Full Service Gross Lease. These expenses include real estate property taxes, property insurance, utilities, maintenance, and janitorial. Some office leases, retail leases and industrial leases are gross leases.

Landlord

A commercial lease structured in this manner places the risk of expense growth upon the landlord. The landlord is responsible for any increase in the price of insurance, property taxes, or utilities. A landlord may choose this lease because the rental market demands it, the tenant leases the entire building, or the property only has one utility meter and the landlord cannot accurately divide utility costs.

Tenant

A commercial gross lease relieves the tenant of the risk of price inflation. As well, it simplifies the lease rate as the tenant will only be quoted a base rental rate that includes all expenses for the property.

Combination Leases

Most commercial leases are a combination of a net lease and a gross lease. In other words, the tenant pays some of the expenses and the landlord pays some of the expenses.

Industrial Gross Lease

In an industrial gross lease the tenant pays a base rental rate and their share of the common area expenses. The landlord will pay the property taxes and insurance costs in the first year or base year. In subsequent years, any property taxes or insurance costs above the base year amount are the responsibility of the tenant.

Modified Gross Lease

A modified gross lease is similar to a full service gross lease except that one or more item may be the responsibility of the tenant. In a modified gross lease a tenant may be responsible for their own utilities, janitorial, or maintenance costs depending on the scenario.

Procuring a commercial lease for your business can be challenging. If you would like assistance with this process, please call today at (925) 385-8798 to see if we can assist you.

The author and radio host Dave Ramsey has said that a home or personal dwelling is a stake in the ground to which the owner is chained. Your life will most likely revolve around the area where you buy a home. You will work nearby, play nearby, and raise a family where you plant this stake. What if you want to change any of these items?

Often, professionals just beginning their career do not plan to spend their life in the same location that they find their first job. The energy of big city life is not as appealing when you have to raise a family. Their first job is a dead end and a graduate degree is required for advancement. Or you find great success in your career but the next promotion is in another state or another country. What do you do with that condo or fixer of a home you bought?

Financially Wise

Imagine instead that you bought a fourplex (a single building with four separate living units). This fourplex in Concord, CA is a current example. Argyll Avenue – Fourplex

The property is listed for $375,000. According to the listing agent the property has 2 -2 bedroom units and 2 – 1 bedroom units. Let’s figure 3% for closing costs and fees for a total of about $386,000. Our first-time home buyer decides to make an offer at list price with 10% down. Their loan amount will be $347,000.

A loan of $347,000 at 5% interest will have a payment of $1,863 per month. Property taxes and insurance will add roughly an additional $612 per month. If our home buyer mows his own grass and does repairs himself, he likely won’t have many other expenses beyond the occasional repair or vacancy. The total expenses for the property will be roughly $2,475 per month.

According to the listing agent, the 2 bedrooms rent for $1250 each per month and the 1 bedrooms rent for $850. To be safe let’s knock $150 off of each of those and say that the 2 beds will fetch $1100 and the 1 bedrooms will get $700. Our industrious and frugal buyer doesn’t have a roommate and decides to live in a one bedroom unit. His gross income from the property will be 2 x $1,100 = $2,200 plus $700 = $2,900. If we imagine that each of the rented units will be vacant for 10% of the year, this would reduce his gross income by $242 per month. His or her gross income will be $2,658 per month.

In review, our home buyer will be receiving $2,658 per month in rent and expenses will be roughly $2,475 per month. The net income to our home owner will be $183 per month and he will be living rent free.

Besides living rent free there will likely be some tax benefits to our home owner. Cost recovery or depreciation can be claimed on the rented units. The owner may be able to offset taxes on earned income.

If our intrepid home buyer decides to pay down the mortgage by paying “rent” of $700 per month, the home buyer could apply $883 to principal each month ($183 in cash flow).

Assuming the fourplex does not increase in value at all the value would be $375,000 at the end of 5 years. The outstanding principal would be a shade under $260,000. The home buyer has equity of almost $115,000. Calculating selling and closing costs at 8% of the gross fourplex value ($30,000), our investor has net equity of $85,000 to roll into his next purchase. Our investor could refinance the property at 80% LTV and pull out $40,000 in equity to purchase the next investment property.

Flexibility

Buying a fourplex has provided the investor with some flexibility. We assumed that the investor lived in a 1 bedroom unit. If the investor gets a roommate or marries, they could move to one of the two bedroom units without having to buy something else.

If our first-time buyer needs to relocate, the property should have enough income to pay all property expenses when fully rented. Our first-time buyer can safely transfer to another city without worrying about selling a home first.

 Conclusion

The fourplex purchase allows our hypothetical buyer a financially fit decision and a level of freedom that a SFR does not allow. It appears that an investment property, is far superior to the single family home purchase for our first time buyer. (Please do not construe this as a hard and fast rule or investment advice.)

Call me at (925) 385-8798 to see if we can find a duplex or fourplex that fits your investment needs.

Here are three reasons you should not buy a house/condo if you are in this stage of life:

Real Estate Ties You Down

You decide to buy a nice little home in Walnut Creek, CA. Your career starts to take off. A headhunter contacts you with your dream job in Boston. You would love to take it, but what do you do with your home? Do you sell it? Can you sell it? Do you rent it? Do you want to be a landlord on a home in California while you are in Boston?

As one radio host said, “Owning real estate is placing a stake in the ground.” It is a financial obligation that can limit your options and limits your freedom.

Your Spouse Won’t Like It

Let’s say you buy that little two bedroom house in Walnut Creek. One day while walking your dog in the Dog Park, you see the most beautiful creature on two legs. Your whirlwind romance leads to a proposal and wedding plans.

As you begin making plans for life after marriage, you are deciding on where to live. Your spouse begins to point out the deficiencies in your first house. It only has two bedrooms, where are you going to put Jack and Jill when they come along? The kitchen is too small. The bathroom only has one sink. Where are the in-laws going to stay when they visit? Why did you paint the kitchen that shade of blue?

Your options are to remodel or to sell your existing house and buy something new. Do you really want this hassle while planning a wedding?

Odds are that the person you marry won’t have the exact tastes that you do. The house you thought was ideal, is not their ideal. It is a much better decision to buy something together that you both enjoy.

It is Not the Wisest Financial Choice

Imagine a young farmer. He just bought his first plot of land. He needs to plant his fields for the harvest and he needs to build his first house. However, he only has enough capital (money) available to do one or the other. Should he buy seed for his fields or buy lumber to build the home? Which would you choose?

Hopefully, you chose the seed. Seed provides more income for the coming years. Seeds will allow the farmer to have a future in the farming business. Lumber may have provided shelter, but it didn’t produce any lasting return to the farmer.

In many ways buying a single family house is like a farmer buying lumber. It provides shelter, but the long-term benefit is mitigated.

There is another answer that makes sense for a young professional. If you would like to hear more about this solution call me at (925) 385-8798.

Almost without exception the degree of risk is rated based on the guaranteed return of the principle, not how much earnings the investment might yield.

The key factor in evaluating an investment’s risk is: Will I get my money back?

An investment that could lose lots of money, should provide the investor with a greater reward for their willingness to take that risk.  Conversely, “safe” investments provide less reward to investors, because they have a greater certainty of getting their money back.

This explains why savings accounts are bearing such a low rate of return. The federal government has guaranteed that savings accounts up to $250,000 will be made whole, by the FDIC. Investors in savings accounts are taking almost no risk, so they get almost no reward or return.

If you are interested in earning a higher yield on your savings, please feel free to contact me at (925) 385-8798.

Specifically, Jackson Center at 1111 Jackson Street in Oakland and Berkeley Tower at 2120 University Ave in Berkeley.

The bank seeks to foreclose a delinquent loan totaling $47.1 million. The affiliate of Portland, Ore.-based Scanlan Kemper Bard, commonly known as SKB, bought the buildings and the vacant lot for $61.5 million in 2007.

Ouch! That means that SKB is willing to right off almost $15 million in invested capital on these deals.

In an article from April 26, 2010 the Contra Costa Times reported that One Concord Center was also in the foreclosure process.

SKB willingly turning over the keys to the property in Oakland and Berkeley means that they do not see a resurgence in value in the near future. Expecting a near term turn around is unrealistic.

Today, Laura Rowley had an article entitled Starving for Yield on Savings. She writes:

Americans who chose to save instead of buying homes they could not afford or cashing out their equity to splurge on luxuries during the real estate boom need a Robin Hood at the Fed, because they’re the ones getting robbed to pay for the recovery. Conservative places to park cash — savings, money markets and certificates of deposit — are still paying well below the inflation rate of 2.2 percent. As of this week, savings accounts are averaging returns of 0.20 percent; one-year CDs are yielding 0.77 percent, according to the Federal Deposit Insurance Corporation.

“The Fed is determined to keep rates very low, and while it’s painted as fiscal stimulus I think it’s really a stealth bailout of the banks,” says Richard Barrington, a certified financial analyst and expert with the bank comparison site Money-Rates.com. U.S. savers have lost $140 billion in purchasing power to inflation over the 12 months ending in March, according to a Money-Rates study released last month.

A Hidden Tax

Effectively, the government through the Federal Reserve has placed a hidden “tax” on those of us who save money. The saver’s hard earned cash is being used by the government to grow the balance sheet of banks across the country.

I was introduced to this idea through a Maura O’Connor, a veteran real estate attorney speaking at an event in Oakland, CA.

The tax takes money from the savers and investors and transfers it to the banks. Banks use the deposits in savings accounts, CD’s, and money market accounts to borrow 10 times the deposited amount from the Federal Reserve at 0.25%. The banks then invest that money in US Treasuries and earn 3% on the larger amount.

Would you pay $3.50 to earn $26.50? I sure would! And the banks will too!

Real Estate As An Alternative

While we could debate the ethical nature of this scenario, we won’t do that here. The question for the savers becomes: Are you going to take this?

If you have been keeping your money “safe” in a CD, money market, or savings account, you have alternatives to the low return you are getting on your cash. There are a variety of real estate investments that you could own that would generate a higher return than what you are getting now. They also are a better hedge against inflation than cash.

If you are interested, please call me at (925) 385-8798.

P.S. You can invest money in IRA accounts as well.

3D Architectural Rendering of Vidrio

The Contra Costa Times is reporting Construction to resume on stalled Pittsburg project.

After 18 months of inactivity, construction on a housing and retail project regarded as the centerpiece of Pittsburg’s downtown revitalization could resume next week.

Vidrio as the project was named by developer A.F. Evans has been under construction since 2006. The developer defaulted on the original loan from Union Bank in August of 2008.

A.F. Evans filed Chapter 11 bankruptcy protection in March of 2009. A.F. Evans also developed 901 Jefferson Street in Oakland which went to foreclosure and was bought by Madison Park Financial Co.

The City of Pittsburg began negotiating with Union Bank to buy the debt in October of 2009. Escrow for the sale of the debt was just closed last week.

The Contra Costa Times article says that the City of Pittsburg has already spent $26 million towards this project.

The article indicates that the 75 units are listed for sale at an average price of $152,230 per unit, for a gross sale value of $11.4 million. Less than half the cost of the city’s investment.

This looks to be a costly investment for the City of Pittsburg.

This is a post I began writing in June 2009. I thought it still had merit and should be shared.

Social Security’s Inadequacy

According to the 2009 Social Security Trustees’ report if you plan to live for the next 19 years, your Social Security benefits will be dependent on the income tax deduction from those in the workforce. Projected demand for Social Security benefits between now and 2016 will surpass any excess and begin to deplete the “trust” account held on the Treasury Department’s books.

The trust fund will be totally depleted by the year 2037 according to projections. This will require a decrease in Social Security Benefits or an increase in taxes to cover this shortfall.

Bruce Bartlett, a former Treasury Department economist, writes in The 81% Tax Increase:

Most Americans believe that the Social Security trust fund contains a pot of money that is sitting somewhere earning interest to pay their benefits when they retire. On paper this is true; somewhere in a Treasury Department ledger there are $2.4 trillion worth of assets labeled “Social Security trust fund.”

The problem is that by law 100% of these “assets” are invested in Treasury securities. Therefore, the trust fund does not have any actual resources with which to pay Social Security benefits. It’s as if you wrote an IOU to yourself; no matter how large the IOU is it doesn’t increase your net worth.

This fact is documented in the budget, which says on page 345: “The existence of large trust fund balances … does not, by itself, increase the government’s ability to pay benefits. Put differently, these trust fund balances are assets of the program agencies and corresponding liabilities of the Treasury, netting to zero for the government as a whole.”

Prudently including Social Security benefits should be a part of a plan to achieve Retirement Freedom. However, to rely solely upon Social Security will most likely produce a pauper’s retirement.

Real Estate Investments for Retirement Income

There is hope to counteract the pauper’s fate provided by Social Security. Purchasing real estate in growth regions, using prudent leverage can produce solid retirement income.

The Benefit of Control

Social Security’s weakness for an investor is the lack of control. The average U.S. citizen does not have control over how the funds are invested or whether they are invested at all.

Investment property offers an investor much more control. An investor can choose where to invest, what type of property to buy, whether to use debt or not, how a property is managed, and when to pull money out of the investment.

The Benefit of Capital Growth

Social Security benefits are similar to the returns of annuity. When an investor buys an annuity they plunk down a pile of cash and expect to earn a specified payment over time. The amount of return is solely dependent on how much cash is invested up front.

Social Security pays retirees the same way. Retiree benefits are dependent upon their contributions during their working years.

Real estate investing offers the ability for investment growth. An investor may start with $50,000 initially invested. Over time with prudent choices based on prudent advice, $50,000 may grow to $200,000. Invested wisely $200,000 can generate a lot more income than $50,000.

The Benefit of Tax Shelter

Social Security benefits may be taxable depending on retirement income.

Real estate investors use favorable tax laws to provide greater after tax cash flow from their investments and other sources of  income. More cash flow allows greater freedom to pursue their dream retirement.

I would love to hear your thoughts on social security and real estate. Which do you think is better?

If your ready to free yourself from dependency on the government’s handout for your retirement goals, contact us for your free consultation.