Builder Is Constructing REIT for Home Rentals

Investors can buy stakes in malls, apartment towers, timber forests and even cellphone towers through real-estate investment trusts. Now, add to the list: single-family homes transformed into rental properties.

The article goes on to detail that the builder is buying back some of the homes that they originally constructed. The company hopes to benefit from Beezer’s construction background in freshening up the homes and to market the rental properties as “Pre-Owned”.

In January, it was announced that a private equity firm was investing as much as $450 million to pursue single family properties.

I find it interesting that institutional investors are buying single-family rental properties. Obviously, they perceive value in pursuing this strategy.

Do you think it is a wise strategy?

Contact me at (925) 324-8626 to discuss real estate investment strategies. Visit www.maclennaninvestments.com for more information on real estate investment

If so, plan ahead!

The 1031 Exchange Benefits

By using a 1031 exchange investors are able to defer the capital gains tax on a property by exchanging their current property for another property. Both properties must be held for investment or business purposes, they cannot be intended for personal use.

The use of an exchange allows an investor to accumulate more assets before paying taxes on previous gains.

Changes in 1031 Exchanges

1031 exchanges have been around for a long time. Many seasoned real estate investors have used them to defer capital gains taxes on their properties, thus accumulating larger assets. Recently, the IRS is under pressure to generate more revenue and is paying closer attention to all tax issues. 1031 exchanges are no exception to the IRS’ scrutiny.

The 1065 form that is reported to the IRS requests information that wasn’t previously tracked. This information can be a means of triggering an IRS audit. The “Drop and Swap” model of 1031 partnership dissolution is under close scrutiny and may require you to dissolve the entity a year prior to the close of escrow.

Plan Ahead

If you are considering a 1031 Exchange, plan ahead. Depending on your advisors’ counsel, you may need to plan as early as one year prior to the close of escrow.

• Meet with your CPA or tax professional when even considering a potential sale. Your tax professional can help you plan ahead to avoid a disqualification of your exchange and undue scrutiny by the IRS.
• Meet with your estate planner to make sure you end up holding title in the correct entity after acquisition.
• Meet with your exchange accomodator to have them walk you through the timing and procedures that need to be followed.
• Meet with your real estate professional. Let them know what you are planning to do and when you are planning to do it. Let them give you suggestions for maximizing the value of your current property. Let them help you begin to identify a replacement property prior to selling your existing property.

The guidelines and time frames for 1031 exchanges are very tight and inflexible and don’t allow for a change of heart after the fact. Planning ahead in a 1031 exchange can help you avoid mistakes that will force you to pay taxes and incur costly interest and penalties due to hasty, forced decisions.

Here’s a short video of the outside of the property:

Contact me for all of your real estate investment needs at (925) 385-8798. Visit our real estate investment blog for more information about using real estate for retirement.

• Sarasota Florida -12.9%
• Miami, Florida -12.1%
• San Francisco, California 11.1%
• Middlesex County, Massachusetts – 10.6%
• Edison, New Jersey – 10.5%

As well, they reported that the vacancy rate for apartments was just 4.9%. Even cities in the Midwest saw significant price increases.

Market Forces

In a recent article, I shared about a potential wave of foreclosures that is yet to come. Should these foreclosed properties hit the market, pricing on homes should continue lower.

As well, those souls that have lost their homes to foreclosure or via short-sale  may be forced to rent for a period of time. This increased demand for rental properties, would put continuing upward pressure on rents.

These forces lead me to believe that it is a good time to own residential rental real estate.

If you would like more information on how you can augment your retirement with real estate, please contact us. Or call me at (925) 385-8798.

For other articles about investing in real estate, head over to www.maclennaninvestments.com.

The Reuters’ article reports:

Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.

Market pricing is a function of supply and demand. If a large supply of housing hits the market, pricing will will have to fall to a level that demand picks up.

I wrote just yesterday about the lack of current inventory on the market. It will be interesting to see how this plays out in Contra Costa County.

If you are interested in real estate investing, please feel free to visit our website or our blog to get more information about investing. You can call me at (925) 385-8798 to discuss current investments or future plans for investing.

Notice that the number of homes for sale under $300,000 has fallen by 52.6% from last February. Across the entire market the inventory is down 40% from February of 2011.

Now look at a graphic illustrating the months supply of inventory. This metric analyzes the number of active listings divided by the number of homes sold in that month.

In February of 2011, the market would have needed 5 months to clear the inventory of homes under $300,000. This February it would have only taken 1.7 months to clear the market of the inventory of homes under $300,000. This is a 67.2% decrease year-over-year. The entire months supply has decreased by 48% across all markets.

What it All Means

The market is very brisk at the current time. Properties under $300,000 are getting multiple offers. If you are looking to buy, you should be ready with a pre-approval and a competitive offer. If you are an investor, consider making an all cash offer. Many properties are going for at or above market price depending on the area and condition of the property.

One of the reasons I believe this to be the case is that interest rates have remained low. The ability for investors to finance a significant portion of their purchase with low fixed rate financing for 30 years is an incredible opportunity. This type of financing is available for 2-unit, 3-unit, and 4-unit properties as well.

I believe, another reason for the increased demand for investment property is that investors can buy some, not all, properties for below replacement cost. This means that when new homes are built, they will necessarily be more expensive than the investor’s property in order for the contractor to make a profit or break even.

For more information about real estate investment please head over to the Maclennan Investment Group, Inc. website.

If you are interested in buying an investment property in the San Francisco Bay Area, please call me at (925) 385-8798.

Beware of “Successful Rent”

The Apartment Owners Association is warning of a company called Successful Rent run by a lady named Sunny who is scamming rental property owners.

Sunny calls owners who have vacancies and claims she has prospective tenants from out of the country looking for homes. She then sends someone over who fills out the rental application and gives the owner or manager a fake cashier’s check to hold the apartment. She also says that she will run the credit report for the owner for free.

On the day of move-in, she calls the owner and says the tenant found another place and they would like their money back. The owner then writes a check for the deposit amount and a week or two later, gets a letter from their bank saying the original cashier’s check was fraudulent.

For more information about real estate investment call Peter @ (925) 385-8798 or visit http://www.maclennaninvestments.com.

Rainy Day Funds

According to a Wall Street Journal article from 3/9/2012, not at the bank. The national average return for a 4-year CD is 0.89%. Ouch! The article states that I-Bonds issued by the U.S. Treasury should at least keep pace with inflation.

These low yields are acceptable in exchange for liquidity or the ability to access your funds quickly. If this is your “Emergency Fund” (3-6 months of living expenses) or if you are in retirement and need more liquidity, it is acceptable to trade returns for the ability to access cash.

Retirement Funds

However, having CD’s or low yielding bonds as a part of a wealth building strategy is a risky proposition. Many investors chose to have a CD ladder. But maturing CD’s will have to be replaced with CD’s with a much lower rate of return.

Money market accounts are also returning a paltry 0.23% according to the WSJ.

In my article The Hidden Tax on Savers, I laid out how government policy is “taxing” investors using CD’s and Money Market accounts. Low interest rates are a means to “re-inflate” the balance sheets of the large banks.

If you are trying to accumulate wealth or build up your retirement portfolio, choosing an investment that is returning less than the rate of inflation is a losing proposition. If you are paddling up-stream at the same rate as the water is flowing down stream, you won’t make any progress. If inflation is higher than your rate of return, you are not making progress, but actually going backwards.

Alternatives Return Sources

You should seek an alternative investment that generally keeps pace with inflation. You don’t want to have to pay fees to store or hold the investment safely.  It would also be a huge benefit if your investment offered tax advantages.

Hmm… Tax advantages, cash flow, and generally keeps pace with inflation. Real estate seems to fit that bill.

Contact me today to see if we can put together a strategy to beef up your retirement accumulation and returns at (925) 385-8798.

Buffett realizes that current home prices combined with the low interest rate financing environment provide a unique buying opportunity. Investors who buy now, rent out the unit for more than the carrying costs, and hold their investment for the long term are likely to have a great investment.

An investor with $50,000 could buy a $200,000 home here in Contra Costa County that has 3 bedrooms and 2 baths. Assume the interest rate for this 30-year mortgage is 5.00%. The payment on a $150,000 mortgage at 5.0% is $805 per month or about $9,700 per year.

Taxes, insurance, and maintenance will add about $500 per month. This investor chooses to have a property manager for the property which will run another $150 per month. Total expenses for the property will be $650 per month or $7,800 per year. Expenses plus the principal and interest payments should total $17,500 per year.

A 3-bedroom home in Concord, CA should rent for at least $1,650 per month. The total income will be about $19,800. The property will provide the investor with about $185 per month or $2,220 this is a return of 4.44% per year.

If the property never goes up in value through the life of the mortgage, and the rent never changes the investor will also be paying down the mortgage. The investor will have turned a $50,000 investment into $185 per month and a $200,000 value. This computes to a return of almost 7.25% per year.

Do you think housing prices will stay flat for 30 years? Do you think rents will be flat for 30 years? If rents and housing prices go up, the return above will increase.

Do you expect your stock market investment to perform this well over the next 30 years? If not, give me a call at (925) 385-8798.