Thursday, November 1, 2007

If I Had Some Cash . . .

I'm frequently asked the question: "If you had some money now, what type of real estate investment would you buy?" My honest answer to that is, "I don't know." But we can explore some of the options:

These only make sense if you can break even or cash flow as rentals. I would not buy one to flip (I don't mean the contract. I use the looser definition of buying and selling it after it's fixed up.) I say this because it's darn near impossible to sell anything right now unless the price is low enough. If you can get something under current market (or even what you predict the market will be in six months), fix it up, and then sell it for a profit, it would make sense. But it's a gamble, unless you've been doing it for years, so you'd need plenty of reserves.

I firmly believe, as I'm sure most of you do, that this is the buy and hold market. So for that foreclosure to make sense, you need to rent it out for a long period of time and, hopefully, cover your expenses. That still eliminates most of Southern California (even the high desert). This may change by the time the "market correction" is over. You may want to look in other states. Remember, for all those seemingly inexpensive investments in the $100K's, the rents are relative to the area and value of the home.

Also, I haven't tried to obtain a loan lately, but I could imagine that for investors who rely on stated income and have many properties in their name, it may prove to be more difficult and expensive than it used to be. Even when they were handing out loans like candy, when we had 10 properties, most lenders wouldn't touch us--and our credit rating was always in the mid 700's.

Commercial Properties
I don't need to say anything about apartments--just read some of my prior posts.

I would look carefully at some retail NNN (known at triple nets) because the tenants pay a surcharge per square foot for insurance, taxes, and, maybe exterior upkeep. It varies per lease. I like the thought of NNN's because there are no recurring expenses (except maybe some large structural, like roof, etc.) for the landlord. I have never owned a retail strip mall, so I can't speak from experience. If any of you have, let me know what you think.

There are a variety of other NNN and commercial properties, like restaurants with 30-year leases, regional malls, day care centers, and many more types (just go to and check it out--remember most of the numbers on these listings are bogus). Not all retail malls are NNN, so you need to be thorough in your due diligence.

Tenants-In-Common (TIC)
Tenant-In-Common is one way to hold title on a property. There are a ton of stock brokers who sell these. They get a bunch of different investors together to buy properties worth millions or tens of millions or hundreds of millions of dollars. Each investor forms their own LLC, and then they all buy the investment as tenants-in-common. Holding title this way protects each party from being impacted by the other. So, if one investor on title gets sued or dies or sells their share of the property, it shouldn't effect the others. Also, most of these qualify as 1031 exchanges.

This is supposed to be a completely passive investment that has been analyzed up the ying yang by the brokerage firm. Cash flow is estimated. On the site that I use, they have current offerings of between 5-7% return on your investments--with one at 8%. Last year, the assisted living facilities were popular, offering a 10% return. Plus, you share in the appreciation, if any, once it's sold.

With the profits that we thought we'd get from our apartments, we were almost certain that we would get into a TIC. I even called references who gave their properties and returns good reviews. Let me know if you've been involved in a TIC.

The one thing that has always bothered me, though, are the costs. Yes, you're total investment is one stated amount, like $250,000, and that's what your percent of return is based upon. However, some of that money is used at expenses to pay the stock broker, offering company, attorneys, you name it. The rumor is that these properties are sold OVER market and recouping the costs at the time of sale (the hold time is estimated during the purchase---usually 5-7 years, but can vary greatly) may not happen, so you can end up losing a part of your investment. I never quite came to terms with this. It doesn't matter now that I don't have this option.

Pay off the mortgage on a rental
Doing this would not qualify as a 1031 exchange, so, if you're selling something, you may want to check how much the taxes will hurt. However, if you have a solid property that has been performing well for a number of years, the cash flow from paying off your mortgage may be an easy way to make money.

My experience, from working on the numbers of my own properties, is that the cash on cash is relatively low compared to a TIC. Also, you lose the tax advantage of claiming mortgage interest as a deduction. Plus, you tie up all your money in a property or two, find a great investment, and then have to take out a loan again. Costly. After being burned on apartments, having a secure investment like this is attractive, though. If you do this in California, you want to remember to buy some good earthquake insurance.

Pay off the mortgage on my primary residence
The disadvantages of this are the same as paying off a rental, plus you lose the tax advantages to owning non-owner occupied properties.

Buying rentals in cash
This may glean you a higher rate of return than paying off your mortgage. It's all in the numbers. Plus, you would have more tax advantages owning rentals free and clear than your primary residence. The disadvantage would be finding a property manager in one or more locations, if you do not own property there already. And you all know how much I like property managers.

Maybe I should conduct a poll to see which option you would vote for. Until then, please feel free to post comments on your choice(s). My only request (besides not being offensive) is that you write it in English, so that I can read it before I post it (don't ask!).