Norada Real Estate Investments

The Investing Pyramid

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There are three major areas when it comes to real estate investing.  Each of these can be seen as the corner of a triangle as shown here.

It's important to understand these three major areas and the relationship among them.

The first corner of real estate investing is called creating cash. This is where you use real estate to generate chunks of cash or regular cash flow from your income property.

Chunks of cash represent the type of profit made when assigning a contract to another investor or fixing and flipping a property for a larger profit. Depending on the price point of the properties you’re assigning or flipping, you can earn some good money in a relatively short period of time. This often makes for great supplementary income.

In fact, some investors make a living doing nothing more than using real estate to create chunks of cash. Creating cash in this manner is great, but it rarely leads to true wealth; that is, building up your net worth.

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Understanding the Tax Advantages of Depreciation

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There's no doubt about it – one of the greatest benefits of real estate investment are the tax benefits the investor receives!  It's entirely legal to shelter income and defer capital gains.  It's entirely legal to minimize taxation and maximize the money the investor keeps on an after-tax basis.

The concept of depreciation (also known as cost recovery) operates on the assumption that physical assets lose an equal amount of value each year due to wear and tear. Another term for this is “non-cash expense.”  In other words, it doesn't really take any cash out of the investor's pocket.  However, it's treated like an expense or deduction when adding up your income.

And the investor gets a great result from this concept – it decreases taxable income and, as a result, lets the investor shelter positive cash flow from taxation. In other words, depreciation (cost recovery) lowers income taxes for the current year and defers them to a later date.

Keep in mind that cost recovery or depreciation does not eliminate income taxes. In technical terms, an annual depreciation deduction is figured on a reduction in basis of the property. This is calculated as the investor’s original cost in the property plus capital improvements. This is then recaptured (added to the investor’s taxable profit) in full and taxed upon disposition or sale.

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What Determines the Market?

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Most people think of the real estate market as something that's measured like the stock market—bearish or bullish. In real estate, the common expressions for a bull market are “up,” “strong,” “good,” “hot,” and “seller's.” A bearish market is described as “soft,” “bad,” “down,” or “buyer's.” On a daily basis, you'll hear the media use these expressions to describe the real estate market based on facts and figures, most of which are confusing to the average investor.

Let's discuss each of the categories for the numbers you may be hearing and see how they affect the market and, more importantly, your investing strategies.

Most people think of the real estate market as something that's measured like the stock market — bearish or bullish. In real estate, the common expressions for a bull market are “up,” “strong,” “good,” “hot,” and “seller’s.” A bearish market is described as “soft,” “bad,” “down,” or “buyer’s.” On a daily basis, you'll hear the media use these expressions to describe the real estate market based on facts and figures, most of which are confusing to the average investor. Let's discuss each of the categories for the numbers you may be hearing and see how they affect the market and, more importantly, your investing strategies.

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Wealth Protection for Real Estate Investors

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We live in a “lawsuit happy” society.  Attorneys advertise on billboards with slogans such as “Have You Been Injured?  You May be Entitled to a Cash Award!” Nobody wants to accept responsibility for their own actions.  Everybody is a victim.

It's sad but true… when you build wealth and get rich, you become a target of lawyers, the IRS and everyone that has less than you.  It's not what you make, it's what you keep!  But how do you keep it in today's lawsuit-crazy world?

I became involved in wealth protection around 1990. Many of my clients were real estate investors that were running from creditors after the real estate and stock market crashes in the late 1980s. They came to me for help in holding off the creditors, foreclosures and lawsuits. Unable to recover financially, many of them lost all of their assets and filed for bankruptcy protection.

The clients that made it through the crunch taught me a thing or two about financial survival. They were smart enough to arrange their business affairs in case of a crash. Nobody thinks about bankruptcy, business failure, lawsuits and financial distress when times are good. However, as you will discover in this report, it is the most important time to think about it! You must have a plan for your wealth or you will be destined to fail at this game we call “wealth preservation.”

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U.S. Housing Market Intelligence Report (June 2011)

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Categories are graded from A thru F:

Economic Growth: D+
Trends were mixed this month, as a few metrics ticked up while the majority ticked down, resulting in a drop from C- last month to D+ this month for overall economic growth.  The employment market improved once again this month, (albeit at a less than stellar pace) and Y-O-Y employment growth has now been positive for nine consecutive months.

Payrolls expanded by 54,000 in May, the smallest gain since September 2010 when 29,000 jobs were lost, while the unemployment rate increased marginally from 9% to 9.1%.  The government continues to slash jobs (29,000 this month), and has now eliminated roughly 850,000 jobs over the last 12 months.  In addition, the average length of unemployment increased to 39.7 weeks (a new record high), and the labor force percentage of those unemployed over 27 weeks rose to 4%.  While still down Y-O-Y, mass layoffs have been trending up over the last several months, rising again this month.

The rate of inflation (both full and core) continued to increase this month, maintaining its steady upward trend that began in Spring/Summer 2010.

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How Much Cash Should You Keep in Reserve?

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There’s no magic formula you can use to determine how much you should keep in reserve in your business as a real estate investor.  When you rent properties, the four key factors to consider are the strength of the local rental market, eviction time line and cost, the age of the property, and the type of neighborhood.

Strength of the Local Rental Market

The lower the vacancy rates in your area, the fewer reserves you’ll need for vacancies. Your local newspaper or your city’s housing department may have articles or statistics on vacancy rates. You should, at a minimum, have enough cash reserves to pay for one month of vacancy per unit, which is only an 8 percent vacancy rate.

Even in a good market, you’ll deal with problem tenants who may stop paying rent and require an eviction. Good tenant screening will help solve this problem. If you plan to rent properties, you should always, without exception, do a rigorous background check on tenants. This includes reviewing credit reports, employment verification, references, and calling current and previous landlords.

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Strategies to Benefit from Inflation

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The only “hedge” against inflation that we are aware of that works consistently over time, in any market, and any economy is real estate. Well bought real estate can stand the scrutiny of analyses, using historic or current data, by investing using borrowed money.

To be clear, the ability of real estate to provide a real hedge against inflation only works if you get a mortgage to acquire the property. If you use your own cash, then this capital will be ravaged by the same inflation, and in a similar manner, as if you had purchased anything else.

Although we argue strenuously that there are other benefits of investing in real estate. However, the greater the proportion of the purchase price that is funded using borrowed money, the greater the inflation-beating benefits to you.

And this is where we come to one of those great benefits of real estate that is easy to miss. Since real estate prices are subject to inflation, by borrowing the purchase price (or a large proportion of it) you can largely beat inflation, and real estate is also about the only asset class against which banks and financial institutions will let you borrow money in the first place. It's a marriage made in heaven!

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Three Strategies for Surviving in a Slow Market

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Don’t buy into all the doom and gloom stories from the media. Learn how to profit from them. Many investors continue to be very successful in the real estate business by following the philosophy, Don’t be afraid to be a “purple snowflake.” So try these strategies. You can make a great deal of money in a down market if you stand out, show that you are unique, and most importantly, set yourself apart from your competition by being “a purple snowflake!”

Strategy #1: Ride the Downturn — Don’t Sell

Yes, don’t sell. Good times or bad, my advice is always to hold on to a property if you can. Your wealth will come from holding on to real estate, not selling it. How serious is the problem really? Let’s say the home you live in, your rental property, or the property you bought as a “fix and flip” goes down in value. Well, if you weren’t planning to sell right away, would it matter? Hang on until the market comes back. Look at the historical records of the property value where you live and that will reassure you. Realty-Trac or First American Data Solutions provides this data, or you can ask your local real estate professional for help. Historically, a real estate market will always come back.

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When Is Cash Better Than Financing?

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Using all cash to purchase investment property may be better than financing in two particular situations.

The first situation is a short-term deal, that is, you intend to sell the property shortly after you buy it (known as “flipping”). When you have the cash to close quickly, you can generally get a larger discount on the price of a property. In this case, financing could delay the transaction long enough to lose an opportunity.

You’ve heard the expression, “money talks, BS walks.” This is particularly true when making an offer to purchase a property through a real estate agent. The real estate agent is more likely to recommend to their client a purchase offer that is not contingent on the investor obtaining bank financing.

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The Great Debate: Flipping versus Holding

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Some investors focus on flipping — that is, turning properties over quickly, rather than keeping them long term. In most cases, holding property generates more long-term wealth for you than flipping. Therefore, you may consider flipping some properties and holding others. On the other hand, you may consider using the flipping strategy a while, and then begin holding rental properties later. The big question is, “When should you hold versus when should you flip?”

The Advantages of Flipping. The main advantage of flipping is that you get your cash out immediately rather than later. For many people, the certainty of getting a paycheck right away is highly appealing. Flipping takes the real estate market per se out of the equation. If you buy a property correctly, whether the market is rising or falling is almost irrelevant, except for how long it will take you to resell the property. (Of course, if you buy cheap in a soft market, you can afford to hold a property longer.)

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Norada Real Estate Investments 30251 Golden Lantern, Suite E-261 Laguna Niguel, CA 92677

(949) 218-6668
(800) 611-3060
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