Archive for the ‘Real Estate’ Category
I got a message from a physician client of mine who wanted me to evaluate a real estate deal that was supposed to give him a 32x Return in 10 years, tax free. Note that the promised return is not 32%, but 32x, meaning that if one were to put in $400k today, he would get back $12.8mm in ten years. The proprietors of the deal explained it in a 90-minute long video message that was uploaded to a popular video platform. The proprietors further shared that there were only very limited spots left for investors to take advantage of this awesome opportunity.
Let’s ignore the “tax free” claim for now, since that usually has to do with investments in qualified opportunity zones, about which I have previously written an article. For now, I am primarily interested in thinking through the economic possibility of achieving the 32x return. The video explains that they double their money every two years by investing in multifamily units. (Buy and renovate for $400k, then sell for $800k.) By compounding their income over five two-year periods, or ten years, they achieve a 32x return. It’s simple as that. The proprietors have done it themselves, and the wife of one of them is a mathematician – she has confirmed the compounding formula: 2^5 = 32.
Now I am not a real estate expert, but this level of returns does not make economic sense to me. Here is how I explained my misgivings to my client.
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Today I had a conversation with a friend of mine who recently participated in a conference with the mayor of Washington, DC regarding the dire state of the office rental market. The bottom line is that people love working from home, they are not coming back to the office after the Pandemic as initially expected. This means that companies and even government branches are not renewing their office space leases. The ones that do need a much smaller footprint. Developers are considering converting office spaces into residential homes, but that’s easier said than done since office buildings are constructed differently.
On top of that, most real estate companies use debt financing and since last year, the financing cost has skyrocketed, thanks to the Fed. They are really caught between a rock and a hard place.
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How to Pay Off Debts
Posted on: September 12, 2013
A client I visited shared with me that he is very burdened by his debts. He has a primary mortgage, a secondary mortgage and a personal loan. He asked me whether he should pay off the debts and in what sequence. That’s a fantastic question.
Here are the partial details of his debts (I’ve concealed the amounts).
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The primary is a 15 year fixed rate mortgage with a rate of 3%.
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The secondary is a 5 year ARM with a current rate of 2.5%.
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The personal loan has a rate of 5%.
Here are my recommendations to him.
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The Agony of The Landlord
Posted on: September 5, 2013
A physician client of mine called me the other day and asked my advice as to whether she should evict the tenant currently residing in her condo. This is advice I hate to give. Let me explain.The tenant is a single mom with two young children, whose estranged husband just stopped paying child support because he is officially unemployed, but the tenant believes he is getting paid under the table.
My heart goes out to this tenant, I would never want her and her children to become homeless. But my head tells me that if my client lets her stay for free, she would most likely wind up staying for free forever and my client’s rental property would become a toxic asset.
So what should I advise my client?
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I met with three prospective clients on my trip to Los Angeles last week. I did a quick financial review with each one of them and gathered some lessons learned as well.
Prospective client A is a physician in his late 60s. He has already reached retirement age but he needs to keep working since he has less than $1mm saved for his retirement.
All that money is in tax deferred accounts, meaning far less than $1mm is available for his retirement. This is NOT retirement security.
Client A is not an extravagant person, so why is he in such dire straits?
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New York Stock Exchange
The S&P 500 closed the first quarter at a record high. Should that worry investors? The short answer is, No.
When the market was 30% below the high three years ago, I did some research. I categorized all market conditions into:
1. Breaking a new high.
2. Less than 10% below historical high.
3. Between 10% and 20% below historical high.
4. Between 20% and 30% below historical high.
5. Between 30% and 40% below historical high.
6. More than 40% below historical high.
Then I calculated the one year forward returns of the six conditions.
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House for sale
Recently, a client called to tell me that he had finally got the big boulder off his back, and it was such a relief for him.
The “big boulder” he referred to was his big house, with a swimming pool and a tennis court. The house had been costing him $100k a year in property taxes and upkeep, more than 50% of my client’s retirement income. No wonder he called it a big boulder on his back.
He bought the house 25 years ago for $2.2mm, and he just sold it for $2.1mm. After all the costs associated with selling the house, he took home $2mm and change.
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House for sale
Last week, my wife found another fabulous piece of real estate to invest in. It is a two bedroom/one bath bungalow. It is a 10-minute walk from a metro (subway) station and 15-minute walk from lots of amenities.
It is a short sale; the bank-approved asking price is only $155k. The land is about 0.3 acres adjacent to a park and is worth more than the entire asking price.
It is a very interesting investment decision for us. Let me list the pros and cons.
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Tax planning tips
[Guest Post By Cal Klausner] Charitable contributions should be timed so as to obtain the maximum tax benefits, either in 2012 or 2013. If a taxpayer plans to make a charitable contribution in 2013, he should consider making it this year instead if speeding up the deduction would produce an overall tax saving, e.g., because the taxpayer will be in a higher marginal tax bracket in 2012 than in 2013.
On the other hand, a taxpayer who expects to be in a higher bracket in 2013 should consider deferring a contribution until that year. This task is more difficult than in prior years because of uncertainty over whether rates will rise next year under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) sunset.
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Last week, the Fed announced another round of quantitative easing (QE3).
This time around, they plan to buy $40 billion worth of mortgage-backed securities with created money until the employment picture improves. Compared to QE1 and QE2, QE3 is open-ended.
How does this affect your personal finances?
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Commercial property investment
For investors who can’t stomach the volatility of real estate investment trusts (REITs), but also don’t want to get their hands dirty, there is the middle way in real estate investment, namely through a private partnership.
A real estate investment private partnership (REIPP) is a pool of investors’ money that is invested in commercial or residential properties. As an investor, you can contribute capital as a limited partner and let the general partner do all the dirty work. Sounds like the best of both worlds, doesn’t it?
It is emphatically not.
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House for sale
My wife and I own a couple of rental properties, so I feel like I am qualified to give my 2 cents worth on another way of investing in real estate – owning rental properties directly.
Now let me be clear: owning rental properties is a business; it is no longer an arm’s-length investment. It is great for some people, people who are hands-on and disciplined, but it could be a disaster for others.
When we posted a notice to rent out our townhouse, the first person to answer was a single mother with three kids. My wife checked her credit – it was bad. When my wife said no to her, she could not hear the pleas of my bleeding heart: Rent it to her! She has three kids to take care of! We’ll waive her rent if she can’t pay!
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Judge’s gavel
Why do I need an expensive lawyer to do estate planning for me? Why can’t I just write my will on a piece of paper with two people as witnesses?
This is a question I got from a woman who owns 11 properties in 5 different states. Here is how I explained it to her.
It’s a bad idea to write your own will. Each state has its own descent and distribution law that governs the distribution of the estate of the deceased.
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Crises and opportunities
Posted on: August 13, 2012
Is Refinancing Right for You?
Do you see any evidence of superior investment strategy for the last five years? Seems all is correlated and all is going nowhere.
This is a question I got from a reader of my newsletter.
I hate to be impolite, but I think he is focusing on the wrong thing. Yes indeed, over the last five years, the market has given us one disappointment after another – first the financial crisis in the US and now Europe.
There is a silver lining in all of these crises, though. Mortgage rates are at an all-time low. Five years ago today, the 30-year mortgage rate was 6.75%; now it is 3.5%. If you have a $400k mortgage on your house, do you know how much you save if you refinance?
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The best investment I’ve ever made
Posted on: August 8, 2012
Person holding house
I got my power bill yesterday for the first time after moving into my new house. I instantly felt half a million dollars richer.
When we purchased the new house, one of the biggest concerns we had was the utility bill. The previous owners showed us that they spent $1,000 on power and gas each month and that number was pretty constant year round. The house was in good shape, but the windows had not been replaced for 20 years and were leaky.
So the first thing we did after settlement was to replace all the windows.
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Lease agreement
I wrote about our rental property investment six months ago. We purchased the property for $180k, and we are earning a monthly rent of $1,750. That’s a great investment, with cash-on-cash return of 8% after taxes and HOA fees.
All was hunky dory until recently when we got a call from our tenant, who told us he lost his job and he was only able to scrape together $875 to pay for half of the rent.
We told him we appreciated his effort, and we hoped he would get another job soon. Deep down, we are really not sure how long our rental property will be nonperforming.
The Investment Scientist 