REAL ESTATE AS AN INVESTMENT

Does This Look Like a Drought? Lush and green as my back yard looks, we are in the middle of the worst drought I have seen in this part of the country. The humidity is often so high here that we seldom have to water. Not this way now. I have to water somewhere virtually every day. It's around 100 degrees and the humidity is 50% as opposed to high 90's and 70+% in normal times. We are about 20 inches below normal rainfall for the first six months of the year and we won't be able to have our normal fireworks display because of fire danger. Fires have already destroyed several thousand acres of timber in this area.


What About Our Investments? I haven't talked much about investments in recent months, in fact, I have been so busy with life that I haven't posted much about anything. Hopefully, I can get at least three or four posts per month for the rest of the year. I am still favoring cash flow over depending on capital gains from our investments but the main question is where are we going to get that cash flow in the future. Many of my clients are wary of the stock market and are depending on withdrawal of capital to fund their life style. This increases the odds that you will run out of money before you run out of life. I am in a similar situation myself but I'm determined to improve it in the future. The biggest risk I see in the stock market is that much of the recent gains have been fueled by the federal reserves' loose money policy which is scheduled to tighten in the near future. This means that we are looking at the potential for inflation which is always a problem for the stock market. If you don't have the stomach for another correction, better lighten up in this area. That doesn't mean get out altogether because I don't claim 100% accuracy when it comes to something as in-exact as an economic projection.

Fixed Income Investments? Bonds are unlikely to provide a reasonable return on investment in the current low interest rate environment. If you buy longer-maturity bonds you will get a higher interest rate but you run the risk of losing market value when rates increase.

Which Brings Us To Real Estate. I bet there are many out there, who have seen the value of their homes and investment properties drop 20-40%, and think I am crazy. I won't go into tremendous detail but here are some reasons why I think investment in single-family homes is a wise move at present.

1. Prices Are Down. When the market was hot and heavy I received many calls from investors who wanted to get into the market. Prices were so high that I was unable to find properties that I would project to bring a decent return. If you were using me as a real estate advisor at that time, the best deals were the ones we didn't make.

2. The Rental Market is Strong. During the recent bubble, anyone who could fog a mirror could buy a home; therefore, we had a challenging rental market. You have heard me say many times that it is tenants who drive the investment property market. Vacancy rates in Denver, Colorado are approaching 5%. This means that the supply of qualified tenants exceeds the supply of well cared-for properties and excellent potential for higher rental rates in the future.

3. There Are Still Tax Advantages to Real Estate Investments. Not only can you get decent cash flow in this market, you won't have to pay tax on all of it. You can delay taxation until you sell the property. Even then, you will be taxed at a lower capital gains rate. If you decide to sell and buy another property, there are a number of techniques to allow you to defer, or even avoid, taxation. I few years ago, one of my clients sold a property and carried back a note for part of the proceeds. Not only did this allow him to earn interest on money that would have gone for taxes, he now owns a mortgage that pays him 8%. This is an excellent return in this market. It is my opinion that the note is worth more than the principal due because of this high yield.

4. There is A Strong Potential For a Rebound In Values. The population is increasing and there are few new properties being built. This makes it highly likely that properties will increase in value when the current inventory of unsold homes is absorbed. While there is no way to accurately predict when this will happen, property owners will be paid to wait. Current cash flow is higher now than at any time in the past few years and there is a potential for even higher rents in the future. Qualified borrowers can borrow at favorable rates and tenants will make the payments on your behalf.

A Few Cautionary Notes. Real estate investment is not for the faint of heart. Before buying a property, make sure you have a liquidity reserve to carry you through unanticipated vacancy or maintenance expense. Make sure you have a qualified management company to lower your risk of tenant problems. Don't look for very low down financing. This is a two edged sword and can increase your risk of disaster. Mortgage payments must be made whether or not your tenant pays the rent or you have unanticipated expense.

I'm In Town For Much Of July. If you want to discuss ways to add real estate to your portfolio, give me a call. My cell phone is 303-902-3940 or you can call Susan at Westmont Companies 303-996-2010. She always knows how to find me.