San Francisco Real Estate - Residential

Is It Too Late for Real Estate?

I've been investing in real estate for 24 years. I've seen the ups and downs of the market and I've made some bad investments, but most of them have turned out great – as long as I was prepared to stay through the bad times.

There's been a lot of talk lately about the real estate bubble bursting. What if real estate values go down where you live? In today's email, I'm going to cover three possible strategies for a real estate downturn.

Strategy #1: Don't Sell.

How serious is the problem really? Let's say that the home you live in, the property you are renting out 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. Historically, in the bigger picture, a real estate market will ALWAYS come back.

Of course, this sounds really simplistic. Don't sell. Wouldn't it be nice if everything was that simple? Maybe it really is, though. If you've followed the Tax Loopholes strategies for making sure you have enough cash for your debt (as outlined in The Insider's Guide to Making Money in Real Estate and The Insider's Guide to Real Estate Investing Loopholes.) A lot of people forget that when the emotions run high though.

In the late 1980's and early 1990's, the real estate market really started crashing in Phoenix. In 1995, I got a new tax client. She was a real estate broker in Phoenix. The market was recovering well by that time in Phoenix. But, the broker said she'd never own real estate investment property again. She said she'd lost a ton of money in the downturn. Her story, as it unfolded, was that she owned a number of single family residences that were rented for a positive cash flow. The market turned down and suddenly she was upside down on some of the houses. She panicked and sold all of them. In some cases, she needed to actually come up with money to close the deal.

The part that I didn't understand was why she felt the need to sell. The properties had a positive cash flow. By selling, she locked in the loss. At that point, someone bought the properties and waited out the downturn to take advantage of the upswing. Why couldn't she have done the same thing? She was afraid that the market would get worse. She was afraid that her tenants might move out and even though there are generally more renters when a market turns down, she was afraid she couldn't get more tenants. Basically, she was afraid and made an emotional decision.

The market has been running hot in many areas and actually over-heated in other markets. Phoenix is one of those markets. My husband and I are putting more cash away in case the market turns down and we need to wait a little bit for it to settle. We also want to make sure we have plenty of options when the deals start showing up. But, we are not panicking and selling. If we sell, it's part of a well-thought-out plan.

Strategy #2: Run Your Investments Like a Business.

I'm going to talk about some strategies that are worst case only. Remember that real estate is nothing more than a product. If you're good at a business and know how to thoroughly research a product and its market, you can sell toasters or you can sell a house. It's all the same. Of course, not too many people rent toasters and toasters don't appreciate and that's why real estate is such an easy business for so many people to jump into. That's also why there are so many catastrophic failures. It's too easy to make money in real estate, if the market is going hot, even if the investor does everything wrong. They have forgotten (or never knew) the fundamentals of business.

One of the fundamentals of business is to look for a way to create more value in what you're selling. Remember if you're renting a property, lease optioning it, doing a rent to own or straight out selling – regardless of what you're doing, you're selling something. And, if no one is buying (and in this sense, it includes renting as well) ask yourself why? Is there a way to add more value by making it more desirable for the buyer/renter? Some ideas might include changing the property, adding additional features that no one else has or making more favorable terms for a potential buyer.

One more comment on the people who say the end is coming for real estate. In a lot of cases, the doomsayers who happen to have money as well, are people who've gotten lucky. They're now afraid that they can never recreate that wealth and so they're just plain afraid of everything.

They realize, at some level, they had nothing to do with the wealth they've gotten and so they're afraid they will lose it. Having strong business skills means you have the ability to look at any market in any climate and figure out what to do next, without panicking.

Strategy #3 Keep Your Eyes On the Real Goal.

No matter what type of business or investments you have, you need to have fundamental skills. That's what Strategy #2 was all about.

Face it, I'm a CPA and Tax Strategist. For me, one of the biggest benefits of investing in real estate is all the great loopholes that you get. And, you'll get those loopholes no matter what happens with the market. Of course, I don't want you to do anything just for the write-offs. You have to make money to, at least in the long run.

Are you sure you're getting all the tax loopholes for your investments? How about your business structures – are they set up correctly and are you operating them in the best way possible? And, probably the biggest problem of all facing real estate investors, are you accounting for your real estate correctly? If you don't do the accounting right, you're going to miss the tax write offs.

It's possible to take advantage of just one of these strategies, but realistically, you need to have all parts of the Tax Loophole's Real Estate Tax Loopholes Package to take advantage of everything that makes up a strong real estate investment strategy.

- Diane Kennedy

* Visit her website for more information.

posted by SFResidence.com @ 8:28 AM