664: Stay the Course!

SHOW NOTES FOR EPISODE 664: STAY THE COURSE!

In these turbulent times, it is comforting to know that real estate is still the best place for your investment dollar and the best strategy to grow wealth!  In today’s podcast, Bill shares the specific reasons why real estate remains the number one investment strategy in both good and bad times for those who stay in the game!

Introduction

In these turbulent times it is good to be in the game, not on the sidelines just watching, not immersed in research, or glued to the latest depressing news. If you are wondering what others are going to do or how you should respond, you will be following the market. If you want to make good real estate investment decisions, you must continue to stay in the game.

There is not much occurring in the world that is, or could, affect the real estate industry that it can be overwhelming. Don’t let it get to you. There isn’t much you can personally do to help the Ukrainian war situation, or the high inflation in Europe and the U.S., the cold that will be experienced in Europe due to fallout from the war, etc.  We have mid-term elections coming that will certainly cause the negative campaign rhetoric to be ratcheted up a few notches – enough to make your head spin.

Through it all, you must remain focused — on you, your family, faith and what is truly important in that regard. The world won’t stop if you put your life on pause. It will, in fact, continue to spin ever faster during these uncertain times as we move into winter and all that it will brings. Inflation and recession are the proverbial elephant in the room right now that may be causing many of us some financial discomfort, but don’t let that stop you from assessing what your situation is as a real estate investor — if you were to buy or sell a property, invest in a note or syndication, or even examine new asset classes.  Nor the relief you might feel if you were able to sell a property now.  In either case, if you opt to sit on the sideline and watch, you might find yourself frozen because you aren’t keeping up with the many adjustments that are impacting the real estate market today and as they occur.

I can’t even give you the large number of the investors I have interviewed over the years who regretted not investing during the Great Recession.  Conversely, I have known another large number of investors I have interview who did take the leap and saw tremendous results that changed the course of their lives – for the better!

There is definitely a real estate change in the air, based on many conversations I’m having daily with investors. It appears that as list prices begin to moderate, investing in in real estate is attracting attention and has some opportunities for income-producing potential in the making.

When done the right way, real estate investing can provide great returns through rental income, tax advantages, and the capital appreciation gained from buying below the market value. Just look at the advantages:

• Stability: Real estate investments provide cash flow and can be a hedge against inflation.
• Return on Investment: Real estate is a market where you can buy low and sell high.
• Degree of Risk: Actively managed real estate provides better returns and lower risk than stock market investing.
• Tax Advantages: Real estate investing provides unique tax advantages.
• Leverage: Real estate investors can use leverage to build wealth.

Every year, “Gallup” surveys Americans to determine their choice for the best long-term investment. Respondents are given a choice between real estate, stocks, gold, and savings accounts. Again, real estate tops the list.

Other benefits include:

Real Estate is Depreciable.

Yes, you can depreciate residential real estate over 27.5 years and commercial real estate over 39 years. 26 USC Section 179 allows for the depreciation of real estate over the life of the asset class, and in the case of real estate, you can take a $500,000 residential property and depreciate it over 27.5 years. This means that you can deduct $18,181.81 each year in depreciation.

Real Estate Capital Gains Can Be Deferred.

Under Section 1031 of the Tax Code, if you hold a property for the requisite holding period, which is not defined in the  Tax Code, you can sell that property via a like-kind-exchange using an intermediary to hold the funds while you identify a new property or properties within 45 days and close on those identified targets within 180 days. This allows you to defer capital gains taxation and forebear depreciation recapture while buying larger and, hopefully, better cash flowing real estate assets. Thus, this tax mechanism allows the investor to take their profits and leverage those into more assets thereby growing the real estate portfolio in a tax efficient manner.

Cost Segregation.

Depreciation of the real property can be accelerated by using cost segregation studies to break the assets into its various parts that fall under separate classes to allow the individual components to be depreciated over 5,7, or 15 years. This allows the property’s components to be utilized in a tax efficient manner instead of using the 27.5 or 39 year class life of the entire asset. A net result of a cost segregation study is to accelerate the depreciation to allow for more Section 179 depreciation to be taken earlier in the asset’s life.

While more tax nuances can be discussed, these are the tax benefits that high net worth individuals should look into. Additionally, by working with a real estate lawyer who understands the needs of the individual and their goals, tax losses can be carried forward to future years.

Investment properties can provide additional income from a vacation short-term rental, with a seasonal or year-round rental included in the form of a multi-use property or a second rental unit. There are multiple possibilities, including a home with a commercially sized garage/warehouse, residential condos with on-site management, and, my favorite, a commercial/residential location with harbor views.

Investing in real estate means stability. You own a tangible asset, you are generating cash flow income, reaping the tax benefits and you will eventually get a bonus in the equity your property generates.

Owning investment properties gives you tax benefits, and you buy with after-tax dollars instead of pre-tax dollars. Owning a home gives you the opportunity for appreciation over the long run and you will be looking good when you consider the return on your invested dollar. For instance, on a $400,000 home, if you put down 3.5 percent, $14,000, and make $50,000 profit you are getting a $50,000 return on $14,000. Additionally, you get the tax benefits and the emotional return on your investment from the enjoyment of living in your owned home.

This isn’t a time to panic or act out of frustration. Warren Buffet said, “Be fearful when others are greedy, and greedy when others are fearful.” What’s important is that you stay the course!  Study the market, pay attention to the global goings on and how they may affect your local market.  With that, you will be comfortable moving forward… or staying pat. Either way is OK if the decision is made with eyes open and a good understanding of what is happening.

Understand, nobody has the full picture of what is happening, but knowing to the best of your ability is better than sitting back and wondering what just happened and how it might impact things. As always, determine your wants and needs and pursue them with clarity. With that perspective, you will be confident with your decision and whatever you must do.

Get out of the bleachers and onto the sidelines or in the game. It is your life, your future, and your decisions to make. Don’t let others guide you, guide yourself and hold your head high as you do it. Real estate investing is not a spectator sport.  You need to be active and keep moving forward if you expect to see results!

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