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Investing Q&A
GENERAL INVESTING AND WEALTH MANAGEMENT:
Q. Can you (The Carlson Company) help me determine what the best option(s) is/are to improve my investment returns?
A. Yes. Since The Carlson Company almost always begins any new client engagement with a comprehensive review and analysis of current assets/holdings (real estate and other assets in all classes) a "picture" of where you currently are and are heading is first clearly determined and summarized. From that point, market alternatives (including real estate, stocks, bonds, etc.) and likely projected investment returns are compared to the current situation. If the data and timing is right, The Carlson Company will assist in executing a "strategic" change to improve returns and overall wealth accumulation.
Q. Is there a simple way to invest and grow my wealth without having to spend a lot of time researching and evaluating the endless array of investment choices in today's market?
A. Sound and effective investing does not need to require a large time commitment by the investor. However, it is imperative trusted advisors in the areas of law, tax, investment/wealth are consulted appropriately. If some basic, time proven, principles are implemented and followed over a period of time all investors can be successful. Effective cash flow management in combination with the power of compounding can lead to significant wealth generation while maintaining low risk. These basic principles can be applied to all investment vehicles (stocks, bonds, real estate, etc.). When these basic principles are followed in conjunction with the appropriate use of financial leverage (primarily through real estate) investment returns and wealth accumulation can magnify.
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INVESTMENT REAL ESTATE SPECIFIC:
Q. Should I use a Real Estate Broker if all I want to do is buy a property?
A. The answer is always YES. First, the Seller is almost always responsible for paying both the Listing and Selling Broker. However, the primary reasons have nothing to do with commissions or the idea of possibly getting a better deal. A competent and experienced Buyer's Agent will assist in finding, screening and analyzing the financial/investment viability of a given property. Experienced Commercial/Investment Real Estate Brokers are "in the market" daily and will have a pulse on values, market buy/sell trends and other pertinent market/property data that can be used to negotiate the best deal possible. Additionally, many Sellers will interpret offers from respected members of the Real Estate Brokerage community as more viable due to higher closing ratios than deals entered into by private investors without representation. Lastly, a Buyer's Agent will do most of the work and will save the investor countless hours of time.
Q. I/We own several rental homes and small multiplexes. I have been told I should sell and buy something larger like an apartment complex or office building. Why should I do this?
A. Assuming the combined equity-capital in these smaller properties is approximately $250,000 (or greater) the answer is simple… There are better investment alternatives and your returns will almost certainly be greater. The lone exception would be for small properties that have some type of "added value" opportunity that had not yet been pursued (new development, change of use, etc.). Otherwise, changes in the market over the last few years clearly suggest that for those with enough equity-capital there are much better alternatives. The Carlson Company has easy to understand proprietary investment analysis tools and reports that will look at pre-tax cash flow, income tax burden, loan/debt impact, and appreciation considerations; and compare what you currently own with what is currently available in the marketplace.
Q. I/We owe nothing (or very little) on our property(s). Should I be using some of this equity to buy an additional or larger property?
A. If the goal is continued growth of equity-capital (increased wealth) the answer is almost always YES. Assuming the continued long-term appreciation of real estate (even at a modest appreciation rate) the greater the total asset value of holdings the greater the potential for growth (regardless of property type). However, it is recommended a financial analysis be completed to fully understand how increased financial leverage will impact cash flow. A high level of financial leverage can potentially cripple cash flow on smaller properties (particularly rental homes and small multiplexes).
Q. I have $50,000 (maybe $100,000) to invest in real estate. What should I buy?
A. This is a more difficult question to answer than it was even 3 or 4 years ago. The fundamental issue and challenge is trying to generate positive, or at the very least, breakeven cash flow. Even with a $50,000 to $100,000 down payment many small residential rental properties (rental homes and small multiplexes) will not generate positive cash flow after the loan payment, taxes, insurance, maintenance and other expenses are paid. Current market rents are just not high enough to offset the run-up in property values (hence purchase prices) over the last few years. It is recommended a pre-purchase financial analysis be completed before any acquisition is made. Unfortunately, property types with higher returns (apartments, office buildings, retail properties and other commercial property types) will almost always require capital-equity of at least $200,000+. Partnering with another small investor is a viable option to consider.
Q. Should I sell what I own and buy a larger property or take cash-out by refinancing and then reinvest the proceeds in an additional property(s)?
A. The answer depends on many factors including property type(s) currently owned, projected future returns of existing property(s) factoring appreciation, value-added opportunities, etc. In order to accurately calculate and compare both strategies a complete financial analysis is required. The Carlson Company, Inc. can assist in clearly answering this question.
Q. Isn't it better to owe nothing on a smaller property than to buy a larger property and be forced to get a loan and have a big payment?
A. If the fundamental long-term goal is to maximize investment returns and wealth accumulation the answer is almost always NO. One of the primary appeals of real estate is the ability to use financial leverage (borrowing money to make more money). This unique and powerful wealth building opportunity with the asset class of real estate is widely misunderstood by many private investors. It is important, however to understand that the proper degree of financial leverage to be utilized is dependent on numerous market factors and the risk tolerance and goals of each individual investor. One of the primary issues to determine is whether the current market borrowing costs (interest rates) and property capitalization rates indicate a positive, negative or neutral leverage environment.
Q. I don't know anything about commercial properties. How do I figure out what to buy?
A. There are multiple different property types within the Commercial/Investment arena. Included are apartments, office buildings, retail complexes, industrial properties, restaurants and mixed-use facilities (combination of two or more types). All types have pro's and con's which can change over time depending on many factors and considerations. It is important to note that the investment appeal and demand of the various property types do not necessarily run on the same cycle, and in fact, rarely do.
Q. How long should I/we hold any given property?
A. There are many factors that will impact the optimal holding period. However, as a general guideline (assuming reasonable appreciation based on historical averages) most proactive owners of income producing investment real estate make some sort of "strategic" change every 3-6 years. This change may be either a cash-out refinance of an existing property(s) and the reinvestment of proceeds into a new property or the sale of existing property(s) and the reinvestment of all net sale proceeds into a new property(s). Please note that a sale and reinvestment is typically completed through an IRC 1031 Exchange.
Q. What rate of return can I realistically expect on investment grade real estate properties?
A. Returns in any asset class can, and likely will be, both variable and even volatile at times. Fortunately returns in real estate can usually be more accurately projected and controlled than investments in other asset classes. However, please note that ALL INVESTMENTS HAVE INHERENT RISKS!
As of the summer of 2007 (and indicative of the market over at least the last 10+ years) most private real estate investors (when properly invested) have realized average annual returns of 15% to 25% annually on investment/commercial grade income producing real estate investments. This would include apartments, office buildings, retail buildings and other similar properties. The average annual returns (absent of appreciation - THE SUBJECTIVE FACTOR) have averaged in the 6% to 12% range when only factoring pre-tax cash flow, income tax burden/credit and the additional yield from the principal pay down on the debt/loan (if any). Financial leverage will have a significant impact on returns (whether factoring or not factoring appreciation).
Disclaimer — the above investment rates of return are based on both market averages and actual returns from current clients. It is advised that any investor contemplating similar investments and expecting similar returns fully discuss plans with The Carlson Company, Inc. or other qualified advisor before acquiring any real property.
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THE CARLSON COMPANY:
Q. What does The Carlson Company do and why The Carlson Company Inc.?
A. Simply put, The Carlson Company assists individuals maximize investment returns on invested capital-equity. We have the expertise and experience not only to advise on real estate investments but also on an overall Comprehensive Wealth Management program.
Q. Can The Carlson Company help me with more than just my real estate investments?
A. Yes. Even though The Carlson Company specializes in the asset class of investment real estate we take a "big picture" approach to wealth management and the allocation of equity-capital. We clearly understand that too narrow of a focus can result in improper asset allocation and unnecessary risk. Worth noting is that The Carlson Company has considerable experience and expertise in Cash-Flow Management Strategies for both individuals and small business owners. Improving and optimizing cash flow is often a prerequisite to successful long-term investing and wealth accumulation.
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IRC 1031 EXCHANGES:
Q. What is a 1031 Exchange? Does it apply to me?
A. This is a technique used by real estate investors that allows for an investment property to be sold whereby the capital gain will not be taxable at the time of closing. In fact, if the deal is handled properly, any tax on the gain can be postponed indefinitely. It is important to understand that this kind of transaction has the mistaken name "the tax-free exchange". This fact is true only under certain circumstances, with proper planning. Anytime, an investor/owner of an investment property wants to sell and reinvest equity-capital into another investment property the IRC 1031 Exchange applies. It is recommended that planning for, and executing, an IRC 1031 Exchange be completed under the guidance of competent advisor. The Carlson Company has considerable expertise and experience assisting investors/clients through this process.
Q. Can I/we do a 1031 exchange if I need to sell several small rental properties simultaneously in order to be able to afford a larger property?
A. Yes. However, executing a simultaneous multiple disposition exchange is more complex and requires an additional level of planning. There are several timing and deal specific structuring issues that become absolutely critical. The Carlson Company has considerable expertise and experience with assisting clients with this type of IRC 1031 Exchange.
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LOANS-DEBT-FINANCE-MORTGAGE BANKING:
Q. If I need a loan on a Commercial/Investment Property am I better off working with a Commercial Mortgage Broker/Banker or directly with the Lender?
A. Assuming you are working with a Commercial Mortgage Broker/Banker that has experience and expertise as BOTH an Advisor/Strategist as well as with Loan Packaging/Placement the benefits of working with a Broker/Banker should be significant. It is imperative to understand that debt/financing is a "tool" to be used to increase returns and should NOT be handled as an after-thought in the real estate acquisition or refinance process. Beyond simply the interest rate and loan term other critical decision items and issues including loan type, prepayment penalties and final approved loan amount need to be addressed. In today's market the final funded loan amount is often the most challenging issue to deal with and overcome. It is far and away the number one reason why real estate sell/buy transactions fail. By working with a Commercial Mortgage Broker/Banker with an understanding of lender underwriting criteria particularly property income/expense issues and debt-service-coverage limitations greater loan amounts can often be secured due to both proper "packaging" and "placement" decisions. There are a multitude of differences not only between lenders but also with the various programs offered by a given lender. A Commercial Mortgage Banker/Broker specializing in Commercial/Investment Properties can provide objective and unbiased assistance with all critical elements of the mortgage strategy and application process.
Q. Don't I pay more (an additional fee) by using a Commercial Mortgage Banker/Broker instead of working directly with the Lender?
A. In almost all instances NO. Most direct lenders will work with Commercial Mortgage Bankers/Brokers without charging an origination fee. Typically the Mortgage Banker/Broker will charge a "brokerage" fee that is about equal to the "origination fee" a direct lender would charge a retail borrower. Hence, the net pricing difference to the borrower (in most cases) is a non-factor. However, all the other advantages of utilizing an experienced Commercial Mortgage Banker/Broker are still available to the borrower.
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RETIREMENT-EXIT STRATEGIES:
Q. I would like to sell all my properties and retire. What is the best way to minimize my Capital Gains Tax?
A. The proper answer to this question almost always involves issues that extend well beyond just Capital Gains. It is strongly recommended that all your trusted advisors (legal, tax, estate, real estate, wealth) be consulted prior to executing any sort of "Exit Strategy". Strategic mistakes can almost never be undone and can cost investors a significant portion of their wealth that took a lifetime to accumulate.
When it comes to real estate dispositions one of the most valuable and straightforward strategies often missed by sellers is the simple use of owner financing (first and second notes and trust deeds). This will allow sellers to receive equity-capital proceeds in multiple tax years and as needs require. Hence, capital gains taxes are not due/recognized until the year of receipt of monies.
KEY TERMS:
Go to Key Terms listed under the KNOWLEDGE CENTER.
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