1031 Tax Deferred Exchange Strategies

Ron Ricard of Investment Property Exchange Services, Inc sent the follow article regarding current investors strategies paired with the 1031 exchange:

Investors are Buying

Today's educated investors are repositioning their investments and buying up "deals" during this dip. Purchasing at today's low prices can allow investors to have positive cash flow with single family rentals that, in some markets, are normally purchased primarily for appreciation. Investors are beginning to sell assets like apartment complexes, commercial and industrial properties and using the cash to exchange into multiple single family rental properties that will cash flow immediately. When the real estate market turns positive, these investors will be poised to gain maximum appreciation and will continue to reposition their real estate investments utilizing the benefits of a 1031 Exchange.

Some Creative 1031 Exchange Strategies

1. Sell commercial/industrial/retail properties and buy multiple single family rentals
2. Sell single family rental properties and buy desirable vacation rental properties
Many vacation areas are priced at record lows
3. Sell vacant land and buy single family rentals, vacation rentals or commercial/industrial/retail investment properties
4. Sell investment properties and buy a "dream" property that later can be converted to a principal residence
5. Converting from or to an IRC §1031 "Qualified Use" may offer tremendous favorable results

For your 1031 questions, Ron Ricard can be reached at 408-483-1031 or ron.ricard@ipx1031.com

Good Time to Buy Apartments?

Great time to buy investment real estate? Depends. For sure in the single family home market, prices are down significantly. Interest rates are also at close to all-time lows. So, yes, very good time to buy. The apartment market is different altogether. Because first time buyer financing is harder to get and also due to many foreclosures making homeowners into tenants, there are far more renters in the marketplace than normally would be. Therefore, rental rates are up and vacancies are down. Most apartment owners are happy and not very motivated to sell. Read: no good deals here. The one opportunity I see is in the duplex – fourplex market. Here there has been financial trouble because of the loose financing that occurred. Compare this to the financing of apartment buildings above 4 units which has always been very conservative. There are short sales and bank owned foreclosures to be had in the duplex – fourplex market. And with rents up… yes, good time to buy.

4plex Cap Rate Same Same Comparison

I just ran an analysis on a 4plex which traded hands in 2006 for $950,000 and now my investor bought it two months ago as a short sale for $700,000. The GRM went from 16.5 to 12.2. The Cap Rate was 3.5% and now is 5.2%. Yes, definitely better numbers. Even better is the cash flow after financing because interest rates dropped approximately 100 basis points.

Santa Clara County Foreclosures Rising Again

Check out the article by Mercury News real estate reporter Pete Carey about the rising tide of Foreclosures in the Valley. The tide is rising again, somewhat buffered by the Obama plan and other local governmental agencies artificially halting foreclosures. This will stretch out the problem so that the pain will be felt more evenly over the next couple years. Expect a significant impact in listing inventory as we get past September.

Great Specials on New Condos in San Jose

- 2 bedroom, 2 bath downtown San Jose new high rise condo for $354,550!
- Another building offering 3.99% financing this weekend with 5 units on special.
- and my favorite building's best floor plan 1 bedroom on special for $395,000. Great deals on the City Heights, 88 and Axis.
Call me to tour!

Mortgage Update July 2, 2009

Rates have been holding and slightly improving over the past week. Adding fuel to the fire for mortgage bonds today was a stinker of a jobs report. The Labor department reported a loss of 467,000 jobs in the month of June. The national unemployment rate rose to 9.5%, its highest since 1983. Any time there is negative economic news the safer fixed income investments such as mortgage bonds get the benefit.

On Monday of this week China, the largest holder of US debt, announced they will continue to purchase our Bonds as part of their current foreign-currency reserve policy. China holds $763B of the $6.45T in US debt. This was great for mortgage bonds as China’s buying has really helped to keep our interest rates low over the past several years. Why do they do it? They wish to devalue the Yuan against the dollar so their exports to the United States are cheaper for the American consumer. The United States is the largest buyer of manufactured goods from China, and they want to keep it that way! By weakening the Yuan against the dollar it helps to ensure that American demand for Chinese goods will remain strong. Mortgage bonds get the benefit of this when China buys our debt.

Turn times are starting to improve for conventional loans, which is great news for the purchase market. The reason is that the refinance boom came to a halt when rates went up and origination volume decreased significantly. Conventional underwriting is much faster than the past several months, but there are still delays from the new appraisal process started on May 1st of this year. Over all it’s good to see lenders getting caught up with underwriting. I would still allow extra time for condo deals and FHA. Contact us with specific scenario questions as it’s always case by case for turn times.

That’s it for this week. Have a great 4th of July!

Tony Guaraldi
Mortgage Consultant

Commercial Retail Tenants Poorly Represented

It's a sad fact of the commercial real estate world that small retail users of space and for that matter also small office space users don't get good representation or they get none at all. Economics play a big factor in this. If a business owner needs 1,000 square feet of retail space for a new venture and he wants to have a 2 year lease at a rate of $1.50 per month, the compensation for the work is too small for the effort. A commercial leasing agent is looking at gross commissions in the range of $1,000-$2,000. Yes, that is not small potatoes. And yet, when compared to the work of finding the space (think no MLS, lots of sign calls, hitting commercial marketing meetings), setting up appointments to show the space (few small spaces with lockboxes, setting up appointments with landlord reps), a month of lease negotiation, attorney review time, city approval (heaven forbid a conditional use permit process), touring of architects and contractors, and then dealing with huge costs of starting up a business - that may dissuade the hopeful retail operator from actually signing the lease... I could go on and on... Many leasing agents don't see the economic benefit of allocating the time and effort. The realty then tends to be budding business entrepreneurs driving themselves around and calling on signs in the areas they think they should be. Many times not considering other areas that very well may support their business model better. Then calling landlord reps directly - who of course have their fiduciary duty to their main client - the landlord. The prospective tenant then signs whatever lease proposal hits the table. It's not equitable by any means. Solutions are grim - the best would be to hire a leasing agent - not by the commissions expected on a landlord sided fee offering - on a flat fee agreement sufficient enough to warrant the work. Few bootstrap business people want to fork out that kind of fee. OK - that's my gripe for the day - based on a commercial tenant who called me yesterday finally realizing the gravity of the lease document they signed years ago.