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.

Willow Glen Open House June 27th 1:30-4:30

http://tours.altavistavirtualtours.com/5510

This home is wonderful. Come visit tomorrow and be impressed!

Short Sale 4plexes are Gone

The market is improving all around. I cannot say this is our firm bottom by any means. Although, there are a lot of buyers and their agents chasing single family homes, townhouses and condos with multiple offers and going over asking prices. What I found interesting is that this wave has finally come over to the duplex - fourplex market. A few months ago, there were some outstanding short sale opportunities in west San Jose, specifically near Southwest Expressway and San Jose City College. Now those deals are all in escrow - some 3,500+ square foot fourplexes were listed at $650,000-$750,000. My client just bought a fourplex on Leigh Ave - very nice property - Pollack & Gambord style - for $700,000. If that property went on the market now, it would easily be worth $800,000+. We were in a short sale escrow for approximately 3 months and the market moved higher in that timeframe. There are still some deals that are not being chased, but they are becoming fewer. Has the market really turned...? Comments and thoughts please!

Last Year's Bank REO is This Year's Short Sale

It's not this year's Black is the last year's Ecru... Although it is interesting to see that a bank owned condo in the mid-Peninsula in early 2008 is now on the market as a short sale some 15 months later. Yes - all bank deals are not necessarily good deals! And for sure, the banking regulations and scrutiny have become more intense in that period. Good for consumers and banks to have loans decided on their true merits and stability. I also believe that the first wave of bank owned properties last year were the beginning of the slide and many buyers thought otherwise. Most bank properties now are selling quickly in the Peninsula and the South Bay. Some though, especially the higher end homes are sitting and taking price reductions. There are good reasons to not jump in necessarily on a deal just because it is owned by First National Trust and Co, Ltd..

San Francisco Apartment Building Short Sales and REOs

We are tracking a large investor group that is having their apartment acquisitions over the last 5 years liquidated or restructured by their bank partners. Approximately 50 of the 250+ buildings held by the group were given back via Deed in Lieu of Foreclosure. Another 12 buildings are currently being marketed for sale via a mutual agreement of the banks and the owners - essentially a formalized short sale process. 6 of these assets have already gone pending. The properties range from Tenderloin difficult properties to a Marina building ideally located one block from vibrant Chestnut Street to a heart of Chinatown property. All of which are essentially fully occupied properties. This is the best opportunity I have seen since starting the business in 1991 to acquire a solid San Francisco asset at a reasonable down payment and cash flow!

City of San Jose Downpayment Assistance for High Rises

The City of San Jose just opened up the downpayment assistance program to the new high rises in downtown. These will included The 88, City Heights, 360 Residences and Axis. Assistance of $50,000 for one bedroom units and $60,000 for two bedroom units are available. These are no payment loans - the cost of the loan is the pro-rata appreciation of the unit when you sell in the future. Example, if you buy a $400,000 J plan one bedroom at The 88 and use $50,000 from the City for a downpayment, this is 12.5% of the purchase price. When you sell, you would pay back the original $50,000 plus 12.5% of the profit. Very good deal. This paired with some fantastic deals in price that are being offered and you have a great opportunity to buy your first home. Call us for the current best values in downtown.

Technology and Real Estate

I know I've touched on this topic before and I truly believe it has very important investment impact for commercial property owners & investors. Why today though? Well, as a guy who is perhaps on the verge of becoming a relatively young tech dinosaur, this topic is close to my heart. Meeting a friend at Starbucks this morning, she wanted to give me some songs so I could update my Ipod workout playlist. I was handed a microscopic 4meg chip that she easily popped out of her smartphone. My one year old Blackberry had no apparent slot for this media card. I had to open the back plate, pull out the battery and then dig for the media card to take out. Obviously not a new enough smart phone for 2009! Also, today the big media buzz is about the new Palm Pre and the price slash on the 3G Apple IPhone.
My concern over technology and real estate is - not the "what happened to all the retail space taken by travel agencies" but now: What will this freedom and freeflow of information and entertainment do to how we live our lives and where we spend our money? I would like to throw this question out there and ask for ideas on where this will take our need for housing space, retail space and office space. Square feet per occupant has got to go down (just think of all the saved space when the tube tvs and rack stereo systems are replaced by a flatty and an ipod - yes I know this already happened...) and in the workplace everything is shrinking except the size of the employees (think better nutrition). Any thoughts? (See what a tall soy latte is capable of doing?)

Absolute NNN or Ground Lease?

A majority of the single tenant NNN properties that are Ground Leases are marketed at a lower cap rate than traditional NNN leases. The (ir)rationale for this is that the tenant pays for all the improvements built upon the land and the LANDlord has no responsibilities. So, therefore, some would assume that the investment is more valuable and should therefore sell at a higher price/lower cap rate. I disagree...
What the landlord does not get in this scenario is the ability to depreciate the building - this value goes to the tenant. The shift of this financial benefit from landlord to tenant usually is very significant. And to pay a premium for this less-than situation is ridiculous. The far better alternative is the Absolute NNN lease. Whereby the tenant pays for absolutely all costs of the property and the landlord still has technical ownership of the improvements (building) so he can still depreciate the property.

Another Technology Real Estate Death

Near the corner of Stevens Creek at Lawrence Expressway in San Jose is a new for lease sign. It sits in front of the recently closed approx. 4,000 square foot Blockbuster Video store. 10 years ago this would have been a very hot NNN investment property - little did people see how technology would reshape the real estate world. We want to be very forward thinking whem investing in commercial property. What can change in the next 5 or 10 years - the time frame when you may want to sell or exchange. Food is hard to sell on the internet. But cell phones as an example - do they require such an abundance of retail stores? Banks are also significantly shrinking their retail space requirements. All these changes morph strip malls and the investment outlooks behind them. That's what I think while waiting for my haircut at Supercuts.
Mario Pinedo, CCIM
Intero Real Estate
Office 408-342-3155
Cell 415-269-6249

Where to Invest?

Or what to invest in? That was a question just posed to me by a new friend of mine. Big question if you think about it. It all started off by her asking me if I liked Pinkberry frozen yogurt as we were walking through Santana Row. Then the conversation went to the competitors in that marketplace - Red Mango and others. Good or bad for an investor? They are making a volume of sales for sure. Does that make for a good real estate investment? I would say in general no. Starbucks was the industry darling for quite a few years. Everyone wanted a strip center with Starbucks as a tenant. And those single tenant Starbucks and strip centers sold at a premium (lower) cap rate. Now, with Starbucks closing locations, this darling is no longer courted. And owners of these will not be able to sell at the same premium cap rates that they bought. Starbucks was a trend - it didn't seem so at the time - it seemed as if the world economy had shifted to have an endless demand for coffee. Pinkberry is also a trend and trends wane. I'm boring and conservative when it comes to real estate investments - I like unhealthy hamburger and boring drug stores over flash in the pan froyo and grande lattes. And then there is the thing about location...

Estate Quality BANK REO near Silver Creek

Feel like you are on vacation in your own home! Breathtaking views of golf course & city lights from this elegant Ponderosa Ridge home. 6 bedrooms,3 ½ baths with upgrades throughout. Excellent floor plan with marble, hardwood floors, new carpet & paint. Spacious master suite with fireplace, vaulted ceiling, huge spa bathroom. Open kitchen and family room overlooking pool and flagstone patio. 3 car garage. 4,001 square feet on a 15,681 square foot lot. Built in 1999. This is a very well priced bank deal in the Silver Creek area. Just came on the market. Offered at$1,319,900. Call for a tour quickly. I am holding this home open Sunday, May 10 from 1:30-4:30. 4751 Whitetail Lane, San Jose, CA 95138

Investing in Short Sales and Bank Owned REOs seminar

This Thursday at Intero Cupertino we will be holding our investment seminar specifically focused on short sales and bank owned properties. Our manager Jess Wible and Jason Smiley from Intero Mortgage will covering many strategies on how to invest well in this market. Only 6 seats remain for this class. Please email or call me to RSVP. This Thursday, May 7, 2009 6pm-7:30pm.

Warehouse and fenced yard San Jose

Very good deal and excellent location for an industrial warehouse property with parking for trucks or equipment. $1,300,000 is the asking price for this freeway exposure property currently rented by an asphalt paving company. There is over 5,000 square feet of warehouse and dock space. Over 20,000 square foot lot. This parcel is right at the "clover leaf" of North 101 going to South 880. Perfect deal for a construction company that wants to own their own space.

Call me for a tour:

Mario Pinedo, CCIM
415-269-6249

Communications Hills Townhouse Bank REO $425,000

Two bedroom, two and a half bath, modern townhouse built in 2002. 1,264 square feet, end unit model on Communications Hill. Great location. Granite upgrades, Views!, two master suites. Two car garage. Too much to list. Great value! Call me to tour 415-269-6249.