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According to the National Association of Realtors (NAR), sales of investment properties jumped in 2011 to the highest levels since 2005.
Last week, NAR released their annual report, 2012 Investment and Vacation Home Buyers Survey, which covers existing and new-home transactions for 2011.
The study shows investment property homes and duplex sales jumped 64.5 percent to 1.23 million. This is nearly doubly the 749,000 that sold in 2010.
In fact, investment property sales were responsible for 27 percent of all real estate transactions last year.
Perhaps this is because 41 percent of all investment buyers purchased more than one property.
Of these investors, 49 percent paid cash in 2011. Half of all investment properties they bought in 2011 were distressed; meaning they were either bank owned or a bank was involved in the negotiations.
For those duplex investors who financed their acquisitions, the median down payment was 27 percent.
How much were investors spending? The median investment property purchase price was $100,000 in 2011. This is up 6.4 percent from the $94,000 seen in 2010.
On average, the typical investment property buyer last year had a median age of 50, earned $86,100 and bought a duplex or other investment property that was, on average, 25 miles from where they lived.
Thirty percent of all single family, duplex, triplex and apartment building investors lived more than 100 miles from the property.
The share of property investors who were in the market to rehab and sell for a profit stood at 5 percent. While this is an increase from the 2 percent market share in 2010, most investment buyers intend to own the property for a median of 5 years. This is down from the 10 year expected ownership period seen among 2010 investors.
Of all the real estate investors, 34 percent did so with the intention of diversifying their investment portfolio or saw it as a good opportunity. Half did so with the intention of generating rental income.
Fourteen percent of real estate property investors bought so they could provide housing for a family member, friend or relative.
Nearly half of all real estate investors said they will buy another property in the next two years.
As there are nearly 42.1 million people in the country ages 50-59, another 43.5 million between 40 and 49, and another 40.2 million in the 30-39 age range, it looks like the investment property market is positioned to stay strong for years to come.
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Last night, a group got together at my office and played Robert Kiyosaki’s game, Cash Flow.
Even though I work every day in the business of duplex and real estate investment, the game was an important reminder of some basic principles that are easy to forget.
For example, the players who fared the best were those who were the most tolerant of risk. They were the ones least afraid to plunge into an investment opportunity. There took risks the other players weren’t willing to.
Those players also understood the importance of leverage.
While the game allows bank loans to acquire stocks and businesses, in real life real estate is the only investment a bank will lend you money to buy.
Think about it. If you are looking to invest in a duplex, in exchange for coming up with 20-30 percent to buy it, the bank will pay for the remaining 70-80 percent.
And, finally, those players also clearly understood they would never get out of the “Rat Race” based on their salaries alone. They knew they needed other avenues to secure their financial futures.
Isn’t it time we all get started?
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I must admit, never would have thought about using duplex investing as a way to buy a professional sports team.
I might have had I known the history of Los Angeles Lakers owner, Dr. Jerry Buss.
Now I’m a long time Laker fan. But I just assumed he made his money as a doctor. You know, the kind that tells you to open your mouth and say “Aaahh.”
Turns out he made the money he used to buy the team as a real estate investor.
It seems when he was a chemistry professor at USC, he thought he needed something to supplement his income. So, in the 1960s he took $1000 and invested in a West Los Angeles apartment building.
Over time, he was doing so well as an investor that he gave up being a professor.
When it comes to professional sports team ownership, he’s not alone.
Minnesota Vikings owner Zygi Wilf is known as a real estate developer. However, after a brief stint as a used car salesman, he and his brother Harry started buying apartment buildings.
Today, they own over 100 commercial properties and over 30,000 apartment units.
Owners of the Miami Dolphins, St Louis Rams and Denver Nuggets, among others, also made their fortunes investing in real estate.
In a down real estate market, with single family homes, duplexes, triplexes and apartment building selling at clearance sale prices, can you think of a better time to start investing?
Can you imagine owning the Lakers?
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Many duplex buyers I work with are first time home buyers who intend to start a family in the near future.
Their goal is to live there until their family is of the size that a single family home is more suitable for their needs. At that time they will buy a house, and keep the duplex and its cash flow as the college fund.
So what if your kids are already in junior high or high school and you’re lookiing down the barrel of college tuition without a duplex in your portfolio?
What about buying a duplex near a university now?
Many parents know in advance their children are leaning toward a specific college, or, that they can only afford to help with tuition at a local university.
And yet, regardless of the cost of tuition, one of the most expensive components of higher education is on or near campus living.
What if you already owned a property with enough bedrooms for your children to have rent-paying roomates, allowing your child to live rent free?
University communities have not been unscathed by the foreclosure crisis. Whether it’s a duplex by the University of Minnesota or a condo just blocks from Arizona State University, there are many distressed property opportunities for forward-thinking parents and investors alike.
During the boom, these university duplexes tended not to cash flow.
And now?
Not only do they pay for themselves, but the cost of a Golden Gopher sweatshirt or Sun Devil window sticker or two as well.
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Heisman Trophy winner Cam Newton
With tomorrow night’s NFL Draft, 32 young men are set to become millionaires.
According to Sports Illustrated, within two years of the eventual end of their professional football careers, 78 percent of them will have gone bankrupt.
Why?
For some it will be an excessive lifestyle. Others will ignore meetings with professional money managers and opt instead to invest in wild inventions and business ideas brought to them by friends.
Imagine, for a moment, if they listened to one small piece of advice, and simply took one million dollars and invested in real estate.
One million dollars is enough for a 25 percent down payment on $4 million in real estate. Most duplex investors I’m working with are getting double digit cash on cash returns on the money they invest. For this exercise, let’s conservatively call it 12 percent.
A cash on cash return of 12 percent per year on a $1 million investment is $120,000– annually.
This is before we calculate the amount of taxes a draft choice would save due to investment property benefits like depreciation and the mortgage interest deduction.
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said on March 17th, 2011 categorized under: Education
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Just a reminder; the Tom Lundstedt investment property seminar is tonight at 6:30 at the Westin Hotel in Edina.
Thanks to event sponsor Keller Williams Realty, admission is absolutely free. Just let me know you’re coming, so we make sure we have enough seats. (Come anyway if you forget to tell me, we’ll figure it out.)
Lundstedt taught me how to do investment property analysis. This is the stuff that tells you whether an investment property of any kind, whether it’s a single family home, duplex, apartment building, strip mall or office building is a good investment.
In other words, this is the stuff that will help keep you from making a bad investment.
He’s funny, easy to understand, and a great teacher.
In fact, I hated math before I heard him speak. Now, at least when it comes to this stuff, I do it for fun.
No wonder I never get invited to parties.
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In today’s turbulent real estate market, it’s easy to dismiss the idea of real estate as a long term investment strategy.
On one level, this makes sense. Prices are down; there’s a threat of more foreclosures on the horizon which may cause prices to tumble further. Vacancy rates are up, causing more landlords to scramble to find quality tenants and, in the competition to do so, rents to go down.
Maybe it’s better to just leave your money in the stock market, right?
Real estate as an investment isn’t just about how much a duplex goes up in value. In fact, appreciation is just one of the eight ways you benefit by owning investment property.
Real estate provides you with:
- Equity Growth – due to your ability to use leverage, your equity grows much more quickly in real estate than it does in other investments.
- Principal Paydown – every month a portion of your mortgage payment on the property is paid off by rent collected from tenants. Even if the duplex never goes up in value, and you continue to pay off the mortgage over thirty years, at the end of that time you would have the equivalent of the initial purchase price in equity. Managed properly, the only money you would have into it would be the original downpayment required to obtain the loan.
- Increasing Annual Income Stream – on average, the amount of rent you collect every year will increase. This revenue will continue to grow in accordance with the cost of living; providing you with spendable income that has adjusted to economic conditions.
- Leverage - using some of your money as a down payment, banks are, for all intents and purposes, willing to partner with you on a property. If you want to buy a $100,000 duplex, simply put up $25,000, they’ll put up the other $75,000, and pay them back with some interest. Left to your own devices, you’d only be able to buy a $25,000 duplex. But thanks to banks, you can leverage your way into real estate wealth.
- Early Withdrawal Penalties/Annual Contribution Limits – the positive cash flow your property earns is spendable income. It is not subject to early withdrawal penalties or limits to the amount of money you can save.
- Depreciation/Tax Shield – every year that you own a duplex, the government allows you to shield some of your income in the form of depreciation. Essentially, depreciation is the rate at which the government says something gets used up. And because something is, at least theortetically, wearing out, you get a tax break.
- Appreciation – there will come a time in the not too distant future that property goes up in value again. The duplex my grandparents lived in before World War II is today worth approximately 22 times what it was when they were tenants. Historically, there’s no reason to think a duplex won’t cost even more twenty years from now.
- 1031 Exchanges/Cash Out Refinances – both of these are methods for you to harvest the money you’ve earned in both appreciation and principal paydown and reinvest it in bigger properties with greater returns; tax free.
Not all of these reasons to invest in real estate are obvious to a new investor. However, they are the very reasons real estate will always be a terrific financial strategy.
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With the bargain basement prices on single family home foreclosures in the marketplace, I’ve been getting calls from homeowners who, seeing the cheap house down the street, are thinking about becoming first time real estate investors.
I like that they’re thinking like that. Real estate offers investors growth in equity, an annual passive income stream that grows with the cost of living, appreciation, leverage, and the opportunity to use depreciation as a tax shield from other income.
However, most of these novice investors are thinking of single family home ownership as a path to wealth. What they don’t realize is more often than not, single family homes as rental properties do not cash flow.
In other words, the investor will have to reach into her pocket every month for money to pay the bills the rent doesn’t cover.
A duplex, on the other hand, will pull its own weight.
Surprised?
For the first time in decades, small multi-unit properties like duplexes are actually breaking even or producing positive, spendable cash flows.
To illustrate this point, this morning I pulled two properties from the Nokomis neighborhood from the MLS. The first is the least expensive home listed in the area of 42nd and Cedar. It’s a short sale, built in 1949 with two bedrooms and two bathrooms, listed at $149,900.
Just a couple of blocks away is a 1947 built duplex, priced at $145,000. It has two bedrooms on each side, appears to be in reasonable condition, and is a bank owned property.
Both require similar down payments, and will have mortgages at the same amortization and interest rates.
Assuming rent of $950 per month on the single family home, with the tenants paying all utilites, and the investor responsible for insurance and property taxes, this home actually has a negative cash flow of $1149.54 per year. In other words, every month, the owner has to reach into her pocket for cash in order to make up a shortfall of $95.80.
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These days, it seems Wall Street might as well be the name of the latest
Wes Craven horror movie. It’s been a financial bloodbath featuring screams in the night, followed each morning by another casualty and the utter inability of police or government to track down the villain.
More often than not, it’s the potential victims; the
scream queens in these nightmares who save themselves. And around my office, I have witnessed more and more of them doing just that.
More and more people are turning to real estate to protect what’s left of their stock portfolio money. But doesn’t real estate have its own sequel to “
Halloween” under way? Yes. And no.
Real estate investment properties have four benefits: appreciation, principal pay down, tax savings and cash flow. Many investors during the boom years mistakenly focused their purchases on appreciation. The thinking was, buy now and sell when the market goes up. No matter the market conditions, this is roughly the equivalent of a bunch of teenagers going to a cabin in the woods toting nothing but alcohol for self-defense.
What are today’s investors focusing on? CASH FLOW. It’s what investors should always focus on, regardless of market conditions.
Won’t the property go down in value? Maybe. Maybe not. But if you take the money in your stock portfolio and invest it in the right rental property, as long as it’s rented, you’re realizing a return on your investment.
Example? If you have $100,000 in the stock market, and the value of the stocks you hold plummets or the companies you’re invested in don’t realize profits, you not only lose your original investment, you don’t collect dividends either.
If you took the same $100,000 and purchased a rental house, duplex or fourplex, however, you would continue to benefit from the positive cash flow created by rental revenue, regardless of the decline or appreciation of the property itself.
As chronicled here before, those people who are experiencing short sales or foreclosures on their own homes will not be eligible to purchase a property via a conventional mortgage for anywhere from three to seven years. Those folks are going to need to live somewhere.
The happy ending? Right now, there are actually properties on the market, in decent condition, that cash flow at rates of return not seen in a decade.
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In the past, one of the most lucrative tax loopholes for real estate investors was the provision that allowed an owner to move into a rental or investment property, and after living there for two years, realize and capital gains tax free, up to the individual $250,000 or married couple $500,000 limits.
In Minnesota, this benefit was especially attractive to those eyeing retirement in warmer climates. Why? Well, let’s say you wanted to retire five years from now. Both the Florida and Arizona real estate markets are, perhaps, in even more dire circumstances than the market here. Theoretically anyway, it might be a great time to pick up that vacation condo on the beach in Santa Barbara.
If you found a bargain, you could rent it out until you were ready to retire. It’s reasonable to assume that over enough time, that property will increase in value. Well, that appreciation is taxable. However, if you moved into the home for at least two years, Congress said they would not tax you on that increase when you sold.
As of January 1, 2009, that is no longer the case. When the president signed the Housing Bill into law two weeks ago, the rules changed.
Now, any properties purchased after that date will be subject to an amended version of this law. Investors will now be asked to pay capital gains taxes for the years of appreciation when they did not live in the property. So, if you owned a condo in Phoenix for five years, and lived in it for two, you would be taxed for the three it was tenant occupied.
If you’ve been thinking of purchasing a vacation property, or an investment property to ultimately move in to, a wise strategy may well be to act before year’s end. In all the doom and gloom of the coverage of today’s market, not one prognosticator has ever said the market housing prices will never increase again. When they do, it would be awfully nice to be able to shield those gains.
