Tag Archives: Investment

Capital Gains on a Primary Residence

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Noah Rosenblatt brings up a timely article (timely for me anyway) on the tax benefits associated with selling a primary residence. Here’s the pertinent info:

To claim the maximum exclusion on the capitol gains on the sale of your home, you MUST first meet the Ownership and Use tests…

  • Owned the home for at least 2 years (the ownership test), and
  • Lived in the home as your main home for at least 2 years (the use test)

The general idea is that a single person can exclude $250K in capital gains while a married couple filing joint taxes can exclude $500K provided they meet some basic conditions and the meet the two tests above. (Noah includes the conditions on his post!)

Now for my question, is there a timeframe that someone needs to plow this money back into a new residential property in order to reap the capital gains benefits?

Since Noah doesn’t mention this, I’m assuming that the idea of reinvesting within a certain timeframe only applies to investment properties, but I’d sure like to be more confident of this assumption and (horror of horrors) I’d rather not try to read the tax code!

What’s hot and what’s not in Seattle?

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Where to invest next in Seattle/Eastside neighborhoods? I’ve been thinking about the list Seattle Metropolitan Magazine came up in April (see below). With gas prices up, rapid transit going in, I think the next hot spots will be along those rapid transit routes like what happened in San Francisco and Portland.

Here are 2 lists, one from last month and one from 3 years ago. My clients usually make a decision where to buy based on either the commute or schools, sometimes as specific as a certain grade school. What about home age and style. It has been suggested that buyers like the homes their grandparents lived in, not the ones they grew up in, so Will the next batch of buyers want the 50’s and 60’s houses as has been suggested and if so, should we be buying in those areas? There was supposed to be a trend away from large homes, and that’s probably the case considering home prices are so high most can’t have the size home the buyers of the 90’s did.

Here is the Seattle Metropolitan Magazine list of 15 of the hottest neighborhoods in it’s April issue.

[photopress:bill_gates_residence.jpg,full,aligncenter]
Grandes Dames: established and well rooted neighborhoods:

  1. Medina: (recognize the house above?)
  2. Madison Park
  3. Admiral

The Rock Stars: fast rising districts surging with glamour and vitality.

  1. Ballard
  2. Pike/Pine Corridor
  3. Moss Bay, Kirkland

Cinderellas: Formerly neglected areas now traipsing to the ball

  1. South Lake Union (courtesy of Paul Allen)
  2. Columbia City
  3. Georgetown
  4. Westwood

Sleeping Beauties: Location, economy and neighborliness drawing overdue attention

  1. Upper Rainier Beach
  2. North Greenwood
  3. Monroe
  4. Stadium district, Tacoma
  5. Cape George Colony, Port Townsend

This is a dramatic change from 2003, when SeattleMagazine.com had their list of hot neighborhoods

  1. Bryant
  2. Montlake
  3. Sunset Hill
  4. North Beach
  5. Blue Ridge
  6. Olympic Manor
  7. Phinney Ridge
  8. Greenwood Manor
  9. North Admiral
  10. Westwood

Almost all of these were north of the U District.

Does this mean that our citizens are fickle and don’t have favorites more than 3 years in a row? Or was it this kind of story that drove the prices up in those neighborhoods so that they are now not affordable? Is it possible in 3 years that even Georgetown will be sizzling? I’d love to tap into the collective minds of RCG bloggers and see what you think.

I think Burien is an up-and-coming area and it’s not on either list. Any other hidden gems out there?

Don’t Get Carried Away!

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A couple of weeks ago I had occasion to take three different clients through the same house – an attractively-priced 1967 split-level home just north of Microsoft. So everybody knows that Microsoft will be hiring a lot more folks over the next few years, and a lot of those folks are thinking maybe they should pick up an investment rental in that area – with so much high-income job growth, there should continue to be great appreciation. Great logic. But don’t get carried away by the opportunity.

In this case, the home was priced at $375,000 – for a 1967 split-level home, 3 bedroom, 2.25 bath, 1,820 sf, 2-car garage. All the right specs. Price egregiously low. First, that low price led people to look at the house who were not anywhere near qualified for the price it would actually sell for. Second, that low price led investor bidders to fight over it in a bidding war that maybe should live in the annals of northwest real estate. So here’s what I have heard: the first winner got it for $475,000 – and then failed financing. Seller put it back on the market, same low price, same bidding war (if there were 10 to start with, there might be 9 still standing – hopefully fewer as they realized what it was really going to take to win it). Second winner got it for about $470,000.

Was it a great deal? I don’t think so. Was it a reasonable deal – maybe so. This place was structurally sound, but needed to be completely updated and refinished. It would be fair to say that a lot of the house was original (almost 40 years old) and worn out, including the garage doors – and on and on. The lower level would need to be stripped down to the studs and re-wired and re-sheetrocked. The baths needed to be redone. The kitchen space needed to be reconfigured (i.e. move walls) and then rebuilt. If the new owners are both thoughtful and handy at doing a lot of the work themselves, they will probably come out fine.

If you knew it was going to be $475,000 to start with, you might have looked for one in much better shape and saved yourself a lot of work. Don’t get carried away!

Can Real Estate ever ‘Bust’?

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Last week an investor called me from LA who is a stock broker. Our conversation got me thinking about the rich investment opportunity real estate provides, in spite of all the talk of a bubble burst. I’ve played the stock market for years and have won some and lost some but I’ve never been able to get it down to a predictable outcome. I invest in stocks because I’m told by financial advisors that I need to diversify. However, there is a way to invest that has many more controllable and dependable outcomes – Real Estate! Real Estate will never go out of business, never merge, never have problems with DOJ, never be outdone by the overseas manufacturing industry, never worry about ever changing technologies. There’s always supply and there’s always demand. With the exception of mother nature simply obliterating the landscape, real estate will always be there.

I don’t mean to paint an overly rosy picture here, but having been in the business for, gulp, nearly 30 years, and watching the ups and downs and downs and ups, (I once sold a home to a client with financing at 22%! not to mention using precious gems as a down payment!), I just don’t see the glass as half empty but rather half full. I have been a restaurant and marina owner and a real estate developer and investor, throughout the various market ups and downs. I suggest you look at real estate values over those last 30 years and see how many times they’ve multiplied. And we’ve had 5 or 6 ‘busts’ in that time. As a new licensee, I sold my first home for $32,500 in 1978 and today that home is listed at $495,000 – a multiple of 15 times. We all know this is true, so why are we all sitting around worrying? All this talk about real estate busting like the stock market did is just ridiculous. We’re not comparing apples with apples and even if the prices do go down, it will most likely be short term creating a great buying opportunity, and when prices bounce back we’ll all sit back and have a good laugh at all those naysayers with dour predictions.

I wish I’d taken my own advice in 1986 when I could have purchased 150 homes from a bank for 20 cents on the dollar. I didn’t have the foresight at that time to know what I am telling you now; real estate bounces back and prices rise even higher. Had I bought those homes that year, I’d be writing this from my estate in Maui! I’ve learned my lesson and now I want to share my perspective with you.

So, keep on investing. You may not be able to live off the profits from a short term flip but if you invest with someone that understands the market and the profit potential, you won’t have to worry about any ‘busts’ now or in the future.

If you must flip, flip responsibly!

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(Editor’s Note: I’m extremely excited to announce a new contributor to Rain City Guide. Eileen Tefft is a Managing Partner with Ltd Real Estate and has over two decades of experience in the real estate industry.)

Hello Rain City Guide community,

This is a first for me. First post, first time ‘published’. I’m excited and feel it’s about time I got into blogging as a way to share information to readers interested in real estate. As a kid, my parents bought and held real estate as an investment. My uncle was a contractor, my grandfather a carpenter… In fact, my dear 82 year-old mother was still hanging off rafters, pounding in 2X4’s in her 60’s (she still would be if someone needed a rafter built! Today she’s cutting down trees with her new chainsaw!). I bought my first property when I was 22 and subdivided it at 32. It was fun and it felt natural.

I got 3 calls this week from past clients wanting to begin buying real estate as an investment. After several hours of discussions, I decided to write about the nuts and bolts of my experiences, the mistakes I’ve made and where I found the most success.

There seem to be two types of investment buyers. One that wants to ‘flip’ real estate (turn a quick profit by buying low and selling high) and one that wants to purchase and hold for the long term. I will address the first question here and save the second for another post which will include buying for cash accumulation vs. buying for a positive cash flow, buying using 1031’s and buying using Self-Directed IRA’s.

So, let me start first with the question I get asked most… “How can I buy a house, fix it up, make a profit, quit my job and live off the real estate returns like I’ve seen on T.V.?

Cool Real Estate Search for Investors

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I noticed that Robbie has been playing around with the back-end of the home search tool he has developed for Rain City Guide, and it reminded me that I’ve been wanting to highlight one of the cool feature. The search tool allows you to sort your listings based on the price per square foot…

And why should you care? Well, here is a search of the “cheapest homes in Seattle” in terms of cost per square foot. (note I had to put in values for the low end of a home and the low end of square footage in order to eliminate all the “zero” values.) If you’re the type of buyer who is looking for a good deal this would be a great place to start. I’m not aware of any home search site in Seattle that allows you to filter things in this way so easily!

Create your own search here: Seattle Home Search.

Did you sell your SOLD before the bell?

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As you may know, HouseValues (NASDAQ: SOLD) is a publicly traded company. As you may not know, they reported their earnings for the quarter and year ended December 31, 2005, this afternoon.

To quote the highlights from the press release from MSN MoneyCentral

“For the year, HouseValues reported annual revenue and net income growth of 82 percent and 101 percent respectively. For the quarter, HouseValues reported revenue of $25.2 million, an increase of 75 percent from the comparable quarter last year. Fourth quarter 2005 net income was $4.0 million, up 117 percent from the prior year. Fourth quarter 2005 earnings per diluted share were $0.15 compared to $0.08 per diluted share in the fourth quarter of 2004. Net income for the fourth quarter and the year included an increase of $1.2 million as a result of the favorable settlement of a state tax audit.”[photopress:hv_logo.gif,full,alignright]

Blah, blah, Growth Opportunity, blah, blah…

“A recent National Association of Realtors study showed that 77 percent of consumers used the Internet as part of the home search process in 2005. The study also found that buyers who use the Internet to search for a home are more likely to buy through a real estate agent than non-Internet users.* Real estate and mortgage professionals are projected to follow consumer behavior, dedicating more of their marketing spend online than to any other medium by 2009, according to Borrell Associates.”

Blah, blah, Mortgage Opportunity, blah, blah, blah….

“On November 3, 2005, HouseValues announced its acquisition of The Loan Page, Inc. TheLoanPage.com helps consumers find the best deal on all of their home related financing needs by providing them with up to four competitive bids from the nation’s leading lenders.”

So far so good, right? Not according to “Buy on the rumor, sell on the fact” nature of the Street…

To quote another press release from MSN MoneyCentral

“Shares of HouseValues Inc. plunged in aftermarket trading Tuesday, after the company reported a jump in fourth-quarter profit, but said its first quarter and full-year 2006 results would come in well below Wall Street expectations. Shares of the online subscription service for real estate agents and mortgage bankers dropped $3.26, or 25 percent, to $10.14 in after-hours electronic trading, after closing down 25 cents at $13.50 on the Nasdaq.””HouseValues said it expects first quarter 2006 earnings of 3 cents to 4 cents per share, including about 3 cents per share in stock option expenses. Revenue is projected at $25.5 million to $26 million. Analysts were expecting earnings of 14 cents per share, not including stock options, on revenue of $28.8 million.”

What’s your take on this? Does management think an upcoming war with Zillow is going to hurt HouseValues earnings? Is the slowing housing market at fault? Have enough people seen Ardell’s “Bottom feeder post” to cause this market cap hemorrhaging? Can TheLoanPage.com mount a credible threat to LendingTree.com? Can Batman & Robin save us?

Conspiracy theories and comments?

What makes Commercial Real Estate Different from Residential Real Estate?

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(Editor’s Note: I recently came across an interesting blog put together by Stephen Cugier and Nick Papa from Grubb & Ellis that focuses on Seattle’s commercial real estate market. In talking with them, I thought it would be interesting to have them post an occasional article on aspects of commercial real estate that might be of interest to people who generally follow the residential side of things. This first post by Nick will likely be particularly interesting for investors thinking of expanding into commercial real estate. )

The fundamental difference between commercial and residential real estate is the fact that all commercial properties are potentially income producing while most homes are occupied by their owners. While you can obviously purchase a home and rent it out, it is not considered commercial real estate. The four main product types that comprise commercial real estate are office, industrial, multi family (apartment) and retail properties. There are other commercial property types such as hotel/motel or mobile home parks, but these are the primary products and those that an individual investor might consider investing in.

Each product type has its pluses and minuses depending on a variety of factors including, but not limited to the management of the property, the size of the investment and amount of inventory available. Naturally the value of any particular property is also subject to typical market conditions such as location, physical attributes and current demand for that type of product.

For most investors entering the marketplace who have owned residential properties that they have rented out, multi-family is where they feel most comfortable. The benefit to these investors is that multi-family properties tend to be the most attainable commercial properties because you can start with something simple like a duplex and go up from there. One note here; apartment property five units and larger comes with much stricter financing requiring a higher LTV (loan-to-value) ratio while duplexes to fourplexes can be purchased within single-family financing parameters. Apartment properties also allow owners to save money on property management fees by maintaining and managing the properties themselves, typically for buildings less than 10 units.

Office, industrial and retail properties typically require a greater amount of initial investment because it is more difficult to find smaller properties (i.e. less than $1M) to purchase. These types of properties also require, in most cases, some form of professional management. This is because negotiating commercial leases with businesses is much more complicated and difficult than negotiating leases with individuals in rental property. This element can also be a benefit as it allows the investor to simply purchase and monitor their property without having to deal with the day-to-day hassles of management. These types of investments can be very attractive when there is a solid long-term tenant in place or where there is potential to substantially increase rents on the property.

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One other factor that needs to be mentioned in this discussion is IRS Code 1031. This part of the tax code allows owners of commercial property to defer the payment of capital gains taxes when they sell an investment property as long as they purchase a property of greater value within 180 days. This is very common in commercial real estate and is a great way for an investor to increase their real estate holdings and as a vehicle to gain tax free cash while leveraging their real estate assets.

If you do consider commercial real estate as an owner or user, it is best to work with trained commercial specialists. They can help guide you through the complicated process of identifying and purchasing (or leasing); which often entails working through proposals, offers and considerable analysis. Commercial specialists often know of unlisted properties that may be available through their network of landlord and owner contacts. They are also a great resource in assessing the financial viability of properties, which ultimately will determine their worth as an investment.

Buying Investment Property – Entity Protection

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Many “average” Americans are dipping their toe into the world of investment real estate. Not satisfied with owning REITs, many non-real estate professionals are turning to buying vacation homes, single family rental properties, small multi-family dwellings and even small commercial buildings.

If you are in this group (or thinking of joining this group), I want to give you three letters to remember as you begin your journey – LLC.

LLCs is an acronym for limited liability company. It is a form of entity recognized by states as providing liability protection for its members. At the same time, it receives different tax treatment than traditional corporations. It also is much more flexible than corporations when structuring relationships between members. The following is a very high level discussion on some benefits of forming an LLC. While forming LLCs can be done by laypersons, you should consult an attorney or CPA before taking that step.

TAX TREATMENT – When an individual forms an LLC, the feds disregard the entity and tax the individual as if no LLC existed. If more than one unmarried persons form an LLC, again there is entity protection like a corporation and the individuals are taxed as partners by the feds. So, instead of filing a separate corporate tax return, the members file form K-1s as part of their individual return. The benefit of this is that there is no double taxation as there would be if the investor(s) had created a C-Corp. Moreover, the members can have a much more flexible relationship than had they formed an S-Corp.

LIABILITY PROTECTION – This is the main reason to form the LLC. Say you want to purchase a rental house. If you purchase it in your own name, all of your personal assets are subject to risk in the event that something goes wrong. If you and your renters get into a lease dispute, they may sue you and your individual assets are on the line. What if someone gets hurt on the property and your insurance coverage is not enough to cover the loss? Again, your assets will be at risk. If you form an LLC, you have just created an entity that is separate from you. Its assets are only those that the LLC owns – usually the property. Thus, if something goes wrong, usually only the property is at risk and not your life savings. This can be worth a lot of sleep at night.

While LLCs may not be for every real estate investor, they are certainly three letters that need to be discussed when buying investment property.