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 Real Estate Investments Outlook June 2019

          Los Angeles, CA. After being a stronghold of growth in 2018, our economy is expected to slow this year due to the vanishing of the fiscal stimulus and the delayed impact of prior rate hikes. How will this scenario influence the real estate investment markets?

          At the beginning of the year, growth was well above expectations. The labor market remains strong, with solid wage growth supporting consumer spending. Our economy has been driven by an obliging fiscal policy; its impact should increasingly erode this year, which may have an adverse effect on values of real estate investments.

           In the first quarter of 2019 growth was  3.2% . This was the third quarter our economy has grown at a rate above 3% in the last five quarters. Looking at the makeup of quarterly economic growth, domestic demand slowed sharply.  Economic growth is expected to decelerate to 2020, but at a very gradual pace.

          A recession is highly unlikely in 2019 and in 2020 (as household consumption should continue to benefit from higher disposable income). However, doubts may arise in the coming quarters from fiscal policy, domestic demand under pressure and mixed signals from hard data. We   must always keep in mind that lackluster growth could trigger a recession.

          Since the beginning of the year, we have observed a calm period in the interest rates, with volatility very subdued. The USD index only rose by 1.35%. The USD currently still has a lot going for it, does better on most growth, inflation, and yields than most other indexes. Its Achilles’ heel remains a squeamish Fed, which has the ability to adjust rates.

          A strong outlook on earnings growth, along with manageable wage inflation, would suggest that real estate investment values should remain intact, especially as our monetary policy maintains favorable financial conditions. However, with the renewed trade tensions, the real estate rental investment market could change. Although valuations of the real estate industry appear attractive, we feel that investing in “pockets of opportunity” locations as pointed out in our quarterly newsletter Market Cycles represents a well-balanced risk positioning. Should a proper trade deal between the US and China materializes in the weeks ahead, the prospects of adding potential value should increase.

          Another factor that has an impact on the real state investment industry is the price of oil. The rollercoaster has continued after OPEC cut production by 3 million barrels a day, the most significant cut since the Great Financial Crisis.  The surprise announcement by the US administration that the US is ending waivers allowing several countries to keep importing Iranian crude has pushed up oil prices to $75 per barrel.

          At the end of the day, with low inflation and subdued growth, the central bank has turned more wishy-washy and remains so. Monetary policy is likely to respond to enable economic growth to recover in the quarters ahead. We think the Federal Reserve could cut interest rates if the economy slows materially. Interest rates have a profound an effect on the value of real estate investments. Because their influence on investor’s ability to purchase real estate investment properties (by increasing or decreasing the cost of mortgage capital) is so profound, many investors know that this is one of the most important factors in real estate valuation.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and real estate investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com

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REAL ESTATE OUTLOOK MAY 2019

          Los Angeles, CA. Our economy is losing steam. Economic growth is expected to slow to the 2% to 2.5% range this year, from nearly 3% in 2018. Factors contributing to this include vanishing fiscal stimulus, the impact of tighter monetary policy  and the affects of trade with China  which could  result in a deceleration in  real estate values.

          Economic growth for the first quarter in particular will be weak due to the impact of the government shutdown at the beginning of the year. With the tight labor market and some tax refunds, private consumption should  remain the growth engine that will help real estate investments in the months ahead.

          Despite a relatively tight labor market, inflation pressures are projected to remain restrained. The current capacity utilization has reached 78%. It is around four percentage points below the long-term average. We now expect the fed funds rate to be maintained at  current level for the near future, thereby stabilizing the relatively high hurdles in the real estate investment markets.

          As we do not foresee a severe downturn or even a recession, we are keeping a middle-of-the-road provision to real estate investments. However, as we cannot rule out further political and economic setbacks, we are maintaining our preference for a more “hold” position based on our publication “Market Cycles”.

          However, on the question of which real estate investment offers the strongest potential, we continue to hold a small allowance to midsize apartment investments.  They appear not to be expensive, at least given the expectations of earnings growth of around 7%, according to the cyclically adjusted projected capitalization rates.

          On the other hand, as a further deceleration in the economic expansion cannot be ruled out, and due to the mix of concerns and uncertainties, we caution real estate investors to keep a very close look at all real estate markets.

          According to PwC Real Estate 2020: “Building the future”, looking forward to 2020 and beyond, the real estate investment industry will find itself at the centre of rapid economic and social change, which is transforming the built environment. While most of these trends are already evident, there is a natural tendency to underestimate their implications over the next six years and beyond. By 2020, real estate managers will have a broader range of opportunities, with greater risks and new value drivers. As real estate is a business with long development cycles – from planning to construction takes several years – now is the time to plan for these changes.

         

                   Finally, yet importantly, for coping with the bumpy road ahead, we believe that real estate invested in well-diversified regions will provide the best cushion.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and rental income investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com

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Just Released 1st Quarter 2019

Leading Rental Income Markets

          LOS ANGELES, CA. The Center for Real Estate Studies (CRES) research report has just released their first quarter 2019 issue of “Market Cycles".  It gives a forward look at more than 150 income rental markets with “buy, sell or hold” recommendations. This publication gives the real estate investor a two-year head start on where and when to invest in rental income properties.

          The current number of markets in the “Sell Phase” is forty-four, according to Eugene E. Vollucci, Director of CRES.  The number of markets in the “Buy Phase” is seven. Mr. Vollucci states, “This quarter the three top buy recommendations are Beaumont, TX, Hartford, CT and Oklahoma City, OK. The three top sell recommendations are Oakland, CA, Oxnard, CA and Tucson, AZ.” according to Mr. Vollucci.

          In this edition of our Market Cycles, we find the National vacancy rates in the fourth quarter 2018 were 6.6 percent for rental housing and 1.5 percent for homeowner housing. The rental vacancy rate of 6.6 percent was not statistically different from the rate in the fourth quarter 2017 (6.9 percent), but lower than the rate in the third quarter 2018 (7.1 percent). The homeowner vacancy rate of 1.5 percent was 0.1 percentage point lower than the rate in the fourth quarter 2017 and also 0.1 percentage point lower than the rate in the third quarter 2018 (1.6 percent each).

          The fourth quarter 2018 rental vacancy rate was highest outside Metropolitan Statistical Areas (8.2 percent) and lowest in the suburbs (5.9 percent). The rental vacancy rate in principal cities, in the suburbs, and outside MSAs were not statistically different from the fourth quarter 2017 rates. The homeowner vacancy rates in principal cities (1.5 percent), in the suburbs (1.4 percent), and outside MSA’s (1.5 percent) were not statistically different from each other. The homeowner vacancy rate outside MSAs was lower than the fourth quarter 2017 rate, while rates in principal cities and in the suburbs were not statistically different from the fourth quarter 2017 rates.

          Total nonfarm payroll employment increased by 196,000 in March, and the unemployment rate was unchanged at 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services.

          In March, the number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 1.3 million and accounted for 21.1 percent of the unemployed. The labor force participation rate, at 63.0 percent, was little changed over the month and has shown little movement  over the past 12 months. The employment-population ratio was 60.6 percent in March and has been  60.6 percent to 60.7 percent since October 2018. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 4.5 million in March. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs.

          US Median Asking Rent is at a current level of $947.00, a decrease of $56.00 or 5.58% from last quarter. This is an increase of $37.00 or 4.07% from last year and is higher than the long-term average of $586.44.

          According to Berkadia, the U.S. economy reached its second-longest expansion in the post-war era, as employment grew 1.6%, or by 2.4 million workers, in 2018. Job creation accelerated from 2017 as nearly every employment sector posted gains. White-collar industries continued to grow, with 517,600 workers added in the professional and business services sector to lead job creation over the last four quarters. These typically higher-paying positions contributed to national wages rising 3.6% annually through the third quarter of 2018, outpacing the preceding five-year average of 3.0%.

          The rise in payrolls and wages along with positive contributions from personal consumption expenditures and federal government spending contributed to a 2.8% increase in real gross domestic product annually through the fourth quarter of 2018. The expansion cycle is expected to continue through this year with nearly 2.0 million jobs added for 1.3% growth. At the same time, real GDP is forecast to expand between 2.4% and 2.7% this year. While national employment growth remained strong in 2018, several major markets significantly outperformed the national trend. Approximately half a dozen large markets’ expansion more than doubled the national rate.

ABOUT THE AUTHOR: Eugene E. Vollucci is the Director of The Center for Real Estate Studies, a real estate research institute.  He is author of four best selling books and many articles on real estate investing, rental income properties and taxation. To purchase a subscription to Market Cycles and to learn more about the Center for Real Estate Studies, please visit us at   http://www.calstatecompanies.com

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Real Estate Investment Outlook April 2019

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Real Estate Investment Outlook April 2019

             Los Angeles, CA. Economic growth in the US is expected to decline to around

2 ½% in 2019. With the waning of fiscal stimulus and the impact of trade tensions, it appears that real estate investments could take a hit.

            It is estimated by the International Monetary Fund that the impact of fiscal stimulus in the US on GDP growth is shrinking from approximately 0.8% in the first quarter 2019 to 0.1% in the fourth quarter of this year. According to the US Bureau of Economic Analysis, US manufacturing started to decline in late 2018 and continued to weaken at the beginning of 2019.

            The benchmark of stable inflation is the US non-accelerating inflation rate of unemployment. Should the unemployment rate fall below this rate, inflation is expected to rise. In the US, this rate is estimated to stand at 4.5%, according to the Federal Reserve Bank, thereby possibly causing an adverse effect on real estate values. This rate exceeds the current unemployment rate by around 0.5 percentage points. Whether this gap is strong enough to cause wages to rise significantly and pass through to price inflation is an open question.

             Should the US economic recovery start to come to a standstill, the Feds may be inclined to stop the tightening of bank liquidity. As long as inflation remains below the policy target of 2%, it is expected to maintain the current policy stance. Investment conclusions and implications for real estate investments are influenced by the outcome of inflations policy target and trade negotiations.  Although there is uncertainty about the outcome of trade negotiations between China and the US, we expect that real estate investment values will change very little.

            Deloitte reports that multifamily apartments continue to be a preferred property type for investors with a steady outlook for fundamentals and cap rates. Annual effective rent growth is forecast to inch up slightly to 3.1% in the second quarter of 2019 and then start to gradually decline to 2.1% by 2Q 2021, according to RealPage.

            Despite what could be a peak year for completions, the outlook for the apartment market appears to be steady in the short term. The new supply of apartment units has increased every year since 2011 with an estimated 314,747 new units expected to come online in 2019, according to RealPage.

          Potential challenges ahead could include the steady pipeline of new development. So far, demand has remained strong. However, if demand does shift with more renters moving into homeownership, it could have a major negative impact on the sector.

            As reported by Dane Bowler, 2nd Market Capital Advisory specialist, the multifamily sector looks good structurally and fundamentally. It has been boosted in recent years by the shadow supply reduction of Airbnb. We see the primary risks being economic downturn and some sort of regulatory legislative crackdown on Airbnb. Most investors are aware of the implications of Airbnb on hotels so that sector would react immediately to big news, but I think the ties to apartments are less well known so there could be an opportunity to get out after the news, but before the price reaction.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and rental income investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com

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The New Approach to Investing in the 21st Century

Research:  Decreasing the Group Size Making the Second Move

The time was ripe to make the second move on our quest to become millionaires. The proceeds from the first sale were traded, into another property. By keeping up with the research, we knew exactly where to purchase the next apartment building.

Since we did so well on our first move, we were able to make the second move with a smaller group of investors.  

Our second move involved a property that would require a $175,000down payment. Consequently, we needed only half of the original group to reinvest in the second property since each of the original investors now had $35,465 instead of the original $6,000. So, with a group of five members we made our second move.

Using our Research Report, Market Cycles, we discovered that Boston, Massachusetts, had the profit potential we were looking for.

As with the Phoenix area, market conditions indicated that seller financing was available in Boston. There were many different types of financing packages to choose from, but our cost analysis pointed us to seller financing. In fact, seller financing is usually the most economical method to use.

The availability or lack of seller financing also gives additional clues as to current market conditions. While seller financing indicates a “soft” real estate market where buyers can make good deals, the lack of seller financing indicates a “hot” market. Since a hot market is one that favors the seller, it usually means that the seller can maximize profits.  A hot market is a good time to sell real estate, but not a good time to buy.

Our second apartment building was purchased for $1,750,000. Our group had five investors, each contributing $35,000. The $175,000 pool was then used as a 10 per-cent down payment on the property.  

The total number of units in the complex was based on the total square footage and the unit mix to yield 44 units. The most desirable unit mix for this area was three to one.  

The first trust deed was 70 percent of the purchase price. Seller financing amounted to 20 percent; therefore, only a 10 percent down payment was required.

Operating income and expenses per square foot were compared to those published by both local real estate associations and IREM. Local property management firms were consulted to evaluate operating conditions, assist in the estimates, and verify ratios.  

Gross annual rental income was derived by multiplying the average rental rate of $8.01 per square foot times the total square footage of 32,258 square feet, for a total of $258,387. Per IREM’s reports, projected annual expenses of 35 percent of gross income were broken down as follows:

 Sales conditions in Boston were very good. The recent drop in the vacancy rate drew many sellers back into the Boston market. It was definitely the right time to sell.

A selling price of $2,325,000 was calculated by multiplying the total square footage of the property (32,258) by the selling price per square foot of $72.13, as listed in the National Real Estate Index for Boston. Total cash flow from the operations of the property combined with the equity from the sale yielded a total of $740,574 as of December 31, 1987.Since there were now only five investors in our pool, each investor netted $148,115 for each $35,000 invested. This represents a return of over323 percent, or approximately 162 percent per year.

At the end of the second move, some people might be tempted to stop here, count their winnings, and leave the real estate game. For those of you, who wish to make the last move and gain real financial independence, please follow along next month for part 6.

ABOUT THE AUTHOR: Eugene E. Vollucci, is a real estate advisor and Director of The

Center for Real Estate Studies, a real estate research organization in Torrance, California and co-author of "How to Buy and Sell Apartment Buildings" Second Edition (John Wiley & Sons, 2004).  To obtain more information about Center for Real Estate Studies, please visit our web-site at calstatecompanies.com

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Is Real Estate Worth the Investment?

           

            LOS ANGELES, CA. Years ago, I discovered that real estate was the best investment to control risk and create wealth. The Real Estate Digest reports that seven out of ten millionaires made their money in real estate, and Forbes magazine states that there is a three times greater chance of becoming wealthy through real estate than with any other type of investment.

Using Real Estate Investing to Control Risk

            Real estate allows you to control your risk because you can actively participate in the decision-making process. Passive investments such as stocks don’t give you this opportunity. Movements in real estate values are less erratic than in the stock market. Most people don’t understand the economic forces influencing the market. Since real estate is less volatile, it’s easier to control and to understand.  Real estate is tangible. You can touch it, you’ve been exposed to it all your life, and you can identify with it. As a result of this familiarity, you are better able to understand it. 

Effectively Reducing Your Taxes

            Real estate ownership continues to be the most popular form of investment because of its potential for substantial tax savings. Since you are able to actively participate in the management of real estate, the Internal Revenue Service (IRS) currently allows qualifying individuals to write off up to $25,000 per year against salary and other income. No other investment gives you this capability. In addition, you can defer paying income taxes on profits indefinitely by using tax-deferred exchanges. 

Leveraging That Works

Real estate is the only major investment that gives you the ability to acquire ownership with very little money down. This degree of leveraging allows you to amplify profits by using other people’s money. The more assets you are able to control, the more opportunities you have to succeed.  The degree of leverage is calculated by dividing the total purchase price of the property by the amount of funds used to purchase it. Thus, if a down payment of $10,000 plus a $90,000 loan is used to purchase a property, a 10 to 1 leverage ratio has been achieved.  The greater the leverage, the more equity will increase with the change in value of the property.

Residential Income Properties

            In the past 20 years, residential income properties have delivered the highest average total investment returns of all real estate types. With a built-in hedge against inflation, it’s no wonder that residential real estate has out-performed all other types of real estate investments with relatively low risk. Based on supply and demand over the next 10 years, residential income will out pace all other types of real estate investment. Strong demographic and financial indicators along with changing lifestyles should continue to positively influence residential income investments. 

Residential Real Estate Investing’s Three Advantages

1.      They are less dependent on business cycles for occupancy than any        other type of real estate investments. It doesn’t matter if interest rates                and home prices are high or low, residential real estate investments are generally more affordable.

2.       They have shorter leases; thereby offering greater protection          from inflation than the long-term leases associated with                         commercial properties. Rents can be negotiated more frequently.

3.      The pool of tenants is much greater for them than other types of                  properties. This ensures a more consistent occupancy than industrial             or commercial properties, which usually have only a few tenants to           choose from.

Real Estate Investments as a Shock Absorber

            Real estate generally outperforms equities because of its higher yields, greater price stability, and downside protection even in a recession. When stock markets are down, real estate investments hold value and produce a positive return. Real estate is less prone to booms and busts. Residential income real estate is now stronger than it has been in many years. 

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and rental income investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com

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How to Make Yourself Judgment Proof

 

 

The primary goal of a little-known entity, The Family Limited Partnership (FLP), is to make yourself judgment proof against frivolous lawsuits while allowing you to utilize your assets to their fullest extent.

 

Hampering Creditors

 

The creation of the (FLP) protects you from judgment creditors, as  assignees of the debtor’s interest,  they cannot vote to direct the activities of the partnership. Without this ability, they cannot disburse partnership assets to satisfy their claims. The key to hampering creditor’s action is the vote!

 

Judgment creditors can attach a limited partner’s interest in the partnership and receive any disbursement made to that particular limited partner. However, if the partners decide not to make any disbursements, creditors receive absolutely nothing.

 

The partnership may make loans to individual limited partners without making distributions or withdrawals. These loans are very difficult to attach. The partnership may decide to pay wages to the limited partner. If judgment creditors attach the limited partner’s wages, there are severe limitations on the amounts they can take.

 

Eliminating or Reducing the Cost of Personal Liability Insurance

 

By properly protecting your assets from creditor’s claims, you can effectively reduce the cost of personal liability insurance.  You can reduce expenses for personal liability insurance substantially or eliminate them entirely when your assets are adequately protected.

 

Stumbling Blocks of Creditors

 

The net effect of having your assets protected is to eliminate or reduce your exposure. This is a valuable bargaining chip if you do decide to negotiate claims.

 

A creditor attempting to go after a limited partner is in a dilemma. The creditor will have to decide whether to expend additional time and money overcoming many formidable obstacles:

 

More often than not, the creditor ends up with a charging order against the interest of the limited partner that can generally be discharged or settled for an inconsequential sum.

 

The charging order entitles the creditor to income or assets only when they are distributed. Even if income is not distributed out of the partnership, the creditor is still taxed on it because the creditor is named on the K-1 (partnership tax return). Since the creditor cannot force the distribution of assets or income, the creditor may suffer paying taxes on his or her share of partnership income that has not been received.

 

Negotiating a Settlement

 

Once the creditors understand their position, they will probably want to settle their claims as soon as possible. Your goal is to wait. If you decide to settle, use the strategies in my Stop Lawsuits Cold CD/ Workbook  to learn how to settle for pennies on the dollar.

 

  Family Limited Partnership vs. Other Entities

 

The most significant advantage an FLP has over a revocable living trust and other entities is that assets are protected from creditor claims. This is not the case in a revocable living trust. Anyone with a legal claim can effectively satisfy that claim by penetrating the revocable trust and removing its assets. In an FLP, this cannot be done because you control the vote. In addition to asset protection, the FLP can be used as part of your estate plan to avoid probate and estate taxes in the same manner as a revocable living trust.

 

Other entitles, such as corporations and trusts are costly and time consuming. A wrong move can expose your estate to the whims of creditors. Professional fees could add up to more than the value of the assets. Putting aside all these headaches, these other entities still do not come close to offering the protection of a family limited partnership.

 

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and apartment investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To purchase the  Stop Lawsuits Cold  CD/ Workbook and to learn more about the Center for Real Estate Studies, please visit our web site at  # http://www.calstatecompanies.com

 

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