November Greetings!

Al and I are always being asked questions about the Real Estate Market…so, we thought we’d put our “most” asked questions in a letter with our response.  We’ve even added some extra “thoughts” on the market as it stands today and how to build wealth with Real Estate Investment.   Enjoy!

How does residential real estate compare with stocks, bonds, and mutual funds in terms of return on investment?

Real Estate offers numerous benefits that stocks, bonds, and mutual funds do not, including cash flow, leverage, and tax benefits such as depreciation and the 1031 exchange.  When properly managed, leveraged equity in real estate can far outpace stock appreciation over time.

I’ve heard that real estate isn’t a good investment anymore.  Is that true?

Real estate has proven to be far less volatile over time than the stock market.  Over the past ten years, the S&P 500 has lost value while the average home price has appreciated, and this includes the housing crisis of the past couple of years.  In 2008, during the recent crisis, the S&P 500 lost nearly 40% of its value, while during that same year median home prices dropped less than 10%.

When is a good time to buy?

It’s always a good time to buy real estate, but that holds especially true today.  Interest rates are at historic lows, and prices remain low in many areas.  Many investors are buying at bargain basement prices and reaping the benefits of cash flow.  (See our enclosed Purple Cow Synergy Team Investor/Buyer Management Process and Team Member Chart).

How do I find the right property?

Knowing what you want from a property is the first step…we call this knowing your criteria.  Finding the right investment property requires not only knowledge of the local market, but the ability to estimate the earning power of a property.  Whether you intend to buy and hold a property for your retirement or rehabilitate and resell a property for quicker profit, the Purple Cow Team is there to guide and support you through the process.  We’ve put together the most talented group of companies that understand Real Estate and are committed to working with you in support of your goals.  That’s why we call ourselves The SYNERGY TEAM….it’s the Dream Team for Buyers/Investors.

What if my property doesn’t appreciate?

Many who own real estate today have similar concerns.  Even if your property isn’t appreciating, you have other benefits, such as cash flow and tax benefits, to help make up for any lack of appreciation.  Appreciation of any asset is never a sure thing, as the stock market the past 10 years has shown us.  When you invest in real estate, you have more options of how to earn with your asset.  If your stock depreciates, it simply depreciates and sometimes disappears.  Property is REAL.

Can I use retirement funds to purchase an investment property?

Yes.  You can use a self-directed IRA to purchase and sell real estate, earning tax-free appreciation.  Contact us for a knowledgeable accountant or tax advisor for details on this subject.

What is leverage?

Essentially, leverage is the ability to earn a return with borrowed money.  Leveraging means borrowing a certain amount to purchase an asset, but earning a return on the entire asset, not just the money you’ve personally invested.  Real estate is the only asset class that uses leverage to earn significant returns for investors.

What is CAP rate?

CAP rate is a measure of how well an investment property earns a return.  It is the ratio of net income earned by a property and the value of that property.  Cap rate, among other criteria, is used to determine whether or not a property is a good investment.  It measures the risk involved in an investment.  The higher the risk, the higher the CAP rate; the lower the risk, the lower the CAP rate.  The CAP rate is designed to reflect the recapture of the original investment over the economic life of the improvement to give the investor an acceptable rate of return (yield) on his or her original investment and to provide for the return of the invested equity.  Using a qualified appraiser to help determine the CAP rate of a property is always recommended, as a mere 1 point difference can greatly affect value.

More QUESTIONS?  Let us hear from you.  Just call or email us your question.  We will be setting up The Purple Cow Team Blog for just this purpose.  It will be “launched” later in November!

In addition to our Buyer/Investor Management Process Chart , we’ve included a short excerpt from a nationally recognized Investor, Gary Keller.  Please take a minute to review this brief document.

Are you still concerned about the REAL ESTATE market in Phoenix? We think it’s the BEST time to create WEALTH.  Real wealth for you and your family to rely on.  Real wealth to provide for your interests, your charities, your children.  BUT,  there are a few things to avoid when setting out to Invest in Real Estate:

• Following your gut and not your head

Many investors fall into the trap of buying an investment property the same way they buy their home, using emotion instead of relying on numbers.  It is important for investors to remember that every home is the right home for somebody, even if it isn’t them.   The difference between investing and speculating is that investing relies on research and number crunching;  Speculation relies on gut feelings.  The Purple Cow Synergy Team has the professionals, the required training, tools, and resources to properly evaluate real estate as an investment that will offer you the best returns.

• Overleveraging

While leverage is a highly valuable tool in real estate investment, not knowing the difference between positive leverage and negative leverage can mean making payments on an investment rather than getting paid by an investment.  Calculating the Debt Service Coverage Ratio for an investment is an important method of determining whether or not an investment will earn money or cost money.  Working with an experienced lender, REALTOR, and tax accountant can prevent these pitfalls and help you choose the “best” property for your financial situation and long-term plan.

• Thinking real estate is an easy way to get rich quick

From 2002-2006, the residential real estate market experienced a period of rapid appreciation, which was subsequently lost in the years following.  Real Estate appreciation over time has been slow but steady, and offers great rewards to the patient investor who does the research and works to ensure property appreciation.   In fact, real estate investment beat the S&P 500 in appreciation over the past 30 years – and that even factors in the recent crisis.  Wise real estate investors know there are no short cuts, and are willing to put in the time and work to ensure good returns on properties.  “Get rich quick” schemes are just that:  schemes.  The PURPLE COW Synergy Team is committed to assisting you with your Wealth Building Strategy and Goals.

• Not understanding tax benefits and liabilities

Among the key advantages of real estate as an investment are the tax benefits.  Understanding how to deduct for depreciation and passive activity loss can greatly increase the cash flow (or money coming in) from a property.  There are also ways to defer capital gains taxes that are unique to real estate, such as the 1031 exchange.  But benefits are only part of the story.  Wise investors understand depreciation recapture and how to minimize taxes upon sale of a property.  We understand these concerns of yours and have put to together the Tax, Insurance, Financial, and Legal help you will need as a wise Investor.  Why go it alone, when we have the resources you’ll need, ready to work for you!

• Investing without a clear goal

Simply buying a property because it’s a good deal can be dangerous.  Shifts in market conditions, unexpected vacancy, or extended holding costs can quickly turn a profitable property into a money pit.  Investors should always have a clear goal for a property, one that includes an understanding of a specific cap rate, cash flow, and expected return on investment, as well as exit strategies should you need to take action, regardless if it is a commercial property, multi family, or a single family house/condo.

Okay…are you ready to give us a call and get started with buying your 1st Investment property?  Or maybe it’s not your first, but, you are ready to work with The Purple Cow Synergy Team and experience the difference in our “one stop shopping model”.  We’re 24/7/365….and the COW is in, give us a call!

Cheers!

Jane & Al Andersen