As real estate prices continue to drop it may be a great time to buy another piece of real estate. However, it is always important to evaluate your current portfolio first to make sure it as recession proof as possible.

Here is the Nelsonian Theory on things to do RIGHT NOW….

1.  Evaluate your investment portfolio

a.  What is your ANNUAL YIELD:

i.  for each property

ii.   for the entire portfolio

b.  What is each property doing for you?

Restated: Why own it?

c.  Would performance be enhanced by refinancing it?

Restated: Do you have any interest only loans or variable rates loans that will adjust soon and have an impact on cash flow

d.  What is the “runt of the litter”?

i.  Should you hold it or trade it off?

ii. Can use it as a “down payment”

2.  Evaluate your LIQUIDITY (“staying power”)

a.  Make sure you can survive

b.  3-6 months of “survival number” or an extremely safe life of credit

3. Consider buying “foreclosures” and “the walking wounded”

Fannie Mae (FNMA) has a special program called Home Paths which allows an Investor to purchase a FNMA repossessed property and finance it with as little as 10% down payment. Special restrictions apply so check with you a knowledgeable lender regarding the financing options.

These special financing programs will not last forever!!

Rene responds to Ben Bernanke’s announcement about keeping interest rates low and looks into her crystal ball.

Many investors ask us our opinion of the market, when do we feel we will be out of the recession, and what is the right kind of property to buy right now.

First off, if we could predict when we will be out of this recession then we would be sitting on a beach on our own island having waiters bring us fruity drinks with pink umbrellas.  No one can really predict when the recession will end because it is job and employment driven.  Until people go back to work our financial woes nationally will continue.

With that being said, there are some ways to look at real estate to determine what will be the least likely real estate asset to be hurt in this recession.  Here is the Nelsonian Theory:

1. Class B and C Apartments in college towns
2. Modest priced rental houses in strong neighborhoods
3. Small medical office buildings with well established doctors
4. Key: Retain some LIQUIDITY!!!

Retaining liquidity is critical in a tough market like this.  If you have a leaking roof or the HVAC of the property fails having the cash to fix it quickly can make the difference of keeping your tenants happy or having them move out.

Liquidity is also important when you have a vacancy.  It is always painful when you have to dip into your own pocket to cover a mortgage payment if your space is vacant and there is no rent coming in.  Set a goal today of accumulating 1-2 months of operating expenses in a reserve account.

Class B and C Apartments are becoming very attractive to investors.  The tenant mix in these types of properties are hard working blue collar individuals who usually become long time renters.  They work hard and pay their rent on time.  They are looking for a clean, safe place to live and don’t expect granite, stainless steel appliances, etc. They are also not the type of tenant who is renting your place just long enough so they can save up a down payment and then vacate to go and buy a house which is a trend in Class A apartments.

The most popular Class B and C Apartment complexes can usually be found in college towns.  Right now with unemployment high the local universities and colleges are busting at the seams with people wanting to get an education.  College towns are great for apartments because there is a healthy mix of the working sector in addition to the student sector for possible tenants.

Read our next blog about things you can do right now to get yourself in a better financial position to weather the storm.

With the second consecutive quarter of positive economic growth now apparent, it is likely that the recession will be declared technically over. Although we aren’t out of the woods yet, we are one step closer to recovery. However, it will take much more time for the businesses trying to sell their goods and services, the commercial property owners struggling to fill empty space, and the more than 15 million Americans that do not have jobs, to see their situation improve.

Read the rest of this in depth report

I recently heard some interesting statistics and I thought I would share them with you. There is currently a 12% national unemployment rate of people aged 20-34 years old and that is one of the factors that is driving apartment vacancy up. We are currently seeing apartment vacancy rates hover around 6.5 to 7% per Mark D. Barry a Real Estate Appraiser in Portland. Many of the young people that are currently unemployed are either doubling up in a rental unit or moving home to live with Mom and Dad, job growth is critical for the renter population and overall apartment vacancy. We hope to see a stabilization of rents in late 2010.

The complete article related to Portland, Vancouver apartment vacancies was featured in the Oregonian. We hope you enjoy the article.

Click to enlarge

2009 will go down as one of the toughest years for the Portland economy since the early 1980’s, with only the Great Depression causing noticeably more pain. While we all know how tough the second half of 2008 was, there was little to prepare us for the turbulent waters and gale forces winds which impacted the Portland economy and commercial real estate in 2009. So just what happened here in 2009?

Portland Economy: The big surprise of 2009 was just how weak the Portland economy was. Over the twelve months ending in October 2009, we have lost 53,200 wage and salary jobs, or over 5% our employment base. In addition, our unemployment rate rose from 6.8% in October 2008 to 11.6% in October 2009.

Read the full 2010 Winter Newsletter.

In recent weeks we’ve seen reports suggesting that real estate prices have begun to stabilize. What’s being said is not that prices are returning to the levels seen in 2007, but instead that declines in many communities have now slowed or stopped. Indeed, home prices are actually rising in some local markets. These reports are good news, but many people wonder: How is it possible for home values to stabilize while our vast “shadow inventory” of distressed and unsold real estate continues to grow? Read the entire December 2009 Market Trends Report

A flurry of recent apartment transactions and positive reports from the trenches by apartment owners is leading multifamily experts to say the sector is finally showing signs of improvement.

“The attitude towards multifamily has completely changed in the past year,” said Dave Doupé, managing director of Jones Lang LaSalle’s West Coast Capital Markets team. “Financing from Freddie Mac and Fannie Mae has certainly bolstered the viability of this sector, but we’re also seeing buyers and sellers begin to come closer to a common ground on pricing discovery in the multifamily product category.”  Read the full story

Potential Tax Savings Opportunities 

Nelsonian Fundamentals: There are two ways to increase “profits”.

Either: 1. increase your incomes; or,

        2. decrease your expenses.

Both will increase the “Bottom Line”.

Both of the following “opportunities” can improve your profit margin right now by decreasing your expenses… the expense of taxes paid to the government.

 Do I have your undivided attention? Read on.  

NOTICE: THIS IS NOT INTENDED TO BE “TAX COUNSEL”.

This is intended to be a “heads up” for those who own real estate.

 Item One: NEW FEDERAL LAW as of 11/6/09

 Great Tax Relief, if your business has LOST MONEY in 2008 and / or 2009.

 The “Worker, Homeownership, and Business Assistance Act of 2009″

Five Year “NOL” (Net Operating Loss) Carry-Back

Who Qualifies:

1. Owners of a small business with gross receipts of less than $15 million per annum in 2008 and/or 2009; or,

2. Tax Payers who do not qualify may use it in either 2008 or 2009 (but not both years)

Summary of Opportunity: If you own an eligible small business that:

• grosses less than $15,000,000 in 2008 or 2009, and
• had business losses

then, you may amend your tax return to carry those losses back for up to five (5) years and thus reduce your taxable income in those years by offsetting those more profitable (and more taxable) years with current business tax losses.

 How About the “Alternative Minimum Tax” (AMT) Tax payer? This new law suspends the 90% limitation on the use of a NOL for the AMT Tax Payer. Pretty interesting for once for us AMT tax payers!

 Nelsonian Theory: With Your CPA’s Blessing, Maximizing 2009 Expenditures:

1. One way to legally increase your 2009 “tax write-offs” is to increase your IRC Section 179 Expenditures (new computers, business oriented equipments, etc…. ask your real estate oriented or business oriented CPA to make sure that your perceived “expenditure” qualifies). This can really increase your qualified expenses while acquiring needed equipment to become more productive.
2. Another whopper of a legitimate tax shelter expense increase is to convert to the Cost Segregation depreciation method. Unfortunately, the conversion to this method is not quick. It takes a detailed Cost Segregation Study to get started, and that doesn’t happen over night or at a small expense…. See “Item Two” below for addition information on that topic.

 To Learn More: Consult your business oriented CPA. This could be a whopper for those who did very well before the Recession hit, and are now not having nearly as much fun with accumulating business losses.

 Item Two: Cost Segregation Depreciation

 Who Can Use It: Any owner of real estate who uses that real estate in a manner that qualifies for a depreciation allowance:

• an investment property owner who owns a property with building improvements; or,
• a business owner who occupies the building that they own as a productive asset in your trade or business.

 How to Get On Board: It takes a Cost Segregation Study to start to receive the benefits. There are a number of firms who specialize in preparing the necessary Cost Segregation Report.  Those firms typically consist of engineers and CPA’s. For a not-very-small fee, they perform a Cost Segregation evaluation of the buildings. The study identifies the structural components and their relative “cost”.

 How It Is Used: Once the study is completed, each identified component is evaluated to identify its specific value and a specific depreciation schedule. Each year, the CPA will calculate the annual depreciation allowance that the owner is allowed to claim.  

 The Result: The owner/tax payer can claim a substantially larger amount of depreciation allowance each year…. thus offsetting a like amount of otherwise taxable income generated by that property or that business (in the case of an owner-occupant).

 Heard on the Street: A broker friend of mine stated that it saved one of his clients $100,000 of real money in the first year of application. That tax savings came in a refund from IRS on taxes paid in former years on income generated by that property.

 Is It For Everyone?  I don’t know. However, the initial cost of establishing the Cost Segregation Study is probably not “cost effective” unless your property improvements exceed $1,000,000 in value.

 How Much of This Should I Rely Upon?  Very little. I am just trying to give you a “heads-up” that might save you big bucks.

 How Can I Get Good Advice? Talk to your real estate oriented CPA.

 Don’t Have A Real Estate Oriented CPA? If you own real estate and are not using a good real estate oriented CPA, then that could be very costly! You need to correct that defect RIGHT NOW!

 Our new President has ideas for tax increases to fund the new socialized medicine and other programs that will require new tax law changes. Guess what…they will not favor additional wealth accumulation by investors and business owners.

 Get ahead of the curve… even then, it will not be easy or safe. Don’t go to a proctologist for a tooth ache, and don’t trust your financial future to tax counsel to a person who is not an expert in real estate taxation and real estate investment concepts.  

 Get informed counsel for your specific needs! If you need assistance in finding a “real estate oriented CPA”, then call me Bob Nelson (541) 485-8100.  I have some ideas.

I recently read this article in USA Today (10/15/09) that gave the top indicators of economic heath.
These are the indicators according to HSBC Consumer Survey of 1,000 households.

• 42% stated: People around me get jobs again
• 39% stated: Unemployment rate declines
• 22% stated: Home sales improve
• 16% stated: Retail sales increase
• 15% stated: Fewer empty store fronts.

Nelsonian Theory would state:

• Watch new job growth – there must be jobs to generate income that will allow and support consumer spending.
• Consumer spending leads to the spending cycle that generates consumer confidence and a return to the free flow of money. Nothing works unless people have money and borrowing capacity.
• Watch for the stable return of the commercial mortgage market – The “continual bad news” being emitted by the commercial lending sources is by itself squelching the desire to borrow on a long term basis. If there is a fear of availability of financing, there will be an absolute slow down in construction.
• Frankly, that can be an advantage, if you personally would purchase existing construction. The increase in user demand (tenants) will force a reduction in vacancy factor in the existing supply (apartment units to be rented to the folks that need safe and clean shelter).
• It is a great time to corner good quality property – The competition is sitting on their hands, and sellers will consider reasonable offers.

 Bob Nelson, CCIM

(541) 485-8100  bob@1031gur.com

Pacwest Real Estate Investments, LLC