1. MISCELLANEOUS TOPICS
Real Estate and REITs

2. Real Estate Investments Types
Direct Real Estate Investments
As the investor, you hold the title to the property
Your home
Your vacation home
Rental property – whole course unto itself!
Undeveloped land
Can be tremendous gains but this type of investment poses enormous risks
All the money is riding on a single parcel of land
Plus there is no cash flow and you still have to pay the property taxes
And there is often no guarantee that you will be able to develop the land

3. Real Estate Investments Types
(continued)
Indirect Real Estate Investments
Real Estate Investment Trusts (REITs)
Real Estate Syndicates or Limited Partnerships
Hurt by 1986 Tax Reform Bill
Passive versus active income
Tax Credits
Low-income housing, etc.
Equity Sharing
You put up the down payment for someone else and then share in the appreciation
First and Second Mortgages
Not an “equity” position – you are a “loaner”

4. Investing in Commercial Property
Most common investment of this type is a duplex or small apartment building
Also includes hotels, office buildings, stores, and many other types of commercial establishments
Do not be surprised if you are looking at negative cash flow for several years
Rule of Thumb: Price = 7 to 10 times Rent
In San Diego? Ha! Ha! Ha! Ha! Ha!
For over 20 years, prices had become untouchable – simply insane
But the recent turmoil has changed the investing landscape for real estate
I think the South Bay is where the great bargains are now if you are so inclined

5. Investing in “Fixer-Uppers”
Concentrate on smaller properties first
Two to four units and live in one of them
Look for low down payments and seller financing of rundown properties
Banks usually do not want to loan to distressed properties, however…
Banks are normally all too happy to finance a rundown foreclosure on their books
Avoid property managers
Nobody cares about your property as much as you do (but there are always exceptions)

6. Investing in “Fixer-Uppers”
(continued)
Most Importantly,
Are you savvy dealing with repairs? …and…
Are you savvy dealing with renters?
Fixing a tenant is just as important as fixing a toilet
One bad tenant can set you back thousands
Make improvements that add perceived value
Example: Install a white picket fence
Investing in Fixer-Uppers, Jay P. DeCima

7. Real Estate Investment Trusts
Real Estate Investment Trusts (REITs)
“Pass-through” investments – kinda’ like a mutual fund
By law, must distribute 95% of their earnings to shareholders
Examples:
Shopping centers
Office buildings, warehouses, etc.
Apartment complexes
Management fees typically range between 1% and 2% per year
Long-term return – 7% to 8%
Example: Realty Income Corporation, symbol O

8. Advantages of Real Estate Investments
A hedge against inflation
Financial leverage
The use of borrowed funds for investment purposes allows you to acquire a more expensive property than you could own on your own
For Real Estate Partnerships / REITs
Easy entry – REITs are easily liquidated
Limited financial liability (limited partners, REITs)
No management concerns
You can’t check the price of your real estate investments every day on the Internet
One of the major problems with stocks

9. Disadvantages of Real Estate Investments
Liquidity may be poor
It may be hard to sell the property (or your share of the property if a partnership)
Not a problem for REITs – buy/sell like a stock
Normally there is a lack of diversification
REITs & partnerships offer diversification
Passive tax shelter for real estate syndicates
Management or tenant problems
Property values can decline
Oh, yes, they can!

10. Your Home as an Investment
A major asset of most households
Possible hedge against inflation
Traditionally, a home produces an after-inflation return of about 2.5 percent a year (San Diego?)
Tax advantages
$250,000 capital gains tax-free for single people
$500,000 capital gains tax-free for married folks
But it is a home first, an investment second
In my humble opinion…

11. “But my house is the best investment I have ever made!”
“Of course, it is pretty much the only investment that I have ever made,
Except for that penny stock my brother-in-law, the ex-stockbroker, conned me into buying…
But that stuff is worthless now
And those gold coins I bought back when the first Gulf War started back in ’91
What did I do with those things, anyway?”
Bottom Line: A House is a Home First, an Investment Second

12. “But what about San Diego?!”
Prices in San Diego have gone down in the past
They are going down as we speak
How far before we hit bottom, no one knows
But if you plan on staying here, by all means, buy whatever you can afford
San Ysidro and National City are two of the best values in the region, by the way
Imperial Beach is also a great beach value
But don’t expect what happened the past few years to repeat itself for quite some time…

13. Sign seen over a desk in a San Diego office, circa 1993
“Please, God, let there be another real estate boom and I promise I won’t piss it all away this time!”

14. The “Perfect Investment”
“C’mon, Paiano – Admit it!
Real estate is the ‘Perfect Investment’
Look at what has happened in the past five years”
Beware the Permanent Trend (Andrew Tobias)
Real estate goes up and down in cycles
Ask those who bought in 1990 and sold in 1994
And those who bought in early 2006 and are still trying to unload that “flipper condo”
But if you plan to hold for the long-term, you should do well
By the way, there is no “Perfect Investment”
Folks were saying the same things back in 1999 about stocks

15. The “Perfect Investment”
(continued)
“But what about Leverage?! Huh? What about the ability to make money with other people’s money?”
We have already discussed leverage, haven’t we?
“But isn’t that what makes real estate such a great investment?”
Well, yes. But there are pitfalls. Just as with margining stocks, leveraging real estate magnifies your gains and magnifies your losses.
Worksheet

16. Real Estate and Capital Gains
“Wait a minute. Did you say that there are no capital gains taxes on real estate?”
Currently, as the law stands now, as long as the real estate is your primary residence for 2 out of the last 5 years, you pay no capital gains on the first…
$250,000 if you are single
$500,000 if you are married
By the way, capital losses on your primary residence are not tax-deductible
Example: Buy your home for $200,000. Sell it for $700,000. If you are married, then you pay no capital gains taxes!

17. Speaking of Info-mercials
Have you seen the ads?
“Start your real estate empire with No Money Down!”
“You, too, can take advantage of the tremendous opportunities now in the wide-open Real Estate Foreclosure Market!”
“Just buy our Guaranteed, Sure-Fire Real Estate Investment Kit for $395”
“You will be on your way toward Riches beyond your Wildest Dreams!”
No comment necessary.

18. My Advice on Real Estate
Buy a house
Make it your home
After you have digested that purchase
Then look for some rental property
But learn as much as you can from folks who are already doing it
Maybe even work for a property manager for a spell to get the feel for what you will need to be able to do