Wednesday, March 27, 2013

4 Los Angeles Apartment Buildings for Sale

The San Francisco bay area is a very hard place to buy an apartment building these days. This has also been true ever since I have been in the business - some 22 years now!  If you are considering a 1031 tax deferred exchange or a straight investment purchase, the $59 each way fare on Southwest to LAX may be beneficial.
I am currently tracking 4 buildings that are excellent opportunities in very strong rental markets in western Los Angeles.
Locations are in Hollywood, Beachwood Canyon and Koreatown. Price ranges for 9 units to 26 units range from $2,900,000 to $4,185,000 and cap rates on current rents are 4.7% to 5.2% at asking prices.
These are deliverable, managed and fully occupied buildings in strong demand areas - all with good rent upside due to older rents and rent control.  Of course, with rent control, going to market rate rents is not possible - but realistically you get modest increases every year and vacancies are very beneficial as you can raise that unit's rent to market.
Better returns are also possible in secondary areas of LA too.

Tuesday, March 19, 2013

Do Google, Apple and Facebook Stock Prices Affect the Market?

Google is the darling of the stock market right now at $808 from a 52 week low of $556!
Apple went from $700 a share to $450 today in less than one year.
Facebook stock opened at $38 and is now at $26 per share.

How does this affect the real estate market?

Silicon Valley is healthy. There are some winner companies and some losers (there always has been). There are winner stock bets and losers. These are not always related.

The personal residence market is hot for the most part. Although I would bet that over $2,000,000 the market is hesitant.  There have to be Apple employees rethinking their net worth over this year's steep decline.  Are Facebook employees feeling the pinch?  That all depends on whether they evaluated their gains from $38 or from $0.  I expect some will be selling now to lock in their gains at $26 and many more will be holding tight - expecting growth over the next few years.  Regardless, it will dampen the flow of cash into real estate (nice homes).

And the investment market???

Let's assume less exuberance and some conservation:

1. The single family home market will taper off - meaning lower demand/prices for SFRs. Which in turn makes the investment cash flow better since rents will maintain the same levels.
2. Silicon Valley economy still very healthy - high demand for the tech workforce - so apartment buildings will not be affected by SFR demand or lack of it.
3. Retail - not to be affected much - household expenditures are not impacted by new worth of stock portfolios much. Household spending is linked to monthly household earnings.
4. Industrial - healthy market in Silicon Valley - hard to find space for many larger and mid-size users.
5. Office - Not as strong as Industrial.  Overall, still healthy and not tied to household net worth.

Overall, the investment market will do well and not feel the impact of household wealth fluctuations via high flying and low flying stocks.  What say you?

Tuesday, March 12, 2013

Ron Ricard - 1031 exchange expert - Top 10 mistakes


1. “Like-kind” means I must exchange the same type of property, such as an apartment building, for another apartment building.
No! Like-kind is an unfortunate misnomer within the context of real property. 1031 exchanges are often called “like-kind exchanges” because that is the language used in the tax code. And there’s the rub: “like-kind,” in effect, simply means that as long as you’re selling real property
somewhere in the USA and then buying/exchanging into some other real property located somewhere in the USA, then you’re OK. Exchanges can be done anywhere in the country and can cross state lines. If you sell a rental condo, you do not necessarily have to exchange into another rental condo! You could exchange into raw land, or a strip shopping mall, or a commercial office building, etc. So let’s recap: all real property is like-kind to other real property. Although most 1031 exchanges are done with real property, exchanges can be done with aircraft, artwork, machinery, business vehicles… just about anything that has a capital gain tax can be exchanged. We call these non-real property items “personal property.” The term “like-kind” means that you can’t exchange real property for an aircraft. You can’t exchange machinery for artwork. But in the context of real property, always remember that all real property is like-kind to all other real property.

2. A 1031 exchange means that the sale and the purchase have to happen at the same time. In other words, the seller has to find someone willing to swap properties.
No! The odds of you finding someone else with the exact property that you want – and who wants the exact property you have – are slim. For that reason the vast majority of exchanges are “delayed exchanges” in which you can sell your investment property to anyone wanting to buy it. You need to use a special “middleman” called a Qualified Intermediary (“QI”) or Accommodator who is required to hold the sale proceeds for you and who then uses those proceeds to buy any replacement property that you want.

3. My attorney can handle the exchange for me as my Qualified Intermediary. Or, my accountant
knows all my tax stuff – I’m going to use my CPA as my QI.
No! If the seller’s attorney or accountant has provided any legal or accounting related services (or any service not exchange-related) in the two-year period before the exchange, they are disqualified and may not act as the Qualified Intermediary.

4. To do a 1031 exchange I just need to file a form with the IRS with my tax return and “roll over” the proceeds into a new investment. As long as the seller doesn’t touch the sales proceeds, he can do an exchange any time.

No! A valid exchange requires much more than just reporting the transaction on Form 8824. One of the biggest “no-no’s” in structuring an exchange is allowing the taxpayer to have actual or constructive receipt of the sale proceeds. This could trigger a taxable event. The QI must hold the sale proceeds during the course of the exchange. There are specific deadlines that must be adhered to as well. You have 45 calendar days, starting from the date you close on your sale, to simply identify the possible replacement properties you might want to buy. Then you have 180 days (again, starting from the day you close on the sale) to close on the purchase of one or more of the properties identified.

5. The capital gain tax rate is only 15%. I’ll just bite the bullet and pay the taxes now.
Think twice about that! Capital gain tax rates have changed significantly starting in 2013. Your capital gain tax rate might be 15%, or possibly 18.8% or even as high as 23.8% (depending on your income level, and subject to the new 3.8% Medicare surtax). And since you are selling investment property, there is probably the recapture of depreciation. The depreciation recapture tax rate is 25%. A non-exchanger will also have to pay the tax at the state level as well. In most cases, the state tax on the sale of real estate can also be deferred by doing a 1031 exchange. In summary, if you do not exchange and simply pay the tax now, you could have an effective or blended capital gains rate as high as 35% to 40% (State tax + depreciation recapture + new capital gains rates).

6. All of the funds from the sale of the relinquished property must be reinvested.
Not necessarily! A taxpayer or exchanger can buy down in value. Or a taxpayer can choose to withhold funds or receive other non-like-kind property in an exchange. But the amount that they buy down, or money they withhold, or any other non-like-kind property received, is considered “boot” which means the exchanger likely will have to pay some taxes.

7. You must replace the debt that you had on the relinquished property with at least the same amount of debt on the replacement property.
Not necessarily! The exchanger can always bring their own cash to the closing table for the replacement property to offset any reduction in debt.

8. Exchanges are complicated and are only for big investors.
Again, No! Exchanges don’t have to be complicated! A good Qualified Intermediary will work with you and your tax or legal advisers to make sure the process is done correctly and as seamlessly as possible. And exchanges are not just for big investors: anyone owning investment property that has a gain (the market value greater than its adjusted basis) should consider a
1031 exchange.

9. When I sell my home – where I live with my spouse and the kids and our pets – I should do a 1031 exchange.
Tax-deferred exchanges are not for real property held for only personal use. 1031 is for investment property only: you cannot 1031 exchange your personal primary residence for another home. There is another part of the tax code that already allows you to sell your home and avoid capital gain tax. But there are ways to use 1031 to exchange mixed-use rental / vacation homes within certain parameters. Consult your QI and tax adviser for more information.

10. If you sell one property, you can only exchange into one property.
No. You can sell one property and exchange into multiple replacement properties. And the other way around as well: you could sell multiple properties and exchange into one larger and more easily managed property. You can buy or sell any number of properties in an exchange. The devil is in the details, so choose a good QI to help you.

*** Ron Ricard is my go-to guy for 1031 exchanges - let me connect you! ***