Wednesday, April 29, 2009

San Francisco County - Tax Defaulted Properties Auction’s Result

Last month, I wrote about tax defaulted properties that were being auctioned by San Francisco County. The auction ended yesterday. The original list had 56 properties, which were a combination of lands (10), single family homes (18), multi-unit properties (4), condo (2), office condo (1), commercial properties (2) and timeshares (19). 43 properties had been redeemed by the owners prior to the auction and only 13 properties were available for public auction.

The 13 properties available were all timeshares and only one of them at Union Square sold.
• 4 timeshares of The Suites at Fisherman's Wharf (Fisherman Wharf)
• 3 timeshares of Nob Hill Inn (Tenderloin)
• 6 timeshares of Club Donatello (Union Square)

It makes sense that most of the valuable properties were redeemed by the owners. Had them not been redeemed by the owners, I bet they would sell close to their market value. You could still get a discount, but since the auction was publicly advertised, and San Francisco is such a hot location, everyone with cash would fight to be the winning bidder. Who would not want to win a house in Sea Cliff neighborhood (starting bid was $19,500)?

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Monday, April 27, 2009

Using Self Directed IRA to Invest in Real Estate

The fact that you can invest in real estate using self directed IRA must be widely known by now, but to my surprise, that is not the case. Many people still do not know that they can do variety of investments using their IRA other than stocks, bonds and mutual funds.

So what else can you invest using your IRA? The possibilities are endless, for examples, real estate, trust deeds, partnership interest and private equity. According to Internal Revenue Code Section 408, the only prohibitions are investing in life insurance and collectibles such as artworks, stamps and antiques.

If you want to invest in real estate using your IRA account, first you have to open a self directed IRA account with one of the IRA custodians. Here are few that you can consider (this is by no mean an endorsement of these companies):

Pensco Trust Company
The Entrust Group
Equity Trust Company
Sunwest Trust

Before you jump or run to open a self directed IRA account, consider the advantages and disadvantages below.

• Exposure to wide variety of investment vehicles
• Interest free loan from Uncle Sam, since the growth on your account won’t be taxable until you retire.

• The gain from real estate appreciation will be taxed as ordinary income during your retirement, versus capital gain, had the asset been held outside IRA. This is a disadvantage if you think your tax bracket after you retire will be higher than capital gain rate.
• Since your rental income is not taxable, you can’t deduct paper loss as a result of depreciation.
• You should have enough cash in your IRA for unexpected repairs.
• Mortgages might be hard to obtain.
• IRA custodian companies charge fees for managing your account.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Friday, April 24, 2009

So You Want to Buy Foreclosure?

So you want to buy foreclosure? Make sure you know what you are doing, and be ready financially and emotionally. Sure, you may get a bargain, but you are also more likely to spend tens of thousands of repairs.

Disgruntled homeowners who lose their homes through foreclosure and eviction, often time, try to retaliate by damaging the house, or removing and selling fixtures such as cabinets, sinks, water heater and toilet.

Look at these ads in craigslist (craigslist ads expire a week after posted):

Carpet and Pad 250 sq yds New - $900
Have almost 250 square yards of new heavy grade beige carpet and pad.
Bring your box knife and cut yourself a piece, with pad included.

Custom Cherry Kitchen Cabinets!! Hand made! Beautiful! - $4600
These cabinets were taken out of a friends home that was another foreclosure casualty. The cabinets were too new and too expensive to let the bank have them.

GREAT PRICE!!!--- Can be negotiated, if purchased with other items. (Light Fixture, Mirror, Towel Bar, Toilet Paper Holder and other household items)
Can be purchased together or separately. In perfect condition, only 4 years old.

Nice used fridge stove dish washer, foreclosure special
220 for fridge
295 for stove
120 for dish-
and 150 ea for washers

FORECLOSURE SALE-everything must go
I have a multitude of items for sale......refrigerator(2 years old-white) stove,microwave,dishwasher,kitchen cabinets(1 1/2 years old) full mattress set(good condition),hurricane shutters,bookcase,2 dressers,end table etc All reasonable offers considered-must be able to remove also.

Foreclosure Sale - GE Black Profile Kitchen Appliances - $250
House went into FORECLOSURE.... Must sell all my home appliances I purchased with home.. Everything is basically brand new, we only lived in our house for a single year.
We have available a GE Black Profile Series Stovetop/Oven-Range (electric) this will be for sale at $370 or best offer.
Also available is a GE Profile Stainless Steal Stovetop Microwave Oven.

Sometimes it is cheaper for the bank to give a house away than to keep it. The Detroit News reported bank owned house for sale for $1 in Detroit and it cost the bank $10K to unload the house. The $10K was used to pay delinquent taxes, water bill, sales commission and closing cost. The bank finally gave up since every time property manager tried to fix the house, the thief stole something from the house in the next few days. What do you get with $1 house? Pretty much an empty shell, as the thief stole everything from siding, fence, furnace, kitchen sink and even copper plumbing.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Monday, April 20, 2009

Hillsborough House Under $1M, not in MLS

If you search MLS today, you will not find a single family house under $1.7M in Hillsborough, California. The house has 2 large bedrooms, 3 baths, approximately 1,770 sq ft living area, and almost half an acre lot. A little TLC is needed, but the house has great potential.

Hillsborough is an upscale, quiet and secluded neighborhood in San Mateo County, located 20 miles south of San Francisco. The Town of Hillsborough maintains its rural country atmosphere, characterized by scenic winding road and green vegetation. The median family income according to HUD is estimated at $250K.

If you are interested, please email me.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Wednesday, April 15, 2009

Correlation between Neighborhood Characteristics and GRM

In one of the seminars I attended, I met a gentleman in his mid fifties. Despite the worldwide financial troubles, he saw a lot of opportunities in the real estate and wanted to start putting his money into real estate. He asked me if I can find him a property which produces annual rent 12%-15% of purchase price. That means GRM of 6.7-8.3.

GRM or Gross Rent Multiplier is a simple way of comparing investment properties by dividing the purchase price by gross annual rent before vacancy and expenses.

                                                                      Purchase Price
Gross Rent Multiplier (GRM) = -----------------------------------------------------------------------
                                              Gross Annual Rent before Vacancy & Expenses

Again, GRM is just a rough estimate to compare properties. For accurate financial analysis, all factors such as vacancy, repairs to bring property ready for rent, taxes, insurance and property management fees have to be included.

While it is not impossible to find GRM of 6.7-8.3, based on my experience, you will find those properties located in depressed neighborhood. I call them “junk real estate”.

Let’s examine neighborhood characteristics based on median household income, poverty level, vacancy, ratio of renter occupied to owner occupied and crime rate. Those data can be found from US Census Bureau and local police department. From scale 1 to 5, I give 1 to neighborhood with the lowest median household income, highest poverty level, vacancy, ratio of renter occupied to owner occupied and crime, while I give 5 to neighborhood with the highest median household income, lowest poverty level, vacancy, ratio of renter occupied to owner occupied and crime.

As a case study, we’ll take a look at 5 single family homes with 3 bedrooms located in Oakland.

Neighborhood characteristics12345
NeighborhoodEast Oakland Lake MerrittOakland HillsOakland HillsPiedmont Pines
Beds/Baths/Sq ft3 /1 /12483 /1.5 /14943 /1.5 /15083 /1.5 /15423 /2 /1716 ZESTIMATE$221,500$367,000$466,000$587,500$709,500
Monthly rent$1,600$1,975$2,295$2,500$2,795

Compare the house in east Oakland and Lake Merritt. Lake Merritt house is 66% more expensive than east Oakland house, but the rent is only more expensive by 23%. Compare any other 2 houses above, you will find, the percentage increment of rent tends to be less than the percentage increment of housing values. It shows you a tendency of higher GRM as the neighborhood characteristics improve, because the price goes up faster than the rent. While this tendency generally holds true regardless of the location (eg: Phoenix instead of Oakland), this analysis is only a general observation, and not an exact science. Instead of fixed value of GRM, you will find a range, and it could be possible that two neighborhood characteristics have GRM range overlap to each other.

House Value and Monthly Rent
I personally stay away from investing in depressed neighborhood and advise the same thing to my clients, but I know other investors who mainly invest in low end housing. It really depends on your objective, risk tolerance and experience. Why people invest in low end housing? Lower GRM usually means higher cash flow. They get more steady income from the cash flow regardless of the appreciation and the up and down of the housing market (please read “Nice Cash Flow or Great Appreciation?”).

Few years ago, one investor bought multi unit property in depressed downtown Los Angeles. He worked with police department, evicted drug dealers, and promoted education in the community. As a result, the quality of the neighborhood gradually improved. As the quality of the neighborhood improved, so did the building value.

If investing in low end housing is appealing to you, three properties are available, two of them currently offered at $49K, and the third one offered at $59K. You won’t be able to find these houses in the MLS.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Wednesday, April 1, 2009

Low Income Housing Tax Credit

Tax credit is absolutely better than tax deduction. Let’s say your tax bracket is 35%. $1,000 tax deduction reduces your taxable income by $1,000 and subsequently reduces your income tax by $350. $1,000 tax credit directly reduces your income tax by $1,000.

Federal, state and local government offer variety of tax credits. One of them is low income housing tax credit (LIHTC) for investor to develop, acquire and rehabilitate housing for low income tenants. Why does government give investor free money? Well, it is a win-win scenario. The government lacks the resource to provide affordable housing, and it needs private investor to help the government increasing the supply of affordable housing. On the other side, without tax credit, providing housing for low income tenants may not be economically feasible for investor.

LIHTC program was enacted in 1986 based on Section 42 of the Internal Revenue Code. Tax credits have been awarded to developers whose project meets requirements as follow:

• Residential rental property
• At least 20% of the units must be rent restricted and occupied by households with incomes no more than 50% of the HUD-determined area median income OR at least 40% of the units must be rent restricted and occupied by households with incomes no more than 60% of the HUD-determined area median income
• The rent, including utilities, do not exceed HUD specified limit
• 30 years or longer operation under rent and income restriction

The developers can then sell the credit to investors and investors will receive tax credit over 10 years period. Investors need to maintain compliance with applicable rules, and if the rules are violated, investors may have to pay back the credits taken, or unable to apply for future credit.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved