recession proof investing

Understanding Depreciation in Real Estate

Mid-Day Market News & Commentary by Chris McLaughlin, December 3,  2008
http://www.shortsalesriches.com/welcome.html

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What if there was someone who would lend you money for 24 hours, regardless of your credit, your income, and whether you just filed bankruptcy?   What if you could then re-sell a property in that time and make a fortune?  Join us for our amazing webinar tomorrow!  We’re holding this again because of the tremendous demand that jammed up our servers last night … Right now there are only 27 spots left:

Recession Proof Investing Webinar (Thursday, 3 PM EST, 12  PM PST):

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In the latest on the botched government bailout, the Government Accountability Office blasted the internal controls over the handling of the $700 billion allocated for the TARP bailout.  The report specifically noted that the ultimate outcome – providing liquidity and getting banks to lend –is not being monitored.  As it notes: “Treasury has no policies and procedures in place for ensuring that the institutions are complying with these requirements or that they are using the capital investments in a manner that helps meet the purposes of the act.” 

So let’s give the banks $300 billion … but put no requirements that they actually lend it.  Hmm… and guess what’s happening?  They are hoarding the cash, so Main Street still gets hurt.  Our bet: the next $350 billion that goes out has a lot more strings attached to it, not just restrictions on executive pay and dividend payouts.

And in the latest sign of desperation from the Big 3 Automakers, Jim Press, the Vice Chairman of Chrysler said the big D work: depression.  “We’re on the brink with the U.S. auto manufacturing industry,” Press told The Associated Press.  “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.”

Depression?  Really?  That’s really pushing the envelope folks.  First they fly in with corporate jets asking for help.  Now they’ve gone to scare tactics because the American people are not happy about another bailout.  How about designing cars that are fuel efficient?  Novel idea, eh? 

President elect Barack Obama nominated New Mexico Governor Bill Richardson as the Secretary of Commerce.   “We have everything we need to renew our economy, we have the ingenuity and technology, the skill and commitment — we just need to put it to work,” Obama said.

Now on to our real estate educational section …

Understanding Depreciation—Especially on Short Sales & REOs

When it comes to buying and selling short sales, foreclosures or other distressed real estate an understanding of depreciation is essential. To begin, let’s use a working definition of depreciation; depreciation is simply an accounting method of reducing accounting income by spreading the deductible fixed asset cost over the estimated life-span. Two questions should quickly come to mind; “what is a fixed asset” and “what is the estimated life span”?

When dealing with real estate the house and property are considered “fixed” assets; other items such as appliances are also assets but not long term. For tax planning purposes, the government has established typical life-spans associated with most assets; for example, buildings often have a life-span of 27.5 years, appliances 5 to 7 years etc…land, which doesn’t deteriorate or become obsolete, never depreciates.

There are several ways to calculate depreciation depending upon your specific needs and situation but it is important to understand the benefits and consequences of each; once you select a method it is difficult to impossible to change to another formula in future years.  The two most common methods are the straight-line  and units of production however, for the purpose of real estate, most short sale investors will only use the straight line formula.

The straight line formula is easy: Depreciation = cost-salvage value/number of years of useful life. So for example, if you purchase a new HVAC unit for a home at a cost of $5,000 then subtract a salvage value of $500 for a total of $4,500 divided by a 10 year lifespan you would derive an annual depreciation of $450.

Alternative depreciation calculation methods include “Sum of the Years’ Digits” and “Double Declining Balance” are useful when additional depreciation is needed earlier in the lifecycle of the asset. Keep in mind, whatever method is used, the total depreciation will result in the same amount by the end of the period. It is only the annual amount of depreciation that changes.

A few depreciation tips to keep in mind related to short sales:

1.     Bonus depreciation is currently authorized for investment properties – this accelerated depreciation is a major tax advantage to those seeking a shelter or hedge against gains. If you currently need additional tax breaks then take it; otherwise, use the standard straight line depreciation method without the acceleration.

2.     Calculate depreciation when crunching numbers; depreciation can turn marginal homes into the black rather than the red.

3.     Consider selling or doing a 1031 exchange on properties nearing their full depreciation schedule; be careful to calculate depreciation recapture.

4.     Depreciation isn’t optional; short sale investors that fail to take depreciation will still be liable for it later.

5.     Always review accumulated depreciation expenses reported on income statements/other of investors/sellers etc; accumulated depreciation on a fixed asset is a solid method of determining book value and the real “worth” of a fixed asset.

More on Thursday!

See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

If you have the chance make sure you jump on this link now, to get the insight into why the foreclosure market is going to be THE PLACE to invest:

http://www.shortsalesricheswebinar.com

Don’t miss it – everyone that has watched it says it is perhaps the most useful tool in understanding what’s going on in the real estate market, and how to make money in today’s environment.

P.P.S.:  Join us from our next webinar tomorrow at 3 PM EST, 12 PM PST:

A Recession Proof Real Estate Investing: Making Money in ANY Economy! 

We’ll show you how to make money with no credit, no capital, and no holding costs!  Think we’re crazy?  Find out now!

http://www.recessionproofinvestingwebinar.com

Mid-Day Market News & Commentary by Chris McLaughlin, December 1, 2008
http://www.shortsalesriches.com/welcome.html
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It isn’t about what the economy is doing … it is about how you respond to it! Can you imagine that there’s a way to actually make tons of money in this market, literally a recession-proof investment strategy? Yes, you don’t need capital. You don’t need good credit. You just need a plan. And we’re gonna show you that plan, on Tuesday night. But there are only 50 spots available, so grab yours now:

Recession Proof Investing Webinar (Tuesday, 9 PM EST, 6 PM PST):
http://www.recessionproofinvestingwebinar.com  
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The financial markets were jittery this morning after the Institute of Supply Management index of manufacturing activity dropped to 36.2 in November from the reading of 38.9 in October. The drop represented the lowest reading in 26 years, spooking investors who for the most part were pleased with reports that holiday shoppers were buying.

ShopperTrack RCT, a firm that tracks sales for over 500,000 retail outlets, indicated that sales rose 3% to $10.6 billion compared to the Black Friday in the year ago period.

Around noon the Dow Jones Industrial Average was off 371.40 to 8457.64 and the Nasdaq was off 79.14 to 1,456.43.

The U.S. Department of Commerce announced today that construction spending dropped 1.2% for the month of October, a larger decline than the .9% many analysts had expected. Housing construction dropped by 3.5%, a larger drop than the decline of .5% in September. Most analysts attribute tightening credit as the leading factor causing the declines.

And in good news for drivers…national gas prices are now $1.82 a gallon, a price not seen since January 2005. This “energy dividend” is likely to assist many companies that were struggling with higher fuel costs. But for those interested in real estate, let’s hope this doesn’t mean buyers want to drive around to even more homes!

And finally, for the political junkies reading this…Senator Hillary Clinton officially was nominated by President Elect Barack Obama to be his Secretary of State. Obama is keeping Defense Secretary Robert Gates and nominated retired Military General Jim Jones to serve as National Security Adviser.

Now, on to our real estate investor education section…

Indicators and Indices: Information You Need to Know

There are two types of investors in this world: those that follow the masses and those that remain independent. Guess which type typically makes the most money? While many investors that go against the common trend of the day are considered contrarian investors, a more apt description may simply be “informed”. Given the recent melt-down hitting Wall Street and Main Street, only those that have a true understanding of current events will have the stamina, rational and readiness required to profit while others panic.

To that effect, one bit of information every short sale investor needs to know is how to “read” these common indicators and indices. While no single index is able to provide a full picture of current events, taken together the information is useful to demonstrate trends in the market. Here are a few lesser known indices to keep an eye on in the coming months:

Barron’s Confidence Index. Experts tend to think of bond investors as a bit more sophisticated and savvy than stock traders (in general) and therefore able to identify stock market trends earlier. This weekly indictor is not as well known to the common investor but eagerly tracked by “those in the know”. The index divides Barron’s 10 top-grade corporate bonds by the yield on the Dow Jones 40 bond average. Because top grade bonds have a lower yield than lower-grade bonds the index is always below 100 with an average range between 80 to 95; this week – the end of November 2008, it sits at 46.4 as compared to 78.8 only a year ago.

Tip: Most analysts believe there is a “lag-time’ between Barron’s Confidence Index and what stocks will be doing in 3-6 months. Expect the “flight to safety” to continue into early next year and keep an eye out for future reversals.

OFHEO Price Index. The Office of Federal Housing Enterprise Oversight publishes data of major interest to every short sale investor or real estate professional. The most recent data released on November 25th, 2008 shows home prices continued to slide during the past summer by an average of 6.0. However, since the cost of other goods and services increased by 6.7 percent, the inflation adjusted rate of decline actually approached 13 percent over the past year. Despite this dismal news, some states actually showed an increase including North Dakota (4%), South Dakota (3.9%), Texas (3.2%), Alabama (2.8%) and Oklahoma (2.8%).

Tip: The OFHEO utilizes Fannie and Freddie data to derive its data; obviously, given the recent government intervention into these programs the data may be skewed and does not reflect transactions outside of these quasi-governmental programs.
Index of Bearish Sentiment.

Although this index not housing specific, it can provide a useful tool for tracking trends in the general financial and/or economic environment. In a nutshell, this index provides a means of tracking reversals of official recommendations; ie, when the investment advisory service recommends a specific action then it is time to do the opposite.

So for example, if there are 200 total investment advisory services and 100 are bearish then the index would show 200/100 = 50%. This index is used to track the future trends of investors by using a contrarian perspective. When 42 percent or more are bearish then the market will go UP. When 17 percent or fewer are bearish the market will go DOWN.

Tip: Real estate investors can use this as a quick gauge to measure contrarian sentiment in their own markets or as a sub-set of REIT’s, builder stock etc…remember, investor advisory services follow trends rather than make them since by definition, they tend to report on what has happened in the market.

More on Tuesday!

See you at the top!

Chris McLaughlin

P.S.:

If you have the chance make sure you jump on this link now, to get the insight into why the foreclosure market is going to be THE PLACE to invest:

http://www.shortsalesricheswebinar.com  

Don’t miss it – everyone that has watched it says it is perhaps the most useful tool in understanding what’s going on in the real estate market, and how to make money in today’s environment.

P.P.S.: Join us for our next webinar, this Tuesday, December 2nd at 9 PM EST/ 6 PM PST:

A Recession Proof Real Estate Investing: Making Money in ANY Economy!

We’ll show you how to make money with no credit, no capital, and no holding costs! Think we’re crazy? Find out now!

http://www.recessionproofinvestingwebinar.com  

We’re limiting the webinar to 50 registrations to give individual attention to those who join … so jump on this link to register:

http://www.recessionproofinvestingwebinar.com  

Mid-Day Market News & Commentary by Chris McLaughlin, November 28, 2008
http://www.shortsalesriches.com/welcome.html

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Retail stores on Black Friday aren’t the only places you can go to get a great deal!  If you watch this amazing video … about an hour into it you’ll find out a way you can save, too!   The feedback from those who watch this video is nothing short of AWESOME.  It features an investor we’ll name Mr. X who is making more money now than ever before!  Go now to see it!

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 From all the news accounts you’d now think they’ve been lying to us, as shoppers slammed retailers this morning and came out in droves to get deep discounts on holiday items.  But many that were questioned by the media in lines were clear: they are spending a lot less this year.  We’ll have to wait a bit to hear from the credit card companies how many purchases were made … but from the initial look of things it might not be as bad as everyone thought.  We’ll find out soon!

And the U.S. government isn’t the only democracy not buying up banks.  The Royal Bank of Scotland announced that the British government will take a 57.9% stake in the bank.  The government provided nearly 15 billion pounds to the beleaguered bank, and is expected to invest another 5 billion pounds through a preferred stock sale. 

Now on to our real estate investor education section …

Big Government Leads to Big Cost: 40 Percent of the Cost of a Home Before Taxes!

Short sale investors and those sitting on the sidelines waiting for the “perfect time to buy” would do well to take notice of the current economic policies of the nation. For those that haven’t yet noticed, “bail-outs” are big business…in fact, it seems nearly every big business in the nation is standing in line waiting for their share. The same goes for state and local districts throughout the nation as they scramble to compensate for lower spending and fewer taxes.

What many people forget is that sooner or later all the bills must be paid by someone; and that someone is typically the average citizen. The end result is always the same; “hidden taxes” in the form of fees, assessments and other costs that can drive up the price of a home even while the market rates remain more or less unchanged.

In former entries we have covered the impact of inflation and interest rates on the total cost of real estate with the conclusion that now is the right time to buy. If that wasn’t enough to convince you take the plunge with short sale investing then consider this; state and local governments (not to mention federal) need to make up budget deficits any way possible. One of the most popular ways throughout the history of this nation is to increase the fees and other costs associated with building a new home. In fact, the cost of compliance often results in less – rather than more- affordable housing options for years to come. Here are just a few of the ‘hidden” taxes, assessments, fees and other expenses likely to increase faster than the rate of inflation in coming years:

1.     Increased time and cost of building permits. Longer lead times and complexity also results in increased cost to the builder and eventually the buyer.

2.     Updated building code requirements including new energy efficient and eco-friendly regulations that can add hundreds or even thousands of dollars to the cost of a home.

3.     Higher per square foot land/lot development including Higher impact fees.

4.     Mandatory infill policies.

5.     Higher property taxes.

6.     Reducing parking allotments.

7.     Increased per unit fees associated with lower density developments.

8.     Mandatory ADA/physical barrier compliance changes.

Lest you think these types of fees don’t make a significant difference, recent research conducted by the University of Washington found housing regulations in Seattle added an average of $200,000 to the cost of the average home in the city between 1980 and 2006. During the same period of time, the cost of a home in Seattle went from $221,000 to $447,000…of which $200,000 was due to growth restrictions, impact fees, zoning regulations and development requirements.  Ouch!

 When Less is More and How to Make it Work for You

The federal Department of Housing and Urban Development (HUD) recently released new “zoning for affordability” guidelines for state and local governments throughout the nation.  Every short sale investor should know and understand these recommendations, how it is likely to impact affordable housing and what it means for your investment portfolio.

Less is More

According to HUD, minimum lot size requirements used throughout the nation were originally an artifact of inexpensive land, wide open space and minimal density.  In the modern economy not only is land expensive but the transportation cost, infrastructure requirements, indirect environmental and economic costs are adding up. Individuals, developers, local cities and the environment can no longer afford large lots like those used as former minimum lot requirements; official recommendations call for residential lots under 5,000 square feet (or roughly .11 of an acre) to be used for single family housing of the future.

The Trend

While the official new HUD residential lot recommendation for single family homes is 5,000 square feet or less some areas of the nation have already adopted even smaller lot ordinances. For example, Los Angeles adopted the “Small Lot Subdivision” ordinance which allows detached single family homes or townhouses to be build on units as small as 600 square feet without the typical liability and insurance costs associated with condominium projects. Seattle Washington has also passed a “Residential Small Lot” zoning district that allows single family homes to be built on lots measuring 2,500 square feet and San Antonio has followed-up with “R-3 Single Family Residential” zoning district of 3,000 square feet that do not require side-yard set-backs.

Short Sale Investors Take Note

As the trend toward affordability, reduced environmental impact and convenient commute times continues to increase short sale investors should anticipate state and local governments to adopt the HUD affordable zoning guidelines. As with all supply and demand economics, this trend is likely to result in several long term outcomes which will equate to cold-hard cash in your pocket:

1.     A premium on large lots. Although affordability takes precedent, many homeowners will still desire larger lots – especially those in convenient areas of town. Single families with children, those who enjoy gardening or other outdoor interests will continue to seek out larger lots within a short commute of major amenities.

2.     Potential for sub-dividing extra large existing lots. Single family residential lots well above the newly stated size may eventually be eligible for sub-dividing if they are located on the outskirts of town or other areas suitable for re-zoning.

More on Monday!

See you at the top!

Chris McLaughlin

P.S.:

If you have the chance make sure you jump on this link now, to get the insight into why the foreclosure market is going to be THE PLACE to invest:

http://www.shortsalesricheswebinar.com

Don’t miss it – everyone that has watched it says it is perhaps the most useful tool in understanding what’s going on in the real estate market, and how to make money in today’s environment.

P.P.S.:  Join us from our next webinar, this Tuesday, December 2^nd at 9 PM EST/ 6 PM PST:

A Recession Proof Real Estate Investing: Making Money in ANY Economy! 

We’ll show you how to make money with no credit, no capital, and no holding costs!  Think we’re crazy?  Find out now!

https://www2.gotomeeting.com/register/708013264

We’re limiting the webinar to 30 registrations to give individual attention to those who join … so jump on this link to register:

https://www2.gotomeeting.com/register/708013264