The Trump Blog

Whether your real estate investment is for sale or for lease, one sure way to get the highest return is to “stage” it properly. Doing this will paint the picture and imagery you want for your target audience and make them want the feel you have created.

Identifying your target audience is key. What demographic are you trying to reach? Are they “yuppie urbanites” looking at a condo or condo project in the city? If so, you will probably want to go with a modern and trendy look to stage the property. Use some contemporary furnishings and focus on the art and accent groupings. Be creative and also use style magazines as a reference to give you some ideas. If you are unable or unwilling to take on this task, consult your local area phone directory and look up “real estate staging”. If nothing, then check with an upper-end real estate agent in the area to see if they can give you a name or two.

Another important part of staging is “de-cluttering”. I am not really sure this is a word but it’s a word I use quite often. If the property you are marketing is occupied, then it is paramount that it is free from the clutter of daily living. You want to present this property in its ideal light. If closets are jam-packed, they will appear small and cramped. Most people already live that way and want to get away from it. Take it from someone who looks at properties for a living...prospective buyers get distracted by looking at your photos on the walls and refrigerators. They are so busy doing this that the voyeurism takes them away from taking “ownership” in the subject property and actually makes them feel like they are truly just a visitor peeking in on someone else’s life. Make a great first impression and then carry it on thru the entire property. They won’t have a reason NOT to buy!

I am constantly trying to help my clients come up with creative ways to buy and sell real estate. When I get the type of client that I think would be interested, we talk about how a great way to get into real estate investing is to buy an income producing property that you can utilize for yourself, too! 

Whether you want to buy a residential or commercial property, you can get more favorable bank terms by “owner-occupying”. The actuarial tables for projected default to the banks show that if you own property and are occupying it for your use, you are less likely to experience a foreclosure which in turn minimizes risk. The lower the risk, the lower the rate! It is not uncommon for someone to get a 2% improvement to their interest rate by occupying it themselves and then leasing out the leftover space or units. 

Duplexes and fourplexes are popular residential conduits for this type of investment. Find yourself one of those at a bargain and you will be on your way. As far as commercial properties go, I think small office condos and retail strip centers are ideal. If you own a retail store and have a couple of years in business, it’s pretty easy to obtain an SBA loan with low down payment and a great interest rate.  Do your homework and discover what the anticipated rents and hold times will be before buying. If you do a good enough job in negotiating, you could likely be living rent free for yourself!

You make your money in real estate when you purchase it.  In other words, it’s extremely important that you shrewdly negotiate to win when you buy to give yourself the highest return on real estate when you sell. To do this, follow my 5 simple negotiating tips and you should succeed. 

1. Don’t fall in love - Treat your purchase as a business and check your emotions at the door. Use your head rather than your heart because this will keep you from buying at any cost. If the deal makes financial sense.
2. Don’t just low ball...validate - When submitting an offer which is below what the seller is asking, make sure you have data from comparable sales and a detailed spreadsheet of expenses you will incur (if any) to make the property fit your needs/wants. By doing this, you show the seller that you are not trying to insult him and that you have done your homework.
3. Leave room to move - I usually like to “ask for the moon” knowing that I most likely won’t get it. In doing so, you can show the seller that you are letting him win too by allowing him to negotiate your price UP from where you started. You may be surprised what a seller will do to keep you in negotiations. 
4. Negotiate closing costs - In addition to purchase price, you can ask for other concessions from the seller such as getting them to pay some or all of your closing costs. Some sellers feel better about paying these costs rather than accepting a lower price. Maybe it is so they can say they got a higher price to their friends/family. It all boils down to their “NET” anyway but this seems to play on their ego quite often. Also, another negotiating “chip” you can use as a sacrifice to show the seller that you are trying to work with him.
5. Motivation - Always try to find out why the seller is selling. Is it a distressed situation? Pre-foreclosure? Divorce? By learning this valuable piece of information, you can get inside the seller’s head and therefore better appeal to his wants/needs. Maybe it’s just a quick close date they need to get to your price so be sure to get your financing in order before starting to look so you can be ready to move quickly if the need arises.

Today I want to make investors aware of a well known tax break offered up by the IRS that allows them to depreciate their properties as they would any other fixed asset as a business owner. While it’s not a new concept, not all investors are aware of this and with the influx of new investors into the market, it’s important to bring this into light.

The government, in its attempt at fair taxation, realizes that just like any other piece of capital equipment used in a business, a piece of investment property will wear out over time. They currently allow you to depreciate on an equal or “straight-line” basis over 27.5 years. What this means to you is that you can expense a portion of your realty holding each year against the income it earned. It’s important to know that since the land on which it sits generally does not suffer wear and tear, you cannot depreciate it. Other than that, it is pretty simple to calculate and here’s how it works...

Purchase price - Land Value = Building Value.

Building Value / 27.5 = Annual allowable depreciation deduction

It may not sound like much but on a simple $500k four-plex where the land is worth $100k and the structure is $400k, you could expense or “depreciate” $14,545 against the income generated from this unit. Even at a 30% tax rate this could save you $4,363 in income taxes for your business. This is nearly enough to pay for a month’s worth of the gasoline you will use to locate your next investment property!

As an owner of an investment property, the question arises as to whether or not you should hire a property manager to help you. It’s an important decision and the answer can vary on a case-by-case basis for several reasons.

I recommend that most “first-timers” go ahead and enlist the help of a property manager in the beginning so they can get a feel of what to expect from the monthly processes that encompass the task. You can learn a lot of ways to efficiently handle the marketing, leasing, billing & collections, repairs and most importantly of all, what rights you have in your state as a landlord. Use them as a sounding board for questions and “mock dispute resolutions” that could come up during your tenure as presiding landlord. What I like about a good management company is that they have proven systems in place that you can easily incorporate as your own when you are ready to take this task on yourself. If you have a flexible schedule, you may choose to take on this role after the first year and feel like you can handle it.

If you are remotely located or a part-time investor and have a “day job”, a property manager is a great way to free up your time to focus on your work. You can still maintain a level of control by requesting that the management company you hired call or email you for approval of maintenance requests.  I always did so in order to keep them honest and let them know that I am watching every penny! That being said, a management company can save you money by using their volume buying power to negotiate great rates on tradesman labor. 

The average management company charges around 10% and is a vital element if you want to grow your portfolio. Managing can take time away from your schedule when you need to be looking for more real estate deals!  

What experiences have you had either good or bad with property managers?

I never like to assume that consumers know the best strategies when it comes to structuring their real estate holdings, so when publishing a generic blog article I will assume that my readers have no knowledge. It’s no news flash that one can itemize expenses associated with owning a second home such as interest, taxes, PMI etc. 

There are a few gray areas, however, that the IRS wants to be sure you are clear of before filing that return. Are you perfectly clear on what is considered a second home and what is an investment property? If you have tenants renting this property for a year at a time, it is not considered a second home. To qualify, you must “reside” at this property for at least 2 weeks a year or at least 10% of the amount of time the property is rented out.   Also, before you itemize in this way, you might want to make sure that the standard deduction isn’t a better route to go. In some cases involving smaller units or fractional ownership, it is more advantageous to take the “standard”.

Just last week, another of my clients and I were talking and I casually mentioned about the second home deduction also applying to their new boat! That’s correct. Since they purchased a boat that has a kitchen, bathroom and bed, it can be designated as their second home and the interest, taxes and marina storage charges can be itemized deductions used for their benefit. If you have more than one second home, remember that you can only select one to use for scheduling deductions each year.

Make sure to check with a qualified CPA or tax preparer each year to make sure you are in compliance with the current allowable deductions to avoid trouble with the IRS.

 I do respond to your blog questions, so feel free to comment.

One thing that has come from the economic downturn of late is the need for viable housing options for those consumers with damaged credit and who may have recently lost their homes to foreclosure. In my market area, I see plenty of this and have been unfortunately declining many loan applications due to credit and lack of available loan programs for these types of customers.   

As a real estate investor, I think this is a wonderful recipe for success. Where are all of the people going to live who were formerly candidates to buy and now are forced to continue to lease for another year, two or three depending on their situation? The segment of the market I feel is poised for growth is the rental market. If you are a landlord of residential property whether it be single or multi-family, you should be now or soon will experience a “bumper-crop” cycle of long term residents requiring your product. 

The days are over where the 6-12 month tenant strolls through with your property in mind as a short term stepping stone to homeownership. The fact is, they will need to stay much longer to be able to save the money necessary for down payment and to “repair” their damaged credit.

This is the time that the savvy and patient real estate investors have waited for to add to their portfolios and build large numbers of income producing properties. Leveraging these purchases with mortgage money is still very inexpensive and the banks still want your business. With the new construction industry slumping, there are plenty of tradesmen available to make repairs to the properties too and help you in increasing the value of property.  

What are your thoughts on this “down turn”? What opportunities do you see that others are missing in real estate? People often hind site is 20-20 and there were great opportunities in past down turns, well I think we are in one of those time people may look back on with regret in the future.