Creating Wealth “Investing in Denver Real Estate”

            Many realtors I speak with share their experience of the current Denver Real Estate market as pretty much one of “feast or famine”. While there are always the fortunate few who perform well in any market, many are experiencing the impact of the local recession economy. Seasoned veterans speak of the value and opportunity of “market cycles,” so then the challenge becomes anticipating the real estate curve and understanding how to teach buyers why now is a good time to become a real estate investor.

Local Market Reality:  Sales of previously-owned homes are down 1.6% as of June of this year compared to the first half of 2005. “Meanwhile, June inventory hit a record high of 31,900 homes, up from 30,457 homes in May.”  This increase in local inventory is a classic example of strong supply with relatively weak demand. On the bright side, the median sales price of a single family home in Metro Denver increased 6.3% in June to $335,111.

While it may seem buyers are hard to come by and a significant percentage of the ones that do appear seem to be credit challenged and non committal, I was encouraged by these statistics because they show an appreciating market. Also, Colorado is outpacing the 1.8% expected national average for job growth at 2.8% and is ranked 10^th in the nation for year-to-date employment growth. With rising interest rates making it more difficult for buyers to qualify for mortgages, the local rental market is becoming stronger every day. The glut of homes on the market also means investors can find value now and expect appreciation over time.  If you consider all of these factors, investing in local Denver real estate with a buy-and-hold strategy is a smart business decision.

Finding Investors:

1.                  Participate in local investment groups – CAREI, eRealEstate and IRR are a few of the local groups.  Ask around for others in the area. 

www.carei.com

www.irrofcolorado.com

www.erealestate.com

2.                  Sponsor or teach a seminar about real estate investing

3.                  Share the statistics here with your current market sphere – get them excited about investing in the
Denver market.

Finding the Money:  The challenge many investors face is where to find the cash to invest.  There are ways to access additional capital your buyers may not have considered:

1. An equity reposition:  your buyer may have untapped equity in his home that would be better used investing in more real estate.  Consider this example:  Your buyer owns a home worth $300,000 with a mortgage of $150,000.  When his home appreciates 5%, he earns $15,000.  Not bad, but he could be doing better:  Using a cashout refinance, he taps 80% of the home’s total value or an additional $90,000.  He uses this money to buy 3 investment properties at $150,000 per house with a 20% downpayment on each.  With good financing, including rents received combined with expenses and depreciation that help him increase his annual tax savings, he can hold onto these rental properties indefinitely with little or no negative cashflow.  When the market appreciates 5%, he makes $7,500 in appreciation on each rental property and increases his wealth by $22,500 in one year!
2. Self Directed IRAs:  The Dow Jones Industrial average is up less than 1% for the year, and returns on other traditional investment vehicles such as annuities are averaging about 6% – barely keeping up with inflation.  What better way to accelerate wealth than to take control of orphaned 401ks and IRAs and roll them into Self Directed plans where you can invest in real estate and other higher yield investments? Having more control over your retirement funds can grow your wealth faster.  Self Directed IRAs and other retirement plans have been around since the 1980s and are gaining attention in the market today as a viable way to invest in real estate. 

Given the current state of the market, it is important to develop alternative marketing strategies and be a resource for your customers by helping them grow their wealth.  Hopefully this article has provided you with some helpful information so you can take advantage of the growing real estate investing market in
Colorado.  For additional information, feel free to contact me at 303-877-6323 or visit the websites I have provided. 

**Statistics quoted are from the following sources:

http://www.denverchamber.org/ecdev/index.asp

http://www.metrodenver.org/

http://www.metrodenver.org/DataCenter/RealEstate/RealEstate.icm

http://www.metrodenver.org/DataCenter/DenverEconomy/MonthlyEconSummary.icm

http://www.bloomberg.com/markets/stocks/movers_index_dow.html

Creating Wealth “Self Directed IRAs”

 Welcome to another addition of Creating Wealth. This month we are going explore some of the benefits of using a self-directed IRA as a real estate investment vehicle. In the last article I discussed some of my thoughts on the current condition of the real estate market in Denver and why I thought that
Denver was a good buy-and-hold market. I am sure there are some that would disagree with me. The truth is, the real estate investment community is actively participating in a host of long and short-term investment strategies in the
Denver market, and those I have spoken to are not spooked by the doomsayers.  So how do we get the attention of this savvy market segment that typically has liquid cash and good credit? We show them how to finance property without using their liquid cash or their credit and then take a profit without paying taxes!

            The IRA or Individual Retirement Account was created in 1975 by the Employment Retirement Securities Act of 1974 to provide similar benefits to employees that did not have a pension or were self-employed. IRAs allowed employees without a pension plan to make pretax contributions to grow tax-deferred in their IRA account. Then in 1997 the Taxpayer Relief Act was passed and the Roth IRA was created. Roth IRAs are established with after tax dollars and grow tax-free. Now almost 3 decades later, IRAs make up 27% or 3.5 Trillion of 13 Trillion of retirement holdings in the U.S. Believe it or not, since the inception of the IRA, there has been the ability to self-direct IRA funds for real estate investment.

So what is the Buzz about?

            The Self-directed IRA as a real estate investment tool offers a number of advantages to investors. Control: Over the past decade it has been real estate that has out- performed the stock market, and Mutual Funds are performing at about 6% – barely keeping up with inflation. I currently have an investment partner who employs the fix and flip strategy for investment real estate and is making anywhere from 14-70% cash on cash depending upon the hold time and how we do the financing. Tax Deferred or Tax Free: With those type of returns if our properties were financed through our self-directed IRA or Roth IRA our gain would be either tax-deferred or Tax Free! (See the Special Insight section below regarding specific advantages of self-directed IRAs over 1031 Exchanges.) Protects credit and liquid cash: There are two things that investors run out of when playing in the investment real estate game 1.) The cash to fund and maintain property. 2.) The credit to finance additional property. By funding property with proceeds from your IRA or Roth IRA you can protect liquid cash reserves for other endeavors, and since the IRA owns the property outright it has no impact on your credit score unlike traditional financing.

Your competitive edge

            Armed with your new knowledge of the self-directed IRA as a viable real estate investment vehicle, you can see why this would benefit the local real estate investment community. However, an additional benefit that you may not be aware of for you as a real estate professional is that all of the coaching and resources currently available on this topic instruct potential investors to build a team of qualified professionals around them to ensure the success of their endeavors. These partners include but are not limited to a residential real estate broker, commercial real estate broker, CPA, Financial Planner, IRA Administrator and real estate attorney. If you do not have contacts in these other fields of expertise, I would recommend making some. If you are able to refer your potential clients to your partners, you are not only able to add tremendous value to your potential clients but also effectively create the opportunity for reciprocity from your other team members which will grow your business!

Resources

            The complexity of this topic does not allow for me to cover all of its nuances in this article, however I would like to offer you some good reading on the subject.

IRA Wealth Revolutionary IRA Strategies for Real Estate Investment Patrick W Rice; Square One Publishers Copy Right 2003

How to Invest in Real Estate and Pay Little or No Taxes Hubert Bromma; McGraw Hill Publishers Copy Right 2005

www.iracoach.com

www.iraresource.com

www.irs.gov

Special Insight 4 Benefits of a Self Directed IRA vs. 1031 Exchange

1.) Taxable gains on IRAs are not realized until you retire. Since Roth and Education IRAs are created with after tax dollars these vehicles are tax exempt. In a 1031 Exchange your taxable gain is only deferred until you sell your last property.

2.) When you sell a 1031 Exchange property you will immediately be taxed on your gain. When you sell your IRA property it is either tax deferred or tax exempt.

3.) A 1031 Exchange requires you to replace real estate within 45 days of close on a previous property in the exchange. Your IRA does not require you to replace sold property.

4.) A rule of the 1031 Exchange is that the replacement property is higher in value then the previous property. An IRA does not require this