The return of economic growth stimulates commercial real estate activity, but will it last? As 2010 reaches its halfway mark, the euro crisis and the phase-out of economic stimulus programs in the United States are contributing to fears of a double-dip recession. Yet several economic indicators suggest that the year has also ushered in the first stages of recovery for the U.S. economy and the commercial real estate industry. ................. Read the rest of the article by clicking here 1. Cash flow: This is the cash left after all expenses have been covered: mortgage, vacancy factor, repairs, property management etc. Most banks will not lend money to buy a property if there is no hope of a cash flow. 2. Appreciation: Appreciation in investment properties is generally dictated by cyclical cap rate fluctuations and increases in rental income. A lease that has CPI increases built in will help ensure some appreciation. Shorter leases that can adjust to market rates upon renewal entail more vacancy and market risk but allow for greater appreciation if the market environment is steadily increasing (of course risk also exists that the market will not increase). Extra appreciation potential exists, of course, for properties with some type of value added aspect such as excess land for development or re-hab opportunities. 3. Equity build-up: You reduce your mortgage and increase your equity with every mortgage payment made on underlying debt. A portion of your payment goes toward reducing the principal. The shorter the loan period, the faster the equity builds. 4. Tax savings/Depreciation: Depreciation is a ''paper loss'' required for estimated wear, tear and obsolescence. However, land value is not depreciable. Residential income property is depreciated over 27.5 years on a straight-line basis. Commercial property is depreciated over 39 years. Personal property used in operating the property, such as appliances, is depreciated over shorter periods, typically five to 10 years. Even automobiles and trucks used in the investment operation can be depreciated over their useful lives. Because depreciation is a non-cash deduction, it reduces taxable income from the investment property. But it doesn't require any cash outlay; as do property taxes, mortgage interest, utilities, insurance and repairs. The depreciation expense deduction often turns a positive cash flow property into a tax loss. Most investment properties appreciate in market value each year, but on paper their value is declining annually. The bookkeeping result is that the book value declines while the market value usually goes up. The 1997 Taxpayer Relief Act reduced the federal capital gains tax rate to 20 percent. Then the maximum capital gains tax rate was further reduced to 15 percent in 2003 for assets owned more than 12 months. But the special 25 percent depreciation ''recapture'' tax rate remains unchanged. ''Recapture'' means the property is taxed when it is sold. For example, suppose you bought a small investment property for $300,000 and deducted $100,000 of depreciation during your ownership years. That means your book value (also called ''adjusted cost basis'') declined to $200,000. Then you sold for $450,000. Your capital gain is therefore $250,000 ($450,000 minus $200,000). Of that $250,000 capital gain, the $100,000 depreciation deducted will be ''recaptured'' and taxed at the 25 percent special federal tax rate. The $150,000 remainder of your capital gain will be taxed at the new 15 percent maximum tax rate. However, a superb way to avoid paying the federal recapture tax is to make a tax-deferred exchange for another investment property, as allowed by Internal Revenue Code 1031. ___________________
Here is a good article from the website/magazine - National Real Estate Investor:
The Awakening
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The Equity Gap - Commercial Property Values Down from 35 to 40%
Prices have fallen; so when, why and how will they get back up? What's the Equity Gap?
To find out read this great article from the Institute for Fiduciary Education by Michael J. Acton
The End of the Great Recession and the next Great Exchange of Commercial Property
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Multi-Family Depreciation Advantages
Multi-family properties usually are offered at a lower cap rate than Office, Retail or Industrial. One of the reasons is the lower perceived risk of the property type. Also, multi-family is depreciated on a 27.5 year basis rather than the 39 year schedule that office, retail and industrial are allowed. Take a look at this link to see an actual example of how your net income is favorably impacted by this differential. The bottom line is that multi-family can give you the same net returns with a significantly lower gross return.
Link to the pdf file - Multi-Family versus Office, Retail and Industrial
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Four Great Reasons to Invest in Real Estate, (With a special focus on Depreciation)
714 848-3707
