Expert: Dick Dennis - 3/6/2005

Question
Hi Dick,
Thanks very much for your thoughts. I agree it's wise not to expect to make quick money in real estate. I have ~$25K equity in 2 of the 4 houses - each is lease-optioned and will likely sell this summer (July & Sept). I have ~$50K+ equity in the other 2 homes, both of which will likely turn over renters this summer (June & Sept) & could be sold/exchanged or held with new renters (rental rates will give me negative $100-200 monthly cash flow).  
I have 2 concerns about exchanging into multiple-dwelling and/or commercial. #1 is that I know Phoenix single-family pretty well, but other property classes much less (I understand NOI, cap rates, etc but am not at all familiar with the Phoenix multifamily and/or commercial RE mkts, nor do I know a knowledgeable Phoenix broker/agent). #2 is that the other property classes offer better monthly cash flow, but unclear appreciation outlook and unclear risk (you won't make a killing on any one single-family house, but if you can make $25-50K on an increasing number... looking long-term of course... you can gradually build wealth with risk that seems lower than the other property classes).  What are your thoughts or recommendations here?  
One other area where I'd like your opinion if you don't mind: I'm not looking to make a quick buck, but my long-term view on Phoenix SF homes is bullish. Median price growth has been slow & steady the past 20 yrs(2004 has accelerated) vs boom & bust, much of this due to plenty of available land. Other market fundamentals appear strong. But the main thing for me is the parallel to Sacramento's growth: great weather, good amenities/things to do, diversified economy with job growth. Most of all, one of the few metros very close to very large CA population centers, attracting tons of "equity refugees" who have driven Sacramento prices up 100%+ in past 4-5 years. All the same is true for Phoenix (absent any nightmare interest rate/economic scenarios in the future). What are your thoughts here? Am I missing anything in my back of the envelope analysis?   

Finally, I really appreciate you sharing your time. Someone so knowledgeable willing to volunteer their time is really a great thing. I hope to do the same one day. Thank you again.  - Mike Schneider



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Followup To
Question -
Hi Dick,
My wife & I are 35 & hope to grow our moderate net worth thru real estate investing. Ideally we want to take calculated risks that allow growth without risking bankruptcy (make $ when buying property, vs gambling on making $ when selling). We recognize there are no get-rich-quick schemes. The past 18 mos we've purchased 4 brand-new single-family homes in Phoenix,AZ enabling low-risk equity buildup (prices always hike as lots release), but builders no longer allow investors (too many other Californians have recently done the same). What appear to be potential strategies to use these 4 homes to continue growth without high risk? 1)1031 Exchange (4 homes can be exchanged into 8, or into other property types). 2)Consider moving into other promising growth markets w/less builder restrictions. 3)Other strategies?  Any advice is very much appreciated.  
Answer -
First thing, Mike, you're going to have to realize that the flurry of real estate sales is in the past. You must realize real estate is a long-range capital gain asset. If you're expecting to make money is comparatively short lengths of time, you'd be making a mistake. If it happens, fine. But do not expect it to happen.

Now that you have four residential properties, (you haven't told me what kind of equity you feel you have in each of them) you now go out and look at multiple-dwelling properties (anything from duplexes on up, even commercial properties). You're going to have to arrange to sell those four houses unless you know you can rent them out and be satisfied with the monthly income (if you have any).

In making a 1031 you should arrange to have your property on the market, preferably in escrow so the seller of the multiple-dwelling properties you're looking at doesn't turn you down because he would have to wait until you get a buyer. As you know, on a Starker Exchange, you have up to 180 days to culminate the exchange. You must identify the property you are going into within 45 days.

Be aware that some properties ARE NOT REAL ESTATE, therefore not eligible for a 1031 exchange: time shares, co-ops. But an interest in REITs are.

To accomplish it the right way, you should engage a real estate broker who is 1031 knowledgeable, an Exchangor, a CCIM. You'll be doing it the right way and on your way to creating a real estate Estate.

I wish you well.

Dick Dennis,    dixiedee13@aol.com

Answer
One main thing you must realize, Mike, is that when you own rentals you are in business. Unfortunately, those who have dropped out of owning rentals are those who failed to devote the time that it takes to maintain their properties. Since you have a negative cash flow, it is not going to be too easy to exchange to multiple units or commercial. After all, the other owner wouldn't want a negative, either.

As long as you can afford the negative, you must wait until opportunities open up. Part of your duty as a real estate business owner is to get yourself education. You must also find yourself a knowledgeable broker who can help keep an eye on any opportunities that may open up. This broker will have received your permission to make an offer, wherever,  in your behalf subject to your approval.

I gather from your recent response that your properties are in the Phoenix and Sacramento areas. You can fine ONE broker to work for your benefit. Just keep looking and asking. You might start by asking the local boards of Realtors. Do not hesitate to ask names you see on commercial signs or property management signs. These brokers are more likely to be in the know where you can find a broker who specializes in exchanges.

Or.

You can just hold on. Keep on buying real estate when opportunities arise. I have never seen it to fail when someone who has an assemblage of properties is well set up when that investor is ready to retire. By that time, you'll have tenants keeping your estate healthy. But do not minimize the necessity to treat what you have as a regular business. That means you are going to make regular visits to each of your properties to let your tenants know what you are vigil for them and yourself. You're fair if they are. Part of your education will also be the one you'll get as owner of rentals. There will be temptations to sell them all off because you can't stand the problems some properties will continue to give.

I, for one, wish I never sold all the houses I have owned down through the years, and there were many, from Atlanta to Houston to Merced to Newhall and San Diego. So, I am telling you what you should be doing.

I do wish you well, Mike.


Dick Dennis   dixiedee13@aol.com