Jason Hershey

Webster’s defines investing as “laying out money or capital in an enterprise with the expectation of profit”. That broad definition applies, in real estate, to people purchasing rental properties, flipping houses, holding property in hopes of price appreciation, developing condos, and on and on.

The IRS has its own view of real estate investing. Owning rental properties is considered “passive income” and is subject to special rules. Flipping properties is considered ‘work’ and profits are taxed as regular income. Property development and land speculation are a specialty all of their own, with their own tax rules.

That last sentence has an interesting word, “speculation”. The definition is, “an investment that is very risky but could yield great profits”. At Tellus Real Estate Solutions, we don’t recommend taking a risky approach to your real estate investments. If you have a high tolerance for risk, and the knowledge to back it up, we are happy to help you with your speculative real estate transactions. But for new investors, we don’t suggest speculating.

At Tellus Real Estate Solutions, we group flipping, holding for appreciation, and development as speculating, since they are highly risky for novice real estate investors.

First, let’s look at flipping properties. This is definitely an area where someone can make money, and we know people who do quite well in this arena. But, it’s not as easy as it appears on television. Successful flippers are market experts. They have to recognize properties that can be purchased cheaply, repaired, and sold quickly for a profit. This requires market expertise and construction expertise that the average investor does not have, and which it takes years to build. Flipping was popular in the hot real estate market, but most of those flippers were making money as much by luck as by planning. And, when the market died, many flippers lost everything when they could not unload their latest investment on an unsuspecting buyer (the hot potato syndrome, we call it). Or, to use a different grade-school analogy, too many folks got stuck without a seat when the real estate music stopped. To add insult to injury, the IRS has a nasty surprise for you. They consider the income from flipping properties to be regular income, not capital gains. That means if you have a day job and are in a 25% tax bracket, then your income from flipping is taxed at 25% instead of the 15% capital gains rate that investors enjoy.

Next comes holding for appreciation. The problem with holding for appreciation is similar to the problems of flipping. You have to have better than average skills to make money just holding property, and you also have to have deep pockets. I subscribe to the view of some of the better known GRGs (Get Rich Gurus) that an investment should be something that brings you more money in now than you are spending on the investment now. Paying cash or paying loan payments in hope of the value going up over several years does not match that definition of investment.

This might be a good time to talk about the home you live in. Your home is not an investment, except when you consider it as one you are holding for appreciation. It is an expense to own a home. It is often more expensive in the short run to own a home than it is to rent. In the Washington market is pretty easy to rent a home for less than the monthly payments of buying the same place. That doesn’t mean you shouldn’t purchase a home… just don’t view it as an investment. The value of owning your own home is made up of many things beyond the possible appreciation in value… pride of ownership, control over your living environment, stability, and the even positive affect on your credit rating.

Last comes real estate development. It is an area that requires a level of experience and knowledge beyond the typical beginner. Generally, the upfront investment is large (and the payoffs on the back-end larger), and as typical for high payoff endeavors, there is also high risk of losing money. Like flipping, you need to be a market expert, knowledgeable of construction, and additionally you will likely need to be good at working with municipalities on permitting and zoning issues.

What is an Investment in real estate then?

So, what what do we consider to be a real estate investment? Tellus Real Estate considers a real estate investment to be a property that earns an income whether the underlying value of the property goes up or down. We also believe it should be a situation where you can take control. You can invest in Real Estate Investment Trusts, TICs (Tenant In Common investments), and similar investment vehicles… but these are all situations where you have little actual control over the end results. So, as a rule, when we speak about investment real estate at Tellus Real Estate Solutions, we are talking about a rental property that you own and control. It could also mean a property that earns an income from a business or even resources like timber. But those are areas that require more expertise. There are plenty of different kinds of rental properties: single family homes, multifamily homes, commercial properties, and even land. Just keep in mind 3 things when looking at a real estate investment:

• Investing is focused on the long-term.
• Investing is focused on the stream of income.
• Investing is focused on factors you can control.

Don’t just listen to us

Here is what others have to say about real estate investing:

• Wikipedia
• Bigger Pockets
• CRE Online

Note: This topic also appears on our site under the Investors Center on our website.

and on the Tellus Real Estate Blog at http://tellusre.com/real-estate-investment-vs-real-estate-speculating/

I spent the day with an investor looking at single-family homes for sale in the Central District. As we were looking at what was for sale, we were also keeping our eyes open for "For Rent" signs, so she could call and check what was available and what other landlords were charging. Amazingly, we didn't see any.

Well, so much for my recommendation to new landlords about how to find rental rates! This made me wonder... why no signs? Does it mean there are no rentals available in the area, or does it mean landlords don't like posting signs for some reason? Perhaps they don't want vandals to know they have an empty unit? Are they afraid the Occupy people will occupy their property? Perhaps they simply have better ways to find tenants.

My experience is that "For Rent" signs are a great way to find potential tenants. But, Craigslist.com has quickly taken over that role, so perhaps there is no need for signs anymore. What do you think? got any ideas?

(Reposted from my Tellus Real Estate Solutions Blog - www.tellusre.com/blog)

And, here are the slides for our Landlord 101 class, where we cover finding tenants and keeping tenants.  Included in the handouts our sample lease forms and a great handout from our friends at LT Services, a great eviction service company.

Here are the slides from the class.

And, here are the handouts on my SkyDrive

Below is a summary of sales for March 2011, from the Commercial Broker's Association (CBA). I note the source because it is likely that not all sales that occurred are included. CBA data is a mixture of sales reported by their member agents and researching of sales that happened outside the system.

I have compared these numbers to similar data available from LoopNet, the national
commercial real estate listing service. After reviewing the data, I believe the CBA data to be the most accurate and useful for our local market and for tracking prices and trends in the local market. Occasionally, LoopNet has data that does not appear on CBA, which is the reason that I subscribe to their service. If you would like to have a complete analysis done of comparable sales for your property, please let me know. When performing analysis for a client, I compare and combine data from both sources.

March 2011 Sales

King County-There was a slight increase in the number of sales from February in King County, with 34 total sales. Only 2 property sales were foreclosure trustee sales. Sales were about evenly mixed between the 4 main property types: Industrial, Retail, Office, and Land.

The average price per square foot for each property type was: Industrial-$44/SF, Retail-$171/SF, and Office-$148/SF. Commercial land sales averaged $121/SF, after removing 2 residential land sales from the mix. Those two residential land deals would have lowered the average $/SF to just $5.84/SF

You may notice that the price per square foot for Office and Retail properties jumped significantly from February. This partially due to the lower number of foreclosure sales in each category.

Pierce County-Pierce County had a healthy increase in the number of sales. In March, 22 sales closed, more than in January/February combined. Sales were evenly mixed between property types. One thing to note, though, is that five of the office sales were of Frontier Bank locations throughout the county, by Union bank to the FDIC. I believe the result of this is an inflation of the average price per square foot for Office space. Typical sellers should not expect this kind of pricing in Pierce county.

The average price per square foot for each property type was: Industrial-$51/SF, Retail-$65/SF, and Office-$148/SF (again, this number is inflated by the Frontier Bank sales). Commercial land sales averaged $6.45/SF. The sale price for Commercial land is likely lower than typical due to sales transaction between government entities for several properties.

Snohomish County-There were only 4 sales reported by CBA for Snohomish County in March. Snohomish County commercial buyers seem intent on focusing on specific property types each month. In January, it was Industrial. In February, it was Office. In March, all the sales were Retail Properties. Also, all the properties were located in the southwest corner of the county, along the I-5 corridor. Another item to note is that half the deals were with cash buyers.

The average price per square foot for these Retail properties was $143/SF.

Below is a summary of sales for February 2011, from the Commercial Broker's Association (CBA). I note the source because it is likely that not all sales that occurred are included. CBA data is a mixture of sales reported by their member agents and researching of sales that happened outside the system.

February 2011 Sales

King County-King County continued its strong sales trend from January, with another 29 commercial property sales closed. 4 property sales were foreclosure trustee sales. Sales were primarily of Industrial and Retail properties. There were 4 office property sales (2 of which were foreclosures).

The average price per square foot for each property type was: Industrial-$53/SF, Retail-$106/SF, and Office-$106/SF. Commercial land sales averaged $111/SF

Pierce County-Pierce County had a major drop in sales from January's 13, with only 5 sales closed in February. There was one Office building and one Commercial Land sale.

3 of the sales were of Retail properties, averaging $91/SF, and there were no Industrial property sales.

Snohomish County-There were 8 sales were reported by CBA in February, up slightly from January. In a major switch from January, when most all the sales were of Industrial properties, February sales were almost all Office properties. There was only one sale each of Industrial, Retail, or Commercial Land properties. The Office sales were scattered throughout the southern half the county. Two were foreclosure sales.

The average price per square foot for these Office properties was $107/SF.