Buy Low

By Larry Hotz, Senior Editor

“ You make the most money when you buy, not when you sell”.

That’s an old saying of “fix and flip” investors who buy, fix-up and then quickly sell a home. But, buying low is also important for long-term investors. Kennen Cohen who teaches investment analysis has this to say about the current Denver real estate market:

Buying when prices are low is important. It helps the eventual profit but it also helps improve the cash flow. Loan payments are smaller when you buy lower. But, how do know for sure what the cash flow will be and how much profit and tax savings are involved in a specific property? The answer is a specific and through investment analysis.

This week I had an opportunity to attend a class on How To Analyze Small Investment Properties. Kennen Cohen of Asset Preservation, Incorporated presented it. They are a “Qualified Intermediary” for tax-deferred exchanges. The class was a detailed insight into the various forms of analysis that can be applied to small investment properties including single-family homes, duplexes and apartment buildings.

Kennen Cohen presents "How to Analyze Small Investment Properties"

Kennen Cohen presents

While I have sold many investment properties over the years, I thought class was a good refresher. In addition to just explaining the complicated mathematical formulas, he also explained the advantages of using a tax-deferred exchange when purchasing investment properties. He believes that now is a great time for an investor to begin to purchase investment properties. These can be as small as a single-family home or as large as a small apartment building.

The recent downturn in the real estate market in certain neighborhoods has presented a unique opportunity to be able to buy single-family homes that can actually cash flow with as little as 20% down payment. Until recently, investors had to anticipate having negative cash flow if the down payment was as small as 20%. That’s no longer the case. Savvy investors are now snapping up potential rental homes under $200,000, fixing them up and obtaining the highest rents we’ve ever seen in Denver.

The disappointments in the stock market have caused some of my clients to begin rethinking their asset allocation. Some are considering investing in small investment properties. The combination of lower prices and nearly historically low interest rates are very tempting. Unlike stocks, these rental homes offer the advantage of being able to provide some income and tax benefit while the investor waits for the property to appreciate.

Other clients of mine who previously purchased investment properties are enjoying significant cash flow. But, they understand that the actual rate of the turn decreases over time because some of the tax benefits erode over time and appreciation inhibitis the leverage. So, they begin to consider the advantages of a tax-free exchange into a newer and usually larger property.

Another reason they might consider an exchange is that they want a different type of investment property for example owning a small apartment building can be very management intensive even when a property management service is hired. So, the investor can affect a 1031 exchange into a different type of property including a larger rental home in a resort destination or raw land or an office building.

When to use a 1031 Tax-Deferred Exchange

Whatever the reason investor considers trading investment properties through tax-deferred exchange, it is important to know the rules and to pick a reliable qualified intermediary. I was surprised to learn that several intermediaries have recently have gone bankrupt. Investors who had funds on deposits that were awaiting a closing were out of luck. They often received just pennies on the dollar. That’s why it’s important to use only qualified intermediaries who are insured bonded and offer a third-party guarantee.

This market presents some truly unique opportunities for both first-time investors and for veteran investors. You might be thinking about whether or not to begin investing in a small rental property. Or, you may already have a rental property and are considering an exchange. Either way, I’d be happy to talk to you about what kinds of properties would make sense in your situation.

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November 12, 2008 | Filed Under Denver Real Estate News, Downtown Denver, East Suburb, Home Buying Issues, North Suburbs, West Suburbs 

Comments

5 Responses to “Buy Low”

  1. Gretchen Faber on November 23rd, 2008 2:10 pm

    This is so interesting because I have two previous clients who are now looking to buy rental properties. They’ve both decided that this is a great time to invest in local real estate if they’re very careful when selecting what they buy.

    Gretchen Faber´s last blog post..Denver, Colorado is 150 Years Old!

  2. J Boyer on November 29th, 2008 8:08 am

    It is very important with any investment to buy right and sell right. Why should real estate be any different. I have purchased homes to flip successfully, I have purchased homes to live in, still have not done the rental thing but that may come soon as well.

    J Boyer´s last blog post..South Orange NJ Real Estate Sales Comparison

  3. JCL on December 13th, 2008 9:15 pm

    Buying low also mitigates some of your risks. In the event of a downturn in the rental market you can absorb some of the decline without going under.

    JCL´s last blog post..How To Teach Your Kids About Money While They Are Young

  4. Sam Dodd on December 16th, 2008 9:29 am

    I totally agree with the statement that you should buy low! Its funny what a herd mentality people have. When prices were sky high and you couldn’t cashflow any properties I had investors buying up any and everything that was even close. Now when prices are down and you can easily cashflow a rental property I have a found a different breed of investor and they are getting RICH!
    Anyways I just wanted to reiterate my point that you should BUY LOW and SELL HIGH if you want to make money. :)

  5. Hawaii real estate broker on December 30th, 2008 9:19 pm

    Obviously, every buyer wants to buy low and sell high With the markets depreciating across the country for the past few years and interest rates dropping there are going to be a lot more investors wanting to take advantage of this opportunity. I believe there will be a major shift with more sales starting to happen by the end of the second ¼ in 2009. You never know when you are at the bottom until it has started to go up and make a move. It will be interesting to see how 2009 plays out.

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