CAPITAL GAINS: STOCK MARKET GETS THE GOLD REAL ESTATE GETS THE SHAFT
Under the plan passed by congress and signed by the president, the capital gains rate will drop to 20% retroactive to May 6, 1997. In 2001 it will drop to 18%. Just to make things more interesting. The new rate will apply to long term property only. On July 29 of 1998, the definition of long term will change to 18 months. The part of the legislation not highly publicized is that all depreciation previously taken on property must be recaptured at 25%. Since investors buy real estate and other investments based on their after tax return on capital invested, this puts the investment real estate industry at a disadvantage in comparison to the stock market.
WHY DO PEOPLE BUY INCOME PROPERTIES?
This question is too big to totally explore in a newsletter of this size; so this will be a multi-part series covering the benefits and hazards of investing in real estate. In this episode we will cover the elements of an investment. The basic elements of an investment are Yield, Safety (capital preservation) Leverage and Control. Each investor places more or less emphasis on each of these elements when choosing their investment vehicle.
Some people visualize the four elements as water glasses. There is a pitcher with a finite amount of liquid. The liquid can be divided among the four glasses; but the total amount is always the same.
This is a very good example except that we have no accurate way of measuring elements like safety and control. Some times our projections of yield and leverage are not always exact either. This is what gives certain investors an advantage. "Price" is based on the markets perception of an investment. Value is based on the reality of the investment. The difference between price and value is profit.
An investor learns to discern this gap through experience and study. The investor uses an "educated gut feeling" to make final decisions.
In addition to looking for a gap in price and value, investors look for "upside potential". This is the possibility of increasing the yield or some other element (and therefore the value) of the investment after acquisition.
The money one makes taking advantage of upside potential is not really investment income. It is "entrepreneurial profit." "Entrepreneurial profit" is earned when one takes a chance with money, skill and time.
In the next issue we will discuss yield and its effect on value.
SUMMERTIME AND THE LIVING IS EASY… UNLESS YOU ARE AN AIR CONDITIONER
These 95-degree days are not kind to AC units. There are a few things we can do to make their life easier… and longer.
Scale that builds up on coils can seriously impede the efficiency of the units, making the cycles longer, the life of the unit shorter and the power bills higher. Low coolant levels do the same thing and also damage the compressor. Worn belts on air handlers operate according to Murphy's law and will break on the hottest Friday afternoon of the year.
Combination HVAC units should be serviced in the spring and fall. Split systems should be serviced at the beginning of their season. Filters should be changed at least once a month under normal conditions. When the air is very dusty or renovations are taking place, they may need to be changed more often. Sometimes even daily.
Even in buildings where the tenant is paying the power bill, it is a part of the total cost of occupancy and affects the amount of rent they can afford. Property owners and managers need to be aware of the job-related stress these critical pieces of equipment suffer.
CAN YOU TRUST A TRUST
Often buyers of investment property ask, "Should I put this property in my name or should I put it in a trust." The answer to this question is "Why". An aggravating answer I know; but unless you know what a trust is going to do, how can you know whether to use one or what kind of trust to use. Before setting up a trust to hold a property, determine why you want to use one and then get your tax or estate planner to help you choose the right type of trust.
GOOD NEWS FOR RENTAL HOME OWNERS in NC. A bill (#1074) currently before the state house will require tenants to post rent arrearage with the clerk of court when they appeal an eviction.