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How to pull money out of a property without selling it – Part 2

A reader previously asked: I want to pull some equity out of my San Francisco property and pay as little as possible or no taxes at all. Is there a way to do this?

Our answer: In addition to the suggestions we made in our post for Wednesday, June 21, 2006, a reverse mortgage may work well for older citizens (62 or older) who have a lot of equity in their property. This vehicle allows homeowners to convert part of their home’s valuye into cash. Although the home equity line of credit also provides cash with out tax consequencews, they still require payments of at least interest only. In a reverse mortgage the money goes the opposite direction… to the people who need it! Be aware, this plan works well only if the homeowner expects to stay in their home for at least 5 years.

Reverse.org has a list of Frequently Asked Questions (FAQ) with lots of information.Go to the Reverse Mortgage Internet site to find a reputable local reverse mortgage originator.

– Janis Stone

The wisdom of real estate investing versus other investments

A reader asks: I have been looking over the market reports posted on your website and see that from 2002 to 2006, the May statistics show that my single family home has risen in average value by about 57% which averages out to about 14% a year for that 4 year span. Why would I take such a chance on something so volatile as the real estate market (possible market changes, rising interest rates if I have a variable rate loan or other unknown factors), when there are much more stable investments like the stock market (which has returned about 10% a year (on average) or maybe even buying a triple net lease? 

Our reply: Thank you for your question. Obviously you given this a lot of thought. Experts agree on several things when considering investing. 

  • First, should you invest and why?
  • Second, where are you going to invest?
  • Third, do you understand the risk versus the expected return?
  • Fourth, how much risk are you willing to take?
  • Fifth, is your investment liquid and does it need to be?
  • Sixth, are you diversified?
  • There are other factors, but these are usually the main ones.

Let’s take a look at your last example first, triple net leases. Investopedia defines these as, “A lease that designates the tenant as being solely responsible for all of the costs relating to the asset being leased. The costs could include any upgrades, utilities, repairs, etc.” Horn Capital Realty of Bay Harbor, Florida says, “The triple-net lease offers a long-term lease with the guarantee of steady cash flow and practically no risk.” As this points, out there is practically no risk, so the reward is usually set at a cash on cash return of about 10% which is better than some other investments. As part of a diversification plan to investing, these are great money makers. We have some of these ourselves.

Your second example, the stock market, though relatively stable over the long-term, it can also be very unstable in the short term. True, they address item 5 above; liquidity. With an online account, you can buy and sell almost immediately. There are lots of websites dedicated to setting up accounts to buy and trade stocks. There are also lots of informational websites.
How to Advice by Charles M O’Melia is a pretty good place to start. As long as the stock market continues to go up, the cash on cash return remains about 10% on average (this would probably apply more to mutual funds, of course) and a savvy investor could make much more on individual stock picks. But you invest $100 you buy $100 worth of stock. As part of a diversification plan to investing, these are also great money makers. We have some of our investments in mutual funds as well.

Now let’s talk about our favorite tool for building wealth, real estate. You pointed out that San Francisco real estate from May of 2002 until May of 2006, the return is roughly 14% a year for probably much riskier than the above 2 investment types. But let’s take a simple example of a single family home selling for $1,000,000. Even for San Francisco, that’s a little low, however, it’s a nice, round number! So let’s use that. Many people are buying homes with 10%, 5% and even 0% down, but let’s use an example of 20% which is pretty common (especially now that interest rates are rising rapidly on the second loans which are often necessary with 90% financing – often called 80-10-10 financing. That’s 80% first, 10% second and 10% down payment). Are you with us so far?With this example, the 20% down payment would be $20,000. On an investment valued at $1,000,000 that rises in value at 14% a year, that property would then be worth $1,140,000. That’s 14% on the investment, but a 700% cash on cash return. Of course, this represents the rosiest of scenarios.

But consider a more normal scenario. Let’s say the market rises only 2% for that year. On a $1,000,000 property that’s $20,000. In this case, the cash on cash return would be 100% return. Rich Dad author, Robert Kiyosaki and his Rich Dad advisors like Dolf DeRoos and Diane Kennedy all agree that Real Estate is one of the best ways to build wealth! Of course, when and where you decide to invest will ultimately make this a good or bad deal.

– Mick Orton

A first time buyer has questions about how to get started buying a San Francisco home

A reader asks: As a first time buyer, what are the first steps in buying a house or condo in San Francisco?

Our reply: Our first suggestion would be to meet with a mortgage broker to see what price range home you qualify to buy. There are also mortgage calculators. We have one linked to our site to give you an idea of what you can afford. But meet with a professional who will know what loan programs are available to you as a first time buyer. Once you know this it will go a long way in determining what area you should be looking in and the type and amount of the property you should buy.

– Mick Orton

Explaining the difference between a TIC, a condo and a co-op for Real Estate in San Francisco – Part 1

A reader asks: In San Francisco, I hear a lot of people throw around the terms, tenancy in common, condominium and co-op and often use them to describe the same property in the same sentence. What is the difference between them?

Our answer: We thought we’d answer your question an several parts. In Part 1 will cover “TIC” or Tenancy In Common as a form of ownership.

Attorney, Andy Sirkin, the local San Francisco TIC expert, says, “The acronym ‘TIC’, which stands for tenancy in common, along with the terms ‘cotenancy’ and ‘fractional ownership’, refer to arrangements under which two or more people co-own a parcel of real estate without a ‘right of survivorship’. This type of co-ownership allows each co-owner to choose who will inherit his/her ownership interest upon death. By contrast, the type of co-ownership called ‘joint tenancy’ requires that each co-owner’s interest pass to the other co-owners upon death.”He goes on to explain some of the ways a Tenancy In Common is different from condominiums and cooperatives. We will refer to these in our later articles on the second two types but also go into the nuances of each.

Stimmel, Stimmel and Smith, another San Francisco law firm, explains, “…[referring to new buyers] The question is how to break into that market. How does one manage the economics of buying the first home, the first condominium in such an expensive market? Condominiums were long seen as the best and least expensive way for those with limited funds to enter the market and enjoy the appreciation and tax benefits that come with home ownership.”In short, a tenancy in common allows many people to own the same building, in effect, pooling the resources of two or many people to buy more than they could afford on their own.
One problem with this form of ownership is, what happens when one of the parties wants to move and the others don’t? A well written agreement should cover this, as long as an expert has been consulted from the beginning.

– Mick Orton

Retirement accounts and San Francisco Real Estate

A reader asks: I have quite a bit of money in my retirement accounts and heard from a friend that there is a way to use this to do real estate investing. Do you know anything about this?

Our reply: We are familiar with a company based out of Oakland called Entrust Administration They can help you invest in Real Estate using you IRA or 401(k) money. Go to their website and you will see what types of plans they can work with. 

On the other hand, Fox news contributor, Gail Buckner, cautions readers in her 2002 article to think hard before using retirement money to invest in real estate. She says, “While investing in real estate in and of itself is not prohibited, it does present a lot of problems. If there’s not enough money in your IRA to purchase the property outright, then your IRA would have to take out a mortgage — not you.

“I doubt you will find any lender willing to make a loan to an IRA without your personal guaranty. And your guaranty of the loan to the IRA would be prohibited. Also, you should note that pledging your IRA as collateral for any type of loan is also prohibited.” She goes on to give other reasons, but check with the experts to see if new rules overcome her list of objections.

However, Realty Times writer, Phoebe Chogchua, is more positive in a 2006 article. We realize that she is writing for a magazine that promotes the real estate industry so there might be some bias. At the same time, the article is much newer than the one above and probably has more current information.If you would like more information, Realtor Magazine Online has a really good article explaining this relatively new concept. As always, talk to experts before making any financial decisions based on information found here.

– Mick Orton

No Statewide or National Recession on the Horizon: UCLA Anderson Forecast

No question here! This is good news for the economy but mixed news for Real Estate in California. RIS Media reported in their daily e-news, “RISMEDIA, June 22, 2006—In its second quarterly report of 2006, the UCLA Anderson Forecast anticipates a slowdown in real estate across the United States and in California. But absent other factors that historically precede recessionary conditions nationally and in the state, no recession is foreseen. ” Our number show that the San Francisco Real Estate martket still remains stong.

– RIS Media

Mold issues with San Francisco Real Estate

A reader asks: I’ve heard there are a lot of issues with mold and mildew. Considering the foggy and damp weather, do you think this can be a big deal when investing in San Francisco real estate?

Our answer: Mold and mildew can be an issue anywhere but where there is more moisture in the air it can be a factor. Mold can develop when there is inadequate ventilation and often develops when windows and doors are kept shut and moisture from cooking, showers and laundry accumulates. If leaks in roofs, bathrooms, or other parts of the house are not repaired and moisture builds up, mold can develop within the walls and floors. The occupant of a property should be careful about moisture in the home. It helps to open windows, use fans in the bathroom and kitchen for ventilation, and make repairs to leaks before they cause too much damage.

In these ways mold can be managed. However, if someone cooks and uses the shower and laundry and does not open windows or ventilate the rooms, then mold can become a problem. The Sunday, June 18th San Francisco Chronicle has a good article regaring this issue.

For advice on prevention of mold or cleaning mold when you see it on wall or furniture go to the EPA website. If you own rental property you may also send tenants information on mold which is available from them. Education on the causes of mold and preventative measures is the best way to help prevent serious mold problems.

– Janis Stone

How to pull money out of a property without selling it – Part 1

A reader asks: I want to pull some equity out of my San Francisco property and pay as little as possible in taxes or none at all. Is there a way to do this?

Our answer: There are several ways to do this. When to do it one way or another might be a better question. Depending on the market conditions or current interest rates, you could refinance and pull some money out that way. During the past several years ago where rates were historically low, mortgage companies were swamped with people refinancing their homes. When you refinance, any money you take out from the proceeds is not taxed, and it does not raise your property taxes.

However, with interest rates going up (check our trusted mortgage advisor with Princeton Capital, Dennis Kowalski’s website for the most current information and new trends), that might not be the best strategy right now. It is always a good idea to talk to your accountant or financial advisor to evaluate your situation and determine the best time for you to refinance. There are many things to consider, for instance, the amount of the new monthly payments, what you are using the money for, what the future interest rate might be and how long you think you will hold the property.

Another way that defers most of the capital gains taxes is the Private Annuity Trust. As the Real Estate Journal put it, “Under this plan, the owner of commercial or residential property transfers ownership to a trustee prior to the sale of the property. The trust pays the seller with a special payment contract called a private annuity that stipulates that payments from the sale of the property go to the owner for the rest of his or her life. The trustee then sells the property to the buyer, getting cash for the property and holding it in a trust. The trustee also can invest the money held in trust.” With this method only the amount of the distributions are taxed at a rate calculated by the IRS depending on your life expectancy and only at the time the payments are made.

When you start hearing legal terms bandied about like “trust” and “trustee”, it can sound a little ominous. So check with the experts and ask a lot of questions!

– Mick Orton

Single family homes are not townhouses – San Francisco’s unique architecture

A reader asks: I’ve always wondered this. Why are buildings considered single family homes in San Francisco and not town homes when most of them are built side by side with no yard?

Our answer: San Francisco is one of the most unique and architecturally interesting cities in the world. Part of the charm comes from the way San Francisco has made use of maximum number of properties in such a small amount of space. San Francisco proper is only 7 miles by 7 miles so the city planners have allowed most houses to be built to the lot lines. Some neighborhoods such as St. Francis Woods are zoned as R1-D which means they have to be detached single family homes and cannot be built to the lot line. The lots in that area are much larger and can accommodate bigger detached homes. Most other areas the average lots are only 25′ wide and 100′ deep so a builder has to build across the whole lot in order to get a reasonably sized home.

San Francisco does have some “townhouses” but these are classified as condominiums and not single family homes and they share common walls. The short answer to your question is, town homes share a common wall whereas San Francisco’s single family homes actually have separate walls.

– Janis Stone

Earthquakes affect buying decisions for San Francisco Real Estate

A reader asks: I am considering buying a second home in San Francisco, but just about the time I decide to make the call to a Realtor, I turn on the news and hear that there’s been an earthquake in the San Francisco Bay Area. I really want to own a home there, but how worried should I be about earthquakes when considering buying San Francisco Real Estate?

Our reply: Disasters can happen anywhere with regard to “acts of God”. Consider places that have tornados, hurricanes, horrendous snow storms, floods. And disasters like these can happen every year. So what’s the big deal about an occasional earthquake???

Of course, we’re joking. And earthquakes are no laughing matter either.

On the whole, buying property in San Francisco should be considered relatively safe with regard to earthquakes. They can happen anywhere, and the effect it would have on your property depends on several factors.

Questions you might ask your Realtor when considering specific properties are; what type of soil is it built on? USGS has a soil-type map for San Francisco which might help you when considering certain areas. Another question you might ask is, when was the property built, and has it been retrofitted with shear walls? Does the property have a bolted foundation and adequate reinforcement over the garage if it has one? (we’ll discuss San Francisco parking issues in a later post!)

It is also going to matter how strong the earthquake is and where its epicenter is. After the earthquake in 1989 San Francisco adopted new building codes for any new construction or major remodeling using the latest engineering techniques and passed a law requiring unreinforced masonry buildings (called UMB by the building department) be reinforced to withstand the effects of an earthquake. So San Francisco has been preparing, and there are emergency systems in place. The City of San Francisco Department of Building Inspection has a site with lots more information on the latest building requirements.You might also buy earthquake insurance that would cover damage to your home. Though there is a substantial deductible, it could protect your equity in the event of a catastrophic earthquake.

Regardless, there are no guarantees in life! So if you are really worried about earthquakes then maybe the California, and San Francisco in particular, is not for you. Earthquakes happen all up and down the west coast, and have even happened as far inland as Yellowstone Park. So we do not feel that San Francisco is more “unsafe” than anywhere else on the West Coast or even Hawaii. Having been in San Francisco for over 30 years, it is actually easier to face the risk of earthquakes than have to worry about having tornados every summer as they do in the Midwest and South!

In closing, let us review. The most important thing you can do is be prepared; retrofit your home, have emergency supplies and good insurance. If you want more detailed information about earthquakes, the California Geological Survey has an interesting website which answers specific questions about earthquakes.

– Janis Stone and Mick Orton

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