April 2018 Monthly Letter
“The difference between death and taxes is death doesn’t get worse every time Congress meets.” ~ Will Rogers
Isn’t it appropriate that the month we pay taxes starts with April Fool’s day and finishes with the cries of May Day (traditional International Workers Day)! Adlai Stevenson said in a campaign speech, “I offer my opponents a bargain: if they will stop telling lies about us, I will stop telling the truth about them.” (History might not repeat itself, but it sure does rhyme). In today’s world of “Russia, Russia, Russia” and #DeleteFacebook, I think it is important to be a little reflective. Of course, we should seek to shut down Russian influence as much as possible, without losing perspective. But we aren’t divided because of Russia; we are divided because we have genuine deeply held differences. The fault, to the extent there is one, isn’t with the bots, but with ourselves.
The shuffling among new technologies and potential business responses (and yes that includes commercial real estate) is what sets the page for social change. No one believed that self-driving cars would ever be viable, let alone at the verge of commercialization. Computers will soon be able to perform detailed image processing on x-rays, text mine legal materials and turn out fault-free analysis of tax forms by breaking these dauntingly complex cognitive tasks into smaller and smaller task units. Whether it is the #metoo movement or an episode of House of Cards, your taxes or the future of AI it is all about “Control.” So how do you “control” your commercial real estate (especially in the event of an inevitable real estate downturn)? Times are good, but they won’t last forever. Now is the time to take advantage of what’s left of the good times. Money is still relatively cheap, vacancies are low, and rents are rising. For some, it is time to offload assets that are not strong enough to weather the storm. For others who are confident their properties will hold up long term, here are some beneficial tips:
- Negotiate Long-Term Leases. During downturns when vacancies are up, having long term tenants and steady cash flow is important.
- Pursue Rehabs and Upgrades. Be sure your property is in tip-top condition. When times are slower you want to remain the most attractive spot on the block. Doing this while capital is available and cheap is the best approach.
- Embrace Technology. Look at Tech solutions to make your property more efficient and nimble. New sprinkler box timers connect to WiFi, so they turn off automatically when rain is in the forecast plus you can control your system from your cell phone.
Speaking of technology, I recently read about a new technology that may soon make WiFi obsolete. It is called LiFi and it uses LED lightbulbs to transfer data. It boasts speeds up to 1000 times faster than WiFi. Now that is light speed!
For you to remain in control of your real estate and be light years ahead, it is important to know the fundamentals of how you make money – and optimize it.
- Cash Flow – Income after expenses and depreciation shelter.
- Loan Paydown – it doesn’t look like much, but it adds up to a lot over time.
- Appreciation – appreciation come from rent increases or cap rates going down (buyers accepting less return). Leverage (loan) super charges that appreciation. A 3% rent increase on a $100,000 property that you own for cash is 3% but if you have a 50% loan that is $3000 on a $50,000 investment or a 6% return., on an 80% loan that is 15%! – just remember it cuts both ways when things go south.
Whether we own a skyscraper on Wall Street or a duplex on Main Street, the basic principle of income property remains essentially unchanged. We expect to collect money, mainly in the form of rent, and we expect to spend money to pay for the operating expenses and the loans against the property. When we’re done for the year, we hope to have a surplus and to keep the tax collector from getting too large a chunk of it. Perhaps someday our prudent management and careful upkeep will combine with a healthy real estate market to allow us to sell the property at a profit and wise tax advice will keep some of that profit in our bank account.
So Happy Tax month, may the tax man taketh less, and you have more in all ways of your life. Hope you enjoy the story…
The local bar was so sure that its bartender was the strongest man around that they offered a standing $1,000 bet. The bartender would squeeze a lemon until all the juice ran into a glass and hand the lemon to a patron. Anyone who could squeeze one more drop of juice out would win the money.
Many people had tried…over time: weightlifters, longshoremen, etc., but nobody could do it.
One day, this scrawny little fellow came into the bar, wearing thick glasses and a polyester suit, and said in a small voice, “I’d like to try the bet.”
After the laughter had died down the bartender said “OK”; grabbed the lemon; and squeezed away. Then he handed the wrinkled remains of the rind to the little fellow. But the crowd’s laughter turned to total silence…as the man clenched his little fist around the lemon…and six drops fell into the glass.
As the crowd cheered, the bartender paid the $1,000 and ask the little man, “What do you do for a living? Are you a lumberjack, a weightlifter, or what?”
The little fellow quietly replied, “I work for the IRS.”