Perspective on Real Estate

May 14, 2003

June 4, 2003


Check 'Disneyland' carefully

The combination of the new tax laws and legislation, in relation to the Wall Street scandals, has changed the way you should look at real estate investments. Taxes and exchanges are what I call "the Disneyland of real estate" because they are the fun and games, mostly games, that you play with your accountants to see how many tax dollars you can keep from parting with.

Now with the low tax rates, it isn't a bad idea to actually turn more conservative in your investments and pay taxes on your profits. With the fact that CEOs must sign the financial statements, many will opt to reduce risks, especially in real estate, where there is so much at the whimsy of the entitlement process.

Many REITs are already at their lows and should be checked under the philosophy of buy low and sell high. The stock market is so dependent on institutional investors, like pension funds, which pay no dividends, that they are divorced from the economy and become the greater game of risk-taking.

I was brought up as a research analyst where I had to try to quantify risks. I learned that many risks on new development are not dependably quantifiable. Even pro forma is often a "guesstimate."

In buying an existing building you can and should demand written proof of performance, insurance, taxes and expenses. Insurance is always going up (especially lately). Also check with the police to get a handle on crime in the area of purchase. If it's residential, be sure to check the ratings of all schools in the area.

In terms of investing in real estate, these are some additional caveats I suggest to reduce your risks:

  • Have an independent adviser check out the deal for you.

  • Insist that all written records be inspected by your team.

  • If management is required, know how and by whom the building will be managed.

  • Personally inspect each property you are considering.

  • Have a building inspector go through it professionally.

  • Regarding raw land, check with the local planners to see how they have the land zoned in their master plan. The unexpected is part of buying raw land.

  • Regarding zoned land, check with an engineer to see how much improvements will cost. No matter how cheap the land is, the improvements can be filled with surprises and underestimated costs. Remember that land entitlements are filled with the unexpected because there are so many departments it has to go through in the approval process.

  • If there is an anti-growth pattern to a municipality, such as Del Mar or Santa Monica, the unpredictability will lengthen your battle.

  • Make certain that there is sufficient infrastructure available for your use whether it is land or a building renovation; including water, sewer hook-up and accessibility. Check to see whether any highway or road construction is planned that can destroy its viability.

  • Remember that the unknown is filled with capriciousness. Any true expert knows that arrogance or political contacts will not be able to rescue your property from bad judgment or neighborhood antagonism.

  • Try to walk the property in bad weather so that drainage and other possible problems can be identified.

    Remember that "haste makes waste" and never was a saying truer than it is for real estate speculation or investment. Take your time and never be stampeded into a decision. Let it go to another party instead of losing your common sense and more.

  • May 14, 2003

    June 4, 2003