investment: property in LA or HSBC Savings?
 

Hey Everyone-

My parents are about to sell one of their properties down in Carmel and they want to help me reinvest that money so that I have some investments when I exit law school in 2 years. I had thus far planned to use the money as a downpayment on one or two condos down in LA, but due to the horrible housing market and some friends' advice, I'm now strongly considering placing ALL of the money into an HSBC Savings account.

Any thoughts?

Thank you,

--Marc :)

First off, you are one lucky dude. Your parents are hooking you up bigtime.

Secondly, these are just some thoughts from a real estate neophyte. The housing market in LA is crazy nuts right now. It is probably worth waiting. Also, you are still in school so even if you did use it to purchase a condo or two, you'd still have to make the mortgage and unless your parents are going to cover that, you'll have to rent them out. If you're okay with that, fine, but I think you're not interested in being a landlord just yet. You need to consider where you want to live after law school. That should guide you as to where to buy property. If it's the Bay Area, for example, you're going to need all the money you can get to put a down payment.

I'm all for buying property as a long term goal. It might not be right timing wise for you in terms of the market and your situation. The HSBC savings accounts have a pretty good interest rate so maybe park it there for the short term while you sort out the other issues.

savings account? that will not be a good move as even 5% is not great. Talk to an FA and have them invest your $.

It all depends on how long you plan on keeping the property. If it's only for a few years, then it's not worth it because chances are property values will, at the very least remain steady, if not drop over the next few years. If you plan on holding on to the property for at least 7-10 years, then it really doesn't matter whether you buy now or later, because by that time, the real estate cycle should be on the upswing. Also, depending on your price range and location, some places in LA will hold their value better in this changing market than others. I agree with Sanguru, talk to an experienced FA and see what advice they give. I'm a Realtor here in LA, so if you have any questions about the market here, please feel free to contact me.

If you're looking at the housing market in LA, there are still places the represent great investments....

If you plan on looking down here, definitely give X5guyinLA a call - he is great at this stuff and brings vision to the real estate game that puts him a step above....

Good Luck!

I personally wouldn't recommend the market either here in San Diego or Los Angeles, it has repeatedly been called very volitle, not sure about the OC thou, have you considered a 1031 exchange? One of my best friends actually does that for a living and was explaining it to me, seems a wise way to go.

1031 Exchanges are a whole different beast... plus, you need to have property to start....

He said his parents are selling a property in Carmel, 1031 exchange it and buy another property without being heavily taxed

If you want to invest the money for 2 years, but want something safe, I would recommend purchasing Euros. All signs are that the dollar will continue to drop over the next couple of years. The Euro is a much more stable currency right now, and will most likely yield you a much better return. And even if there is no change in the Euro/Dollar exhange rate, you will still earn the usual savings interest on your money. The great thing about this is that there is no real great risk like investing in the stock market. You are basically opening a savings account similar to your HSBC savings account, except the currency is in Euros instead of dollars.

If they are not buying a like kind property and owning it the same way, they won't qualify. From the brief fact pattern above, it doesn't sound like a 1031 exchange will work. Of course if you can make it work, you should.

Here is some brief 1031 Exchange info. http://www.1031.org/about1031/faq.htm You will need to get your accountant involved.

Hsbc...
 

As an HSBC employee, I vote for the HSBC Savings account. Helps my company's bottom line which increases my annual bonus and provides job stability. I also strongly suggest that everyone reading this thread open an HSBC Savings account. :thumbup:

it will be a nonfactor if owned over 2 years.

are you referring to the $250K exemption after living in a home for 2 years?

I personally will not touch any residential properties in LA area, especially entry level that is more crowded at least for few years. I speculate that there will be some more distressed properties popping out which will present you with some good deals for investors.
If you plan to live in that will be a different story.

omg...stay away from hsbc and their PUTNAM/Mellon investments i lost big time with that, and if anyone has to lose my money i want it to be me. ....hot market or not...i know one thing you can never go wrong in realestate. especially long term....condos....land...multifamiliy...just throw it into real estate, do some reseaerch and consider other places that are developing since the market in cal. may not be "hot" to buy in...vegas..arizona...etc... (btw...i also like the idea about the euro's) just my .02

I am also not a fan of HSBC, they suck!

No strategy that puts all your eggs in one basket should ever be considered. While sales are remaining somewhat constant, real estate inventory in Orlando is 4x what is was last year and interest rates (due to inflation related to energy costs) may rise even more. Me, I'm only buying if the price is right. Everywhere you look, people (many of whom have taken equity out of a first home to get an LC to buy an investment property) are trying to unload them. Wait, study the market, and then invest when you find the right deal---it is critical that you get good advice from realtors, investment advisors, and accountants.

Among other things, determine if the properties qualify as 1031. I believe only commercial property qualifies. Then look at all the tax consequences. Consider whether the property should be put in a trust, then transferred.

If you must buy real estate, buy vacant commercial land until you know the market metrics better. You can lease, sell, hold, or develop vacant land and you don't have to colect rent checks or evict tenants while trying to pass the Bar Exam.

You also have to consider depreciation allowances, cost basis, present vs future income, etc. Do you need to depreciate property now or when you are in a high tax bracket? If you have cash that must be invested, never put more than 25% in one basket--Look up the money manager Bill Miller, he's got a great track record...but don't stop there, and if you put your money with an advisor, make decisions in increments and don't invest in proprietary products just because they are being pitched. Also, there are many REITS that you can invest in that will put you in the real estate game without getting the distraction of management. G/L

Any property held for investment of used in a trade or business qualifies...

But only if held as an S-corp or LLC, right? i.e., an apartment complex vs a single family rental not held in a corporation...I can't reach any of the three folks I know who know this stuff inside out, so it's buggin' me. If you are a RE/Tax att'y, I am all ears.

To preface my comments - I'm a commercial RE broker in Bend, OR:

The term "like-kind" is probably the most loosely defined term according to the IRS. For instance you sell a single tenant retail building you could exchange into raw land, a rental house, apartment complex, TIC, industrial buildings etc. What the current use of the property is will have an impact however. If it's a residence, then it will be more difficult to exchange it, but you should have up to $500k tax free (assuming a husband and wife ownership of 2+ years).

As far as the type of ownership ie. personal, LLC, LP, S-corp or otherwise, it makes no difference as far as a 1031 exchange is considered.

Now to the investment ideas -
Like people have said before, it depends on how long of a hold you're looking for. I wouldn't suggest investing anything in LA since Cap rates are probably somewhere in the mid to high 3% range for residential? This means if you buy a property for $1,000,000 you'll see $30,000 net income from that property. In Bend we're seeing caps from low to mid 6% for commercial buildings. Residential home values have literally gone up over 20% per year for the past three years or so - not normal!! Combine that huge appreciation with twice the cap of LA and this looks like a better move.
Depending on how much you have to invest, check some soon-to-be-hot markets like some of the smaller resort towns in Idaho or Montana and hire a property manager to take care of all the headaches. Don't screw around with trying to manage your own building, pay the 4% to a manager and be happy collecting your monthly checks.

::off rant::

that's just my .02 :thumbup: if you want more I could spew for hours.... :)

Hey everyone-

I'm sorry I've taken a bit to get back, but I just finished reading all your thoughtful comments -- thank you so much for the feedback!!

One of the recurring themes however focused on what my plans were after law school. The short answer is that I necessarily already know I will be (or at least plan to be) living in West LA (read: NOT the Valley or any other region in LA) come Summer 2008. Therefore, assuming that the property(s) I purchase now will *NOT* be in the West LA region, the question becomes whether I will be selling them come 2 yrs from now, or holding on to them?

So the way I see it, I have a 2-part dilemma: (1) *DO* I invest in property -- and from the sounds of things, prehaps I should? and (2) What do I do with it 2 yrs down the road?

Your feedback is tremendously helpful. All my life I've taken pride in learning a lot about many different subjects, but real estate and investing in general are unfortunately areas in which I know very little I'm afraid. :( So I sincerely thank all of you for helping get me pointed in the right direction.

:withstupi At least until you graduate, the liquidity is also going to be a huge advantage over owning property.

I understand all of that. I was referring to the fact that he said his parents were going to sell some property and give him some cash for reinvestment. Hence, no like-kind ownership in this fact pattern.:thumbup:

Some really interesting points of view here..... I am sorry in advance if my point of view (and a bit of a rant) steps on a few toes (so bring on the flames) but there are some really naive replies here.

I have never yet met a so called 'expert' in real estate, including agents (of which I am one) that really 'knows the market', much less one who should be giving advice on when to buy due to the state of the market. I have also yet to meet an agent that knows the growth rates of individual classes of property in each and every suburb of their capital city.

How do you know a suburb, much less a city is performing? Have you analysed the growth rates of condo's vs houses vs apartments vs townhouses over the last 10 years to see the trends and which areas are over or under valued? It took me three months of research before I could get just that as a starting database for my city.

Published growth rates are made up of averaging all of these sectors and the average person does not take the time to do the digging..... particularly real estate agents. Agents know their suburbs but rare is the agent who goes through every home open in every one of their prospective areas all the time? If a full time agent can't do this then what are the qualifications of anyone else saying when or where is a good time to buy? Most people express opinions based on what they read in the press, which is based on the here and now. Negative news sells.

It's no different to someone acting on a 'hot tip' in the stock market. If you haven't researched then you are just a gambler.

Your essential question is what to invest in, savings vs property, and alternatively shares.

I first assess RISK, then RETURN.

RISK
Shares - High risk of loss of capital completely. We all know plenty of stories of bad losses or companies that go broke, highly liquid (ie can get money out quickly)
Savings - less risk (depending on reserves/govt support), fairly liquid depending on term
Property - low risk, poor liquidity due to time required to sell

RETURN
Shares - High return possible, average return dependant on stock selection
Savings - Medium return usually a couple of points above the cash rate
Property- High return possible, average return dependant on stock selection

Ok, here is a quick number example $100k invested over 5 yrs with an annual return compounded

Shares - eg 10% = $161,051 a gain of $61,051
Savings - eg 6.5% = $133,822 a gain of $33,822
Property - eg 10% = 161,051 a gain of $61,051

Now, lets leverage each. Can you leverage savings? No, so only shares and Property. Property can be leveraged up to 90% confortably, which with a $100k deposit (lets use the deposit for say $10k of expenses) could THEORETICALLY allow us to buy a $900,000 property.... giving us over the same period a THEORETICAL gain of $549,459.....

Shares can be leveraged the same way with margin lending. Typically you can get 60-70% LVR but the difference between this and property is that the high liquidity means if the stock falls, your exposure increases and the financier rings you up looking for more cash to stabilise your ratio. It's known as a margin call. High Risk but your return would be $258,472

In my opinion your money must be absolutely safe, with no chance of you losing it. I subscribe to the theory that people, companies and institutions go bust, but properties cannot.

So, back to the question...... property gain of $549,459 vs $33,822. Ok, lets halve the property return because it had a few bad years to $220,000 vs $33,000. I call that a 'no brainer'

Now I know some of you out there are going to complain that the market doesn't move @ 10% pa, the LVR's are different, there are more ways to do certain things etc. The numbers I have used above are just that, numbers. The point I am trying to illustrate is that real estate has a better return for the risk because you can leverage over savings and increase your return.

In your question you appear to want a passive investment. Both savings and property are relatively passive, but one has a higher return. If you select the property class as an investment I would suggest you do the research yourself and make your decision based on FACTS that YOU find out, not opinions. A good place for you to start is at the LA County assessor here LACA

Then, in two/three/four years time you want to buy a new car/ house etc, you will have had a few years of carefully selected growth while you have concentrated on your studies. You can then use the equity built up to draw down cash via a LC (line of credit) to buy what you want, then keep the property and let it keep gaining the growth. It's really that simple.

BUY, HOLD and NEVER SELL

Cheers

He he end of rant.....

Dont know anything about investments, but people I know personally have made some very good returns on real estate in a very short period of time. I just got back from visiting my mom in NC, near the coast (Atlantic Beach area). Last year, I thought about moving there, and a 3 bed home 10-15 min from the beach ran around 160-180,000. One year later I check out the same info, and nothing is available for less than 250,000. And it was a nice sleepy area. Now theres about 20 new condo buildings going up, and they cant build fast enough to meet the demand.

Here in the UK, between 1996 and 2006, most areas have witnessed the doubling, and in many cases, tripling of prices. I guess it just depends on knowing where the next "hot market" is. There are still several places where the property is cheap, and people are rolling in big time from out of town to buy them up. Gulf coast Fla., San Antonio, etc. But I dont think there is ANY risk in buying property, no matter where it is. And hey, you'll always have a place to live! LOL...

This is probably not the right forum to get financial advice, but what the heck. Are your parents trying to give you some money to buy a house to live in, or just trying to help you make some money? There are tax and legal consequences involved that are way beyond the scope of this forum. Look at CD's, mutual funds, life insurance, real estate, etc. It all depends on your goals and situation. I do estate planning, and I would recommend you talk to the appropriate experts for some straight forward advice. Remember, just because it worked for your "friend" doesn't mean it will work for you, and no one ever tells you about the money they lost along the way. Good luck w/law school. The first year is the toughest.

Wow the continuing advice is impressive, thank you so much. And LVR -- your thesis was impressive!!

So here's a thought now that my Mom just suggested to me: SINCE I plan to live in LA in 2 yrs after law school; and SINCE I'll therefore need a place to live obviously; they perhaps I *DON'T* need to worry about getting a 2BR or 3BR place to sell in the future (I understand that in West LA 2/3BR places sell MUCH better/easier than 1BR) -- I'll just take a 1BR condo on wilshire for about $600K (there's 2 or 3 available right now) and just stay there and eventually rent it out when I am able to upgrade to a bigger place after working for a few years! It looks like I'll actually have $350K to put down, so....

How about that?

Excellent. Just as a suggestion, why don't you go and check out the growth rates of 1BR vs 2 BR over say at least the last 7yrs. Get the sales figures of all the 1BR's, then using a spreadsheet plot the movement in price as a percentage then do the same with the 2/3BR's. You might find that there is a significant growth variation and you will be able to do the same thing..... that is rent it out when you upgrade.

Good luck!

LVR, I appreciate the fact that you brought some science of investment to this discussion, I agree with many fundamentals you presented.

Fact, you do not require high level of education to become a real estate agent in California,. People who are successful in the business are hustling salespersons not academics. If anyone asks any real estate agent about investing in real estate, he/she will always say yes to you.

Fact. many academics i.e. scholars from UCLA Anderson School, predicted real estate market collapse since 2003 which NEVER happen. Obviously statistical and scientific projections on real estate and also on stock market do not prevail.

However, if you think anyone could predict/project what your investment will look like in two years by looking at assessor’s website you are seriously wrong. You are better off with a crystal ball.

I didn’t agree with some of the posts, but most of them were very genuine and helpful in nature at least with good intentions. Please don’t discount these people. Trust me, you are not any better because you laid out your highschool economics.
You sound much like a late night informacial.
A good number of people here are more educated than you. From what I understand Crosvs asked for opinions and that is exactly what he got from good people.
Come on give me a break!

FACT: I said start at LACA as they keep records of sales and would be a good place to START your research.

FACT: I didn't make any claims about predicting or understanding the market but rather illustrated how to identify under or overvalued properties by researching. All together rather different.

FACT: I have found through experience that if you try to illustrate an investment with an example allowing for EVERY SINGLE real world fee, charge and variable that the reader loses the point. As I said, the numbers were 'just' for that reason.

FACT: I didn't state my educational qualifications nor call into question anyone else's..... You don't know know anything about my level of experience in real estate.

FACT: I prefaced my comments with a warning that it would offend someone as opinions given are VERY different to your own research.

What I DID do, is take issue with people predicting or offering advice on the state of the market if they don't do research or, when by your own admission many so called experts have no idea...

'nuff said!!!

Thanks for clarifying few things.

Residential Property stats in SoCal, (I don’t know about down under)
Distressed residential properties increased by at least 100% compared to last year and rapidly increasing.
Housing affordability index is around 6% which is all time low.
Residential inventory level has surpassed 3 months while ago and increasing, nationally 6 month which means its sellers market now.

You are right that investors should do his/her own research as well. Yes, giving investment advice based on speculation only is irresponsible and could be even costly especially IF YOU ARE TRYING TO SELL SOMETHING TO SOMEONE.

I said speculate not predict…
I have a good friend with a title company with 25 years experience in LOCAL MARKET. I could have him pull some data. I am not talking out of my ass.

curious as to which opinions you feel are naive? I agree with you that real estate is the safer investment; as long as you can hold on to it and ride out the ups and downs of the market, properties will always have value. while i agree with you on that, i take issue with some of the points you made. what i'm curious about is why you're making the statistics more complicated than it is? I work the Westside of LA, and while I don't see myself as a market expert, I can tell you how much inventory we have, how long the average days on the market a property sits, how many have sold, expireds, gone into escrow, etc. if it's an area i don't know, give me half an hour and i'll know those stats. how is looking at growth rates over the last 10 years going to tell you anything about where the market is going and whether something is a good investment? i don't know which area you work, but here on the Westside (which is the area crosvs is looking in), prices have skyrocketed through the roof in the last few years and only recently have they started to level off and even drop. looking at the last 10 years would tell you that the Westside is a great place to invest, build equity and sell after a couple of years (which is what I think crosvs wanted to do), when in reality it's only good if you hold on to it for a while (another point i agree with you on).

you mention using a HELOC (home equity line of credit) to draw out the built up equity to buy what you want, but you make the assumption that equity will go up when chances are they won't in this market(at least not much). We all know that the best way to add value to a home is to add square footage, so how do you build equity in a condo (which is what crosvs is looking at) when homes sit on the market a lot longer and appraisals are coming in lower than the purchase price (which is already below the asking price)? chances are crosvs will only be pulling out the money he put in, not the equity built up through appreciation. granted appraisals on HELOCs and refinances have been higher than home purchase appraisals, i don't think that will continue.

JonK...i think you meant to say that it's a Buyer's market.....a Seller's market is when there is low inventory, properties get multiple offers and the price gets bid up. you're right, homes are sitting on the market much longer, but this is what a normal market is suppose to be...here on the Westside there's about a 4 1/2 month supply of condos if no other condo comes on the market and there's roughly 20 additional condos coming on the market every month. and that's not including all the for sale by owners out there.

ok, done with my .02.

You are right and thanks for the correction. Real Estate would be safer investment for the long run which I agree, not certain about 2 years period CROSVS mentioned. I must add that it is absolutely important to work with a credible local realtors, not your uncle who is a realtor 50 miles away.

Wow, 4.5 mons of inventory in W.LA? 3 month being equilibrium it must be turning to be Buyers market now. It is about time sellers getting with the program ask reasonable listing price.

I did well investing in RE last 6 years in SCV/SFV, all bets are off for me for now.

I have to say, I'm learning a lot through this discussion ... let's not get into an argument about it though. I think everyone has a lot of invaluable personal thoughts and information to offer, and I have very grateful to all of you in taking the time to help me with this.

A clarification/reminder however: for the sake of simplicity, let's forget I said I'd only keep the property for 2 yrs and go with my Mom's suggested course of action: a 1BR that I will keep indefinitely.

I wasn't going to go any further with this as it is your thread.... and I agree we are not here to argue.

A couple of points of explanation....

You call it inventory, we call it listings. That is all standard info looked up in about 10 seconds for an agent. It means absolutely nothing other than a list of properties available and how long they take to turn over.

Well, I would ask you this, lets say in a given suburb condo's grow annually @ 3%, townhouses grow @ 4%, apartments grow @ 22% and houses were losing value @ 2%, the area has a published median price (ie easily obtained 'official figures') growth factor of 3%, how would you know, without doing the research, that there was even an opportunity in that suburb?

Most agents would be talking about the state of the market and how it is a buyers/sellers environment. If one were to ask about the suburb I just gave then they would tell you it has a growth rate of 3% and depending on their bias would steer you away or offer little favourable info.

Their info comes from opinions based on how long their stock takes to go/price conversion/new listing rate/published growth rates etc.

If you're all for quoting inventory, how slow stock turns over etc you have no idea what the little nugget of gold even is.

That, to me means you are missing the point or, with respect, no one has ever shown you this.

It is obvious from my example that there are opportunities in this suburb enough to start investigating. Then you look at comparisons of land value, improvements etc with comparisons all on a RATE per metre. By looking at these with a baseline you work out when an area/asset is undervalued, overvalued in its' class. You can also see growth occuring in ripples through a region.

By analysing the growth and market I find opportunities such as zoning conversions, commercial, retail, industrial stock and I have no problem paying the price asked. It means you can identify growth areas as I have up to 18 months before they occur.

How do you know this? How do you know when the market growth is going to stop? Here in Melbourne everyone is crying about how bad the market is and wondering when the market will move again.... but I'm still buying/selling.

Take the time to do the research. It's not very sexy and there are plenty of people out there telling you it is pointless or doesn't work, or they say they do but then get bored/distracted.

Why do I go to these lengths? Because I have made CASH gains (ie realised in the bank, not theoretical) with lots of zero's on each property within 2 years, each time.

I do this because it works....