One of the problems many investors face is that they simply have no desire to reside in their rental property. So,they do a 1031 tax-deferred exchange,and obtain a property they would like to live in. Then
they reside in that property until the time limits have been reached and sell it as a personal residence, claiming the big exclusion. The problem here is that the government recently changed the rules. Now, if you previously did a 1031 tax-deferred exchange on the property, you must reside in it for the full five years before you get the exclusion. Apparently, so many investors were taking advantage of a combination 1031 exchange and exclusion that the government saw this as a tax loophole and moved to close it. While many investors are more than willing to reside in a home for two years in order to get the exclusion, far fewer are willing to do so for five years. 

We recently had lunch at a local restaurant and we paid with our debit card, as we often do. Our bill was for $21.04 and we left a $3 tip, making the total $24.04. When the charge cleared our bank, it cleared as $34.04. We took our receipt to the manager and he found his copy of the receipt. The waitress had added a one beside the three, making it a 13, and changed the 2 to a 3. We also learned that she had been fired earlier in the week for doing the same thing to other customers.

REO stands for “real estate owned,” and it refers to homes that lenders, such as banks, have taken back through foreclosure. The presence of a host of REOs sug¬gests that owner/borrowers have neither had the means nor the will to keep their properties when times got tough. The more REOs in the market, generally speaking, the weaker it is. On the other hand, “working the REOs” can be a good opportunity for investors. It is sometimes possible to buy an REO for under market (usually if it’s in bad shape), fix it up, and then quickly resell—a kind of flipping. This will work in all but the worst market conditions. Finding good REOs, however, often means having a contact in a bank. You should check with your local bank to see if it has any REOs in the area. (Most banks farm their REOs out to local agents.)

Some people feel that it’s always a good time to buy real estate. But often these are people (such as agents) who depend on a steady stream of sales for their income. Investors, however, need to be more discriminating. His¬torically, real estate goes through up and down cycles. A great time to buy is when the market has just gotten off a low and prices are beginning to rise. You can buy almost anything and ride the boom to profits. On the other hand, buying right after the market has peaked is not necessar¬ily a good idea. No matter how good a bargain you may get, you could find that you’ll have trouble reselling quickly at a profit because of stagnant or even falling prices. Timing your investment to coincide with real estate market conditions can mean the difference between success and failure. Of course, if you plan to buy and hold for the long term, then over time the ups and downs of the market will tend to even out, and you should end up with a very valuable piece of property. But, if that’s your goal, be sure that you know how to buy right so that you don’t have negative cash flow.