Penny Wise and Dollar Foolish

In my real estate practice I sometimes I feel that I have seen it all. I exclusively represent real estate investors in the sale of income producing assets - whether that is apartment complexes, retail properties, mixed use properties, strip centers, industrial warehouses, or sometimes even a package of rental houses. The value in these type of assets always are evaluated by the income they produce and the present value of the future income they will produce. 

To acquire income producing properties, investors need either cash or access to various forms of financing. Cash is obviously straightforward, however financing requires the investor to show proof of income, other debt, and a story of why they are a viable candidate to receive a loan. There are times when business owners decide they want to pay less than what is required to Uncle Sam - who wouldn't prefer to pay less in tax, after all. In this scenario, the business owner reports a lower than actual net income, which thereby reduces their tax burden. This is certainly an illegal and unethical practice and it can come back to haunt prospective investors when it comes time to obtain financing (and perhaps in court as well!). Yes, they saved some tax dollars, stock piled some cash, but missed out on the ability to obtain leverage because now the lending source cannot legitimately underwrite them as someone who can generate income. The missed opportunity to obtain leverage is substantial as it is an extremely valuable tool in building wealth through real estate. Leverage gives borrowers the ability to increase the return on each of their dollars in the investment. Because of being "penny wise" with respect to saving those tax dollars, these folks suddenly realize they have been "dollar foolish" now with the vanishing ability to obtain financing. Say goodbye to that new passive income stream.

Alternatively, to dispose of income producing assets, a seller must prove the cash flow in the form of legally binding leases, IRS tax returns, and physical inspections. In the same way that was mentioned above, if the property seller does not properly report earnings to the IRS and pay the required tax bill, the value of that asset decreases exponentially. This is penny wise (maybe not so wise, really) and certainly dollar foolish. If the seller has cut corners on repairs and maintenance or other capital expenditures, they are shooting themselves in the foot at the time of sale. A buyer will penalize a seller for not properly completed repairs and the full market value may not be realized as a result in that sale. Another prime example of saving a few bucks on the front end but losing substantially more on the back end.

To be successful in real estate investing, it is imperative that you become wise with the big ticket components that have the most effect. Of course you want to pay special attention to the details, and at the same time avoid engaging in activities such as these that will come back to bite you in the end. 

Let's discuss your investment program today so you can ensure you are making the best possible decisions. Give me a call at 502-648-9523 or connect with me on Twitter at @trches01. (By the way, ANYONE can be a real estate investor, not just the rich and famous. In fact, feel comfortable discussing with me how you can become a real estate investor; it's not as outlandish as it may sound.)