Prices are low. We are at or near the bottom of the most recent real estate cycle.  Every indicator in the Denver market shows us that prices for the low to moderately priced homes (under $ 150,000) in our market have bottomed out and are improving.  It is always difficult to anticipate in real time when the market hits a bottom until well after is has passed (the old analogy of "don't try and catch a falling knife...you will get cut" holds true).  If we look at all the trends data (and I have a lot - call me and I would be happy to provide it for you), overwhelmingly it shows that prices for these lower proceed single-family homes, condos and townhomes are just past the bottom and are heading up.

Distressed property sales will continue.  The sale of foreclosed homes and other “distress” sales will not go on indefinitely.  Our current market in Denver is seeing a greater number of short sales (or pre-foreclosure sales) that traditional foreclosures.  The lenders have realized that they can net higher proceeds by allowing for this procedure, avoiding foreclosures, and reducing their overhead and inventory of real estate owned (REO property).  Short sale properties typically sell for anywhere from 60-80 or “retail” prices.  All indications are that distressed property sales will continue for the next 18-24 months, then begin to taper off significantly.  The window of opportunity for these real estate bargains will not last!

Financing is cheap. We are enjoying record-low interest rates. Interest rates are lower today than virtually any time in the past 40 years!  Interest rates for investor loans are running about 5% and requiring 20% down payment.  With this type of financing available to lock in (for 30-year fixed rate loans), you can generate cash flows with many properties that otherwise would not have been available.

The rental market is very strong.  According to recent newspaper articles (Denver Post Feb 25, 2011) the residential vacancy rates in the Denver metro area continue to drop to near-record lows.  The vacancy rate for single-family and small multifamily (less than four units) properties is under 2.0 percent for the entire metro area.  For Denver County the rate is 3.0%, for Boulder & Broomfield it is 0%.  Average rents (for 2-bed, 2-bath units) is $1029/month.  What this means for the real estate investor is low vacancy rates, quick turnovers, and increased rents.

All in all this is a perfect confluence of positive factors for owning rental properties in the Denver metro area.  Don’t miss out on this opportunity before it passes.

Coming next: How to evaluate prospective rental or investment properties.

Here are the facts: The tax is based on income and profit, and even if you have not lived in your house for a long time, you still may not have to pay this tax. The Health Care and Education Reconciliation Act of 2010 became law on March 30, 2010.

It is a comprehensive and extremely complex piece of legislation. One section (1402) is entitled "Unearned Income Medicare Contribution" and does impose a 3.8 percent tax on any profit on the sale of real estate (residential or investment). But it is aimed at high-income consumers, who comprise a small majority of American citizens. And in any event, it does not take effect until Jan. 1, 2013.

Let's look at the true facts of this new law. First, it is not a sales tax, nor does it impose any transfer or recordation tax. It is called a "Medicare" tax because the moneys received will be allocated to the Medicare Trust Fund, which is part of the Social Security system. Next, if your individual income (technically called "adjusted gross income") is less than $200,000, you are home free.

The income thresholds are clearly spelled out in the law. If you are married and file a joint tax return with your spouse, the law will apply only if your income is more than $250,000. If you and your spouse opt to file a separate tax return, the threshold is reduced to $125,000. For all other taxpayers, you have to earn more than $200,000 in order to be under the new law.

The up-to-$500,000 exclusion of gain from a home sale for married couples filing a joint tax return (or up to $250,000 for single taxpayers) has not been repealed; also, the right to deduct mortgage interest and real estate tax payment has not been eliminated.

How is the tax calculated? It is a complex formula that could be called "the accountant's protection act." As a taxpayer, you (or your financial adviser) must determine which is less: the gain you have made on the sale of your house or the amount that your income exceeds the appropriate threshold. Complicated? Yes.

Let's look at these examples. Your adjusted gross income is $150,000. You sell your house and made a profit of $400,000. There is no change in the way you determine your gain: You take your purchase price, add any major improvements you have made over the years, and subtract that number from the net sales price. Based on this formula, you and your spouse have owned and lived in the property for at least two out of the five years before it was sold. Accordingly, you are eligible to exclude all of your profit; you are not subject to the new 3.8 percent tax. Keep the money and enjoy.

Change the example so that your adjusted gross income is $300,000. Since you are eligible to take the profit exclusion of up-to-$500,000, once again you do not have to pay the Medicare tax; your entire gain is excluded, and thus there is no profit to tax. But let's assume you strike it rich and have made a profit of $600,000. Your income is $300,000. You can exclude only $500,000 under current law, so you will have to pay capital gains tax on the remaining balance.

The rate currently is 15 percent, so you will owe Uncle Sam $15,000 ($100,000 multiplied by 15 percent). But since your income is over the threshold, you now also have to pay the 3.8 percent tax. But on what amount? As indicated earlier, the tax is based on lesser of your profit or the difference between the threshold and your income.

Your profit is $100,000. The difference between your income and the threshold is $50,000 ($300,000 minus $250,000). In our example, the lower number is $50,000, and you will have to pay an additional $1,900 to the Internal Revenue Service (3.8 percent multiplied by $50,000). According to statistics provided by the National Association of Realtors, in March of this year, for example, half of all existing homes sold for $170,700 or less.

Clearly, none of these homes could make a profit of even $250,000, so if you qualify for the exclusion-of-gain requirements you will not be impacted by this new law.

This new law has yet to be analyzed or interpreted. We have more than two years before it takes effect. However, since the law applies to all forms of real estate, including vacation homes, you should consider consulting with your tax and financial advisers as to your exposure.

You will, of course, have to wait until we all have a better understanding how it will work. In the meantime, however, don't believe the rumors.

Jon Sommer

Contrary to shat you may read in the news, lenders are ready willing, and able to  make loans on rental properties...as long as you have decent credit, a steady source of income, and 20% down payment.  There are a number of great opportunities to buy cash-flow properties NOW.  Let me show you how to achieve annual returns of 30% and more on your money.

There are opportunities with all types of residential real estate right now, from condos and townhomes to single family homes, duplexs and triplexes and small apartment buildings.  With interst rates at 4.0% you can lock in those future cash flows now.

Stay tuned for future topics such as: How to buy and hold single family homes with great cash flow.

Home prices are one factor in determining your cost of ownership, but so are interest rates and financing availability. Even though interest rates have gone up in the last six months, they are still near historic lows. Since your monthly mortgage payment is a combination of paying down your principal and paying the interest owed, if home prices come down a little further but interest rates up, it could cost you even more to service a mortgage on an identical home!

While a home is a major investment, it is also the center of your personal life. It's important to live in a home that reflects your taste and values, yet is within your financial "comfort zone." To that end, it may be more important to lock in today's relatively low interest rates and low home prices, rather than to hope for a further break in prices in the future.

Please give me a call if I can be of any assistance in determining how much home you can afford in today's market.