Investment Strategies

The following investment strategies have been used by investors for years. Some of these Strategies may work as well for you as they have for other St. George Island investors. Along with strategies are a few clues on how to enhance your investment by legally avoiding taxes through the use of 1031 tax exchanges and using your IRA or SEP to purchase Real Estate.

General Thoughts on Buying Lots

Many land owners have found the purchase of raw land on St. George Island to be the most financially rewarding approach to investing. True, the land does not generate income, but your only expenses are the taxes and Home Owner's Association dues, where applicable. It is the land itself that gains or loses value. Lot values have taken a beating over the last few years, and the threat of an active Hurricane Season and the Oil Spill are suppressing values even further. The contrarian sees this as a time to buy. You may wish to purchase a lot now, and let it appreciate to the time when a bank will simply use the equity in your lot as the down payment for the building of your dream home. On the other hand, you may prefer to buy a lot as a long term investment for your children's education. Many baby boomers grew up listening to Jimmy Buffett, so they want to retire to a Beach Lifestyle. Beautiful, natural, beaches aren't being made anymore, so the demand will return as the supply goes down! Every house that is built on St. George Island means that there is one less Vacant Lot. Scarcity! Contact John Shelby for further information, financing information, and the best deals today, so that you can better understand how to incorporate island property in your long term investment portfolio.

Buy a Lot, Use Equity to Build

This strategy works purely by buying a single lot, and waiting for the lot to go up in value sufficiently so that a lending institution will refinance the lot as a construction-perm loan, and use the equity as the down payment on the house being built.

Buy Two Lots Strategy

This strategy works by buying two lots, waiting until they go up in value, and selling one lot to obtain money to build a house on the other. You can also employ the Buy a Lot, Use Equity to Build strategy as an extra bonus on the lot you didn't sell. This strategy could leave you with a house on St. George Island, and little to no debt. Sweet!

Plantation Political Timing Strategy

The Plantation is a Home Owners Association, with all of the political turmoil usually associated with such communities. There is (and ever shall be) friction between those who would prefer the Plantation to be a quiet full time residential area, and those who prefer its intended use, as a recreational, second home/rental home community. The conflict becomes almost schizophrenic with the home owners who use their home some of the year as a residence and the other part of the year as a vacation rental house. Most of the conflict is good-natured and the owners with conflicting viewpoints are usually respectful to one another, but the conflict does drive some owners and potential buyers to the East End and Gulf Beaches, effectively putting a lid on the property values, from time to time. Of course a smart investor could attempt to time these types of trends and take advantage of the situation by buying near the end of a time period where the Board of Directors is controlled by individuals out for their own selfish personal agendas. When another group of level headed volunteer leaders who are more representative of the owners and their needs takes control again, the property value lid is removed. Predicting the timing can be tricky, but an investor not afraid of a longer term investment could really use this market timing strategy to his or her advantage.

Allow Vacation Rentals to Subsidize Your Purchase

The days of being able to buy a house on St. George Island and have the income stream from rentals cover all the ownership expenses and a high loan to value mortgage is history. However, the single best, fastest, and most affordable way to invest in and own a Beach House on SGI is to buy or build a rental house designed to maximize rental income, and allow the Vacation Rental Income to subsidize the vast majority of the costs associated with owning that Beach House. This strategy is immediately gratifying and typically only requires the Buyer to have the capability to borrow a lot of money and make the payments. During the Summer Season many of the larger homes, especially those with a pool, will generate more than enough to cover the pro-rata expenses of owning the house. The fly in the ointment is that the Winter months can't generate the kind of income needed to make ends meet, so even if you have socked some of the Summer income away to spread it out over the Winter months, you will still be coming out of pocket to make the mortgage payments in the Winter. USING IRA MONIES TO PURCHASE REAL ESTATEAccording to the Investment Company Institute Research, "There are approximately two trillion dollars invested in IRAs" (and SEPs). Baby Boomers own a big bulk of this money. Most of these people have large estates, therefore have other assets on which to live, and they will end up passing their IRAs to their family members down the road. Their family members will pay as much as 70 cents on each dollar they inherit between the estate tax and income tax on these IRAs. Most of these folks don't know they can can use their IRAs to purchase real estate. It can be done in two different ways. Real Estate can be owned within an IRA Plan, but there are restrictions and ultimately income and estate taxes will need to be paid. Better yet, you can use your IRA monies to purchase real estate and own it outright, outside the IRA. You can purchase real estate with other IRA holders and share ownership, outside the IRA, also.

Using IRA Monies To Purchase Real Estate

According to the Investment Company Institute Research, "There are approximately two trillion dollars invested in IRAs" (and SEPs). Baby Boomers own a big bulk of this money. Most of these people have large estates, therefore have other assets on which to live, and they will end up passing their IRAs to their family members down the road. Their family members will pay as much as 70 cents on each dollar they inherit between the estate tax and income tax on these IRAs. Most of these folks don't know they can can use their IRAs to purchase real estate. It can be done in two different ways. Real Estate can be owned within an IRA Plan, but there are restrictions and ultimately income and estate taxes will need to be paid. Better yet, you can use your IRA monies to purchase real estate and own it outright, outside the IRA. You can purchase real estate with other IRA holders and share ownership, outside the IRA, also.

You can buy a commercial building, land, second home, condominium, an office, beach rental property, etc. This approach takes a design (blueprint) that can save you thousands upon thousands of dollars in taxes and/or depreciation and other write-offs throughout your life. The expert on this is Alan Potts of Potts Financial Services, Inc.. 222 Lafayette Circle, Tallahassee, FL 32303, 850-222-4774 800-525-1893, alanpotts@earthlink.net

1031 "Like Kind" Tax Exchange

Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (20%+ applicable state taxes) if they purchase a "like kind" Property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of their proceeds from their sale to leverage into more valuable real estate with greater potential for value increases, increase cash flow, diversify into other properties, reduce management or consolidate into one property.

There is some confusion regarding what type of property qualifies for a Section 1031 tax deferred exchange. The internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment". "Like Kind" property can include, but is not limited to, any of the following, provided it is held for investment:

  • Single Family Rental
  • Duplex
  • Apartment
  • Commercial Property
  • Raw Land

For example, a single family rental can be exchanged for raw land, or a commercial building. In addition. properties can be exchanged anywhere within the United States.

Exchanges do not have to be simultaneous. Most exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of the replacement property. They must identify the potential replacement property(s) within 45 days from the closing on their relinquished property.

A 1031 tax exchange is applicable on any property that is not their primary residence (and falls under the definition of "like kind") and plans to Buy another "like kind" property within 180 calendar days following the closing of their relinquished property.

Paramount to any exchange is a competent and experienced Intermediary. Here are two (of a large number) with a great track record, deep pockets, and a good reputation.

Putting It All Together

It doesn't take a rocket surgeon or a brain scientist to figure out the potential of combining several of these Strategies. If you have other clever investment strategies, or exciting ideas about combining investment strategies, please let us know.

Potts Financial Services, Inc.  222 Lafayette Circle, Tallahassee, FL 32303,  850-222-4774  800-525-1893, alanpotts@earthlink.net

139 East Gulf Beach Dr. - St. George Island, FL 32328
800.344.7570 - 850.927.4777
info@sgirealty.com