©OnCourse Learning. All Rights Reserved.. Investing in Real Estate ©OnCourse Learning. All Rights Reserved. Chapter 24

©OnCourse Learning. All Rights Reserved.

Investing in Real Estate


Chapter 24


In This Chapter

You will be introduced to the benefits and dangers of investing. Cash flow, tax shelters, loss limitations, capital gain, tax law changes, equity buildup, and leverage are just a few of the topics covered.

Benefits of Investing

Appreciation – increase in property value over time.

Mortgage reduction – the decline of the mortgage balance as payments are made.

Cash flow – money left each year after paying property operating expenses and debt service.

Tax shelter – tax deductible expenses generated by an investment property.


Rent receipts for the year $30,500Less operating expenses $10,000Less mortgage loan payments $20,000

Equals cash flow $ 500

Cash Flow Picture


Rent receipts for the year $30,500Less operating expenses $10,000Less interest on loan $19,500Less Depreciation $ 8,000

Equals taxable income ($ 7,000)*

*In accounting language, parentheses indicate a negative or minus amount.

Taxable Loss


Tax Shelter Tax deductible expense generated by an

investment. Loss limitation – active investor can deduct

up to $25,000 of losses to offset other income.

Straight-line depreciation. Residential 27.5 years Commercial 39 years Recapture rate of 25%


Capital Gains & Investing

Held longer than 1 year = Long Term Capital Gain

Maximum tax rate of 20% Asset held for 5 years qualifies for 18% At-risk rules Installment sales Rehabilitation Tax Credits Low-income housing credit


Equity at Time of Purchase Equity 5 Years Later

Purchase price $200,000 Market value $220,000Mortgage loan -140,000 Less loan balance -120,000Down payment $ 60,000 Equals current equity $100,000

Equity Build-Up

Current equity $100,000Less beginning equity -60,000

Equals equity build-up $ 40,000

(equity)

Calculating Equity Build-up


Leverage

The ability to use borrowed funds to purchase investment property.


Purchase Price $100,000Cash Down $20,000Loan $80,000Leverage 80%

• Investor only needs $20,000 to control $100,000 property

Property Selection Vacant land Houses & Condominiums Small Apartment Buildings Medium-size & Larger Apartment Buildings Office Buildings Other property types


APPRAISER’S VIEWPOINT INVESTOR’S VIEWPOINT

The appraiser solves for value. The investor solves for return.

Value = Net IncomeReturn

Return = Net IncomePrice

Comparative Appraisal and Investment Objectives


Developing a Personal Investment Strategy Risk Taking Debt Repayment Valuing an Investment Ownership Property Management Disclosure Laws


Lifetime Income and Consumption Patterns


Investment Considerations

Risk Taking Debt Repayment Valuing an Investment


Limited Partnerships

Property Purchase Methods Property Management Financial Liability Investment Diversification Service Fees Pitfalls


Disclosure Laws

Prospectus Blue-Sky Laws


EFFORT AND COURAGE There is no “get rich quick” formula, so don’t

expect one. If you have a good, informed investment

strategy & the courage to take the risks, the rewards are certainly attainable.


Key Terms Cash Flow Cash-on-cash Downside risk Equity build-up Investment strategy

Leverage Negative cash flow Prospectus Straight-line

depreciation Tax shelter


Documents

©OnCourse Learning. All Rights Reserved.. Investing in Real Estate ©OnCourse Learning. All Rights Reserved. Chapter 24