US real estate investment basics
Appendix I Investment Fundamentals
The operation of apartment and commercial investment projects is complex and there is no standard to follow. The following concepts and areas will be covered.
1. Real estate investment has four main aspects of return: cash flow, principal savings, value-added and legal tax avoidance (or deferred tax)
(1) The first kind of return: cash flow.
Cash flow is mainly reflected in rental income, coupled with other penalties such as late payment of rent, pet fee, internet and water fee, application fee and background check fee, washing machine and dryer fee, etc. These cash receipts less all expenses, such as maintenance staff salaries, replacement parts, property taxes, insurance, mowing, shoveling snow, garbage fees, painting and cleaning, lawyers, accountants fees, property management fees, repairs to reserves, etc. .
The cash return is the net income before tax divided by the investment amount.
(2) The second kind of return: principal savings.
Investors generally do not pay off their home loans in cash. They often mortgage their houses to banks for loans. The amount of loans and the interest rates vary.
Loans are usually for many years, the shorter the year, the faster the repayment. For example: 15-year loan period, the annual repayment amount, cash flow less, but to pay off the mortgage fast; 15 years after the big cash flow, housing net assets; and 30-year loan period, it takes a long time to pay off, but Early cash flow, reducing the risk of negative cash flow.
(3) The third kind of return: value-added.
Value added is the amount of the owner’s appreciation of the property during the period. The value-added size is affected by various aspects, including rising rent, rising building materials prices and wage increases, short supply of property listings, increasing government approval for new buildings due to government regulations, and lowering interest rates to allow homeowners the ability to pay more for the month Thus stimulating more investor demand for property.
(4) The fourth kind of return: Positive cash tax is deferred tax, negative cash flow legal tax credit.
For high-income doctors, lawyers and many professionals, the annual tax payment is very large. Extra income sometimes brings them more burden. However, real estate depreciation of many real estate can offset some or all of the positive cash flow, reducing the amount of tax. If real estate professionals manage their own properties, it is also possible to reduce their primary income by directly hedging negative cash flows. Some owners have also donated money to social charities to reduce the cash flow from positive to negative tax deductions.
2. Property depreciation
If there is no depreciation of property, investors pay the income tax of cash flow and principal savings every year. The government allows homeowners to use years of depreciation to hedge their incomes and defer tax payments for several years. If the property is sold, the amount of depreciation is still subject to a certain percentage of tax refunded to the government. However, you still legally borrow for free the government’s taxes for several years. If you leave the property to future generations, it is tax-deductible within the amount of government’s estate.
Real estate team
Real estate investment must have an experienced, honest and professional team to assist in transactions, loans and property management. They set investment plans, analyzed project prospects and related networks such as bankers, real estate agents, lawyers, accountants and others.
(1) Real estate agents have social relations in the real estate industry and find one-stop service for finding suitable houses in the market such as appraisers, banks, insurance companies and so on.
(2) The lawyer is responsible for drafting and reviewing the contract, making a deed investigation, setting up a company, drafting a company charter and handling other legal issues, and so on.
(3) The estate accountant provides the most suitable corporate structure for the investor’s purpose to achieve legal tax avoidance (or deferred tax) purposes, such as property conversion and estate transfer.
(4) Banks: Various types of banks can make different projects and sizes. Bank lending points below 1 million, more than 500 million, more than 10 million each unequal, with personal full debt loans and no personal guarantee loans. Bank is the largest shareholder, a large number of banks, namely, commercial banks, deposit banks, insurance companies and a variety of listed companies.
(5) Investment Partners: Share interests with suitable investors. In the small investment cooperation group, the investor’s annual income, family background, occupation, age, and investment destination are mostly similar, reducing disagreement.
(6) Property Manager: Responsible for daily property management, including leasing, advertising, maintenance, lawn, shoveling snow, property roof, renovating both inside and outside.
(7) Title transfer company: responsible for all matters related to title investigation and transfer, including the history of deeds and related debts. Arrears, Debts, Legal Disputes, Deed Insurance, Transfer Expenses, Government Rent Apportionment, Escrow Amount, Conversions, and more.
(8) Insurance companies: apartment professional insurance companies know the difference between indoor and outdoor insurance, the amount of bank loans, errors, the amount of insurance rebuilt or income insurance, benefits beneficiaries, and bank representatives, and so on.
(9) property inspection: understand the infrastructure, view construction errors, property defects, property management issues, all kinds of pests, for example, windows, roof leaks, walls, cracks in the foundation, heating and cooling, water heaters, meters are there any problems, Termites, cockroaches, and more.
(10) Appraiser: Can the assessed value meet the requirements of banks and buyers and sellers? Valuation is not as high as possible, to be specific to the specific situation.
4. Property Management Company: Choose several methods of property management
(1) Learn from other businesses or inquire about the company’s reputation.
(2) Knowing the company’s methods of doing things in newspapers, magazines or specific transactions; visiting the company, visiting or experiencing the company’s activities anonymously, renting houses, etc .; obtaining relevant documents such as income, expense reports, contracts, leases, View the company’s online advertising; view the company’s relevant licenses, such as brokers, sales staff.
(3) test the company’s work efficiency, including the reaction speed and whether to contact.
(4) compare the company’s management fee is reasonable.
(5) See if the company has posted fair housing and civil rights laws.
5. Loan Notes
(1) What conditions must be provided for my loan?
(2) What documents do I need to provide, tax bills, net worth, bank deposits, credit cards?
(3) What is the cost of the loan application form?
(4) The total cost of applying for a loan – including transfers, surveys, appraisers, commissions – how much?
(5) What is the cost before my loan application is approved?
(6) How long does it take for my loan application to be approved, and how long will it take for my loan application to arrive?
(7) What is the interest?
(8) What is the interest rate?
(9) Loan fixed interest period is a few years? 10 years, 15 years, 20 years, 25 years or 30 years?
(10) Bank escrow accounts to pre-pay property taxes, insurance and bulky maintenance costs?
(11) Before I choose the right kind of loan, please explain the difference between various types of loans.
6. Apartment Property Information (provided by the seller)
Here are some questions you can ask before signing a contract:
(1) How long have you bought this property?
(2) different types of houses how the ratio? Single suites, one room and one hall, two rooms and one hall, three bedrooms, a few sets of garage?
(3) how utilities work? Separate table calculation? Who pay? Who pay the total bill?
(4) What kind of electrical equipment in each apartment? Stove, refrigerator, dishwasher, microwave oven, washing machine, smoke monitor? Do tenants have their own home appliances?
(5) air-conditioned it? Is the apartment central air-conditioning, air-conditioning alone or no air conditioning?
(6) What are the characteristics of tenants? How much income? How much credit? Is there a criminal record? Have you been to court deportation order?
(7) What is the normal amount of deposit? Pet with a deposit or fee (non-refundable)?
(8) how long is the lease term? Monthly rent? Late fees how much? Pets? How many tenants have pets?
(9) Discounts / Promotions: Are there promotions now? Including rent and maintenance services. Are there any free items or services for tenants?
(10) Roofs, air-conditioners, carpets, parking lots and other facilities that have been overhauled in the last two years?
(11) What is the current vacancy rate? How many vacancies are there now?
(12) How many tenants have given notice of moving?
(13) What services are outsourced? Are these contracts effective after changing homeowners?
(14) How many years have the majority of guests staying in?
(15) Are these apartments singled out? What is the management fee?
Which management company? How to charge? What percentage of total revenue?
(17) which bank loans? Loans can be transferred? Is the seller lending it?
(18) Do tenants themselves rent out furniture and appliances?
(19) What is leased in the property?
(20) a model room?
(21) Is the property a wholly-owned or joint venture?
(22) Please provide a report for the two years – Income / Expenses, Rent Now, All Leases.
(23) Have land survey report?
(24) Environmental report?
(25) Have a housing permit?
(26) Have plot planning drawings?
(27) Have the first 5 or 10 years of maintenance records?
7. Pet fee
(1) admission fee, can not be returned.
(2) monthly fee.
(3) pet fee can rise 5-10% each year.
(4) limit the number of pets and the weight of each pet.
(5) Pet excrement treatment.
8. Banks respond to changes in interest rates
Investors according to the reasons for the changes in interest rates, loan types, conditions and duration, the duration of the decision to adjust the direction and details of the investment, interest rates rise or fall will appear the following different social phenomena.
When interest rates fall:
(1) More people can buy the first house.
(2) Now the tenant moved out because he bought the house.
(3) future tenants will choose to buy a house first.
(4) rental discount and promotional amount needs to be increased.
(5) Total rent income will decrease due to “soft market”.
(6) Owners will heavily credit for low interest rates to reduce their monthly loans.
(7) The landlord reduces the amount of money saved and the loss of rent offset each other.
(8) Apartment Prices The market remains strong with low interest rates and more demand for apartments for purchase.
When interest rates rise:
(1) Fewer people meet the conditions for buying a home, postponing the purchase of houses, and the tenants staying longer.
(2) Fewer new apartments, construction costs increase due to housing difficulties.
(3) The occupancy rate of renters increased.
(4) Monthly rental income increased.
(5) Consumption of the interest rate ahead of inflation is the manifestation of inflation.
(6) Property market prices, especially property prices for transferable loans.
(7) variable interest rate interest rate loans increased.
(8) The loan amount is increased every year.
9. Capitalization Rate (Capitalization Rate) The relationship between purchase price and net income
Capital Interest Rate = net rental income divided by the purchase price (the higher the price, the lower the capital rate).
Net income: The total income of an apartment minus expenses.
Revenue includes rent, late fee, pet fee, application fee, water fee, and more.
Expenses include property taxes, insurance, mowing / shoveling, rubbish, repair, painting, cleaning, and more.
Capital Interest Rate = net income divided by the purchase price.
The annual income of a property is $ 10,000, the selling price is $ 100,000, the capital rate is 10%, the capital rate is 11.1% or the selling price is $ 90,000, and the selling price is $ 111,000, the capital rate is 9%.
The higher the price, the lower the interest rate. Net income is usually relatively stable, with little change each year.
Buyers buy low-capital interest rates, that is, high prices. On the contrary, high capital interest rates to buy a house, the low price to buy.
Fuzzy interest rate zone: Mortgage is not an expense category (whether interest rates or investors buy cash in cash has no effect on the conversion of capital interest rates.)
Five Elements Affecting Capital Interest Rates:
(1) Bank interest: Bank interest is low, investors can make full use of the leverage principle of borrowing to buy property. Property with a capital rate above the interest rate will have a positive cash flow. Such as: the capital rate of 8%, 6.5% interest in the property will have a positive cash flow. The greater the gap, the more money. On the contrary, a 5% interest rate on capital and a 6.5% interest rate will generate negative cash flow.
(2) Property Quality: Investors are willing to buy low-interest-rate properties. He must have believed that the industry has good room for appreciation and the rent is stable. The property itself is of good quality and location, relatively easy to manage.
(3) Supply and Demand: Not all investors buy property for economic reasons, some because of other needs, such as regional. Such as doctors, retailers, or office clients, whose job or business needs are in a particular area and the value of the property itself is the second most considered by them. This situation more houses in this area will be reduced, resulting in lower capital interest rates.
(4) Property Conversion: When the property sells a good price in the real estate market, the owner tries to postpone the profits tax of selling the house. The common method is to buy another larger amount of property so as to reduce the availability of houses and lower the balance of supply and demand Capital interest rate.
(5) Comparison of Investment: When investors see bank interest, stock market and retirement fund competing for gold, investors are more inclined to accept the real estate with low capital interest rate.
There are many ways to calculate the net income, sometimes calculated in the same way, different people may calculate the results may not be the same, the old and new landlords expenditure items and figures are not the same.
For example: the new landlord’s property tax will be adjusted accordingly because of changes in trading prices, is no longer the old landlord’s previous tax.
10. Real estate professional name and definition
(1) 1031 like kind exchange Property Conversion: Use a property to buy legal or legal tax (or deferred tax) for a property of equal or higher price.
(2) Assessed value: The county government assesses the value of the property and is used to calculate the property tax.
(3) Balloon payment due date One-time due repayment date: It usually happens when the property is sold or re-borrowed. New and old banks hand over the payment.
(4) Broker licensed broker: not the same for each state, a small number of state licenses common.
Capital gain or loss Capital gain (gain or loss on the sale or purchase of a property).
(6) Capitalization rate Capital interest rate: the relationship between purchase price and net income. Net income ÷ bid = capital interest rate.
(7) Investor’s net worth Investor’s net assets: the balance of the entire investor’s assets less total liabilities.
(8) Perfect a Lien Completed lien: the creditor takes the property-related contract to court for registration. Owners must pay their debts before the property can be sold and transferred.
(9) Recording Public Records: Anyone and company can go to the county court to search records such as sales.
(10) Seller Affidavit: Seller’s warranty.
(11) Survey House boundary drawings: the bank requires the buyer to do the formalities.
(12) Title Title deeds, property rights: proof of possession of property, valuables.
(13) Insurance Property insurance: insured property insurance inside and outside. (14) Title Insurance Warranty: Guarantees what is detrimental to a deed, whether now or in the future. (15) Zoning Zoning: The county government under the Housing Authority for each region, the construction of lots have certain rules and plans, residential area, apartment area, commercial area, industrial area, farmland and so on.