© 2013 All rights reserved. Chapter 4 Real Estate Investments1 New York Real Estate for Brokers 5...

© 2013 All rights reserved.Chapter 4 Real Estate Investments 1

New York Real Estate for Brokers 5th e

By Marcia Darvin SpadaCengage Learning


Chapter 4

Real Estate Investments


Chapter 4 Key Terms

Adjusted basis

Appreciation

Boot

Capital gain/loss

Cash flow

Cost recovery

Debt Service

Gross income

Leverage

Net operating

income

Proforma statement

Rate of return


Chapter 4 Key Terms (continued)

Rent role

Straight-line

depreciation

Tax depreciation

Tax-deferred

exchange

Tax shelter

Valuation

© 2013 All rights reserved.

Fundamentals and Analysis of Investments

Time value of money

Statistical data

Proforma schedule

Current RentRoll

Chapter 4 Real Estate Investments 5


Knowledge of Operating StatementsGross income is received without deducting expenses

The result of deducting operating expenses is net operating income

Mortgage principal and interest payments are called debt service



Types of Value

$ Market

$ Investment

$ Insurance

$ Value in use

$ Assessed

$ Mortgage

Most appraisals

estimate market

value


Evaluation

Feasibilitystudies

Feasibilitystudies

Landutilization

studies

Landutilization

studies

Highest andBest usestudies

Highest andBest usestudies

Supply-and-demandstudies

Supply-and-demandstudies

Marketabilitystudies

Marketabilitystudies

EvaluationEvaluation


Investment StrategiesRisk

Available Financing

Holdings Period PlanningLeverage

OwnershipPlanning



Types of Investment Properties

Hotels/Motels

Offices

Mixed Developments

Retail

Apartment Rentals

Office Buildings

Unimproved Land

TYPES



Marketing Investment Properties Capital

improvement budget Cash flow analysis

and projection Engineering review Feasibility study Income and expense

analysis Lease review

Legal review and compliance verification

Marketing analysis and/or appraisal

Review of existing and proposed financing

Title history



Discounted Investment PropertyForeclosed property-property sold at

auction by lender

Short sale-lender allows property to be sold at a loss

Other distressed property-properties in depressed areas or in disrepair



Commercial LeasesIndex lease

Percentage lease

Gross Net lease (triple-

net) lease

Graduated lease

Commercial leases generally include lease escalation clauses



Rate of Return$ Rate of Return

Percentage of income that

the investor receives

back on an investment

Tom buys an income

property for $175,000.

He sells it 6 mos. later

for $200,000. What is

his percentage of

return?

Investment x percentage of return = dollars in profit

$175,000 x ___ = $25,000Factor missing: divide and

convert decimal to percentage

$25,000 ÷ $175,000 = _____

Answer: 7% (rounded for 6 mos; 14% (rounded) for the year



$250,000/$500,000 RuleFor sale of residence:

$250,000 exclusion if single

$500,000 exclusion if married

Must have owned and resided in home two of the last five years



The Six Federal Income Tax Brackets 10 % 15 % 25 % 28 % 33 % 35 %

Most taxpayers fall

between 15 and 28

percent



Classifications of Income

Income Definition

Active Salaries-participation

Portfolio Interest, annuities,dividends, royalties

Passive activity

Conducting business-no participation



Permitted DeductionsProperty Taxes Mortgage interest



Capital Gains TaxCapital gain-profit from sale of real

estate

Short-Term

Property held less that one year

Long-Term

If property held longer than 12 mos, taxed

at 15% if taxpayer above 15% bracketChapter 4 Real Estate Investments 19


Capital Gains on the Sale of Investment Property

The basis of a property is usually its cost

The adjusted basis is the original cost or other basis plus certain additions and minus certain deductions such as depreciation and casualty losses



Tax DepreciationTax

DepreciationTax

Depreciation

Business deductionBusiness deduction

Property sheltered

from taxation

Property sheltered

from taxation

Accounting concept

Accounting concept

Depreciationschedule

Depreciationschedule

Recovery of cost

or other basis

Recovery of cost

or other basis

Not for assets for

personal use

Not for assets for

personal use

27.5 yrs residential

31.5 or 39 yrsnon residential

27.5 yrs residential

31.5 or 39 yrsnon residential

Property mayappreciate

Property mayappreciate



Taxable IncomeFormula for

deriving income tax:

Total property income

-deductions, allowable credits and exemptions

=taxable income

Value overview by income capitalization

Capitalization formula:

Value x capitalization rate=

annual net incomeChapter 4 Real Estate Investments 22


Cash Flow Income Shelter

Cash flow

Net proceeds after

all expenses are

met

either before or

after taxes

Income = $500,000

Expenses =

$300,000

Cash flow (net

return) = $200,000



Tax-Deferred Property ExchangesBusiness or

commercial property

only

Like kind

Qualified

intermediary

Purchase price of

replacement property

has equal or greater

level of debt

All money from property

sold must be used to buy

replacement property


© 2013 All rights reserved. Chapter 4 Real Estate Investments1 New York Real Estate for Brokers 5...

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