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SALES ASSOCIATE COURSECHAPTER 17Real Estate Investments and Business Opportunity Brokerage
Most importantconsideration: Economic soundness Land use controls Zoning Deed restrictions Permittingrequirements Economic force Population growth Foreign capital Impact of taxationInvestment Analysis
Advantages Income Equity build up Appreciation in value Tax benefitsInvestment Analysis Positive leverage Prestige
Disadvantages Illiquidity Immobility Expense/overhead Additional expertise from Real estate brokers Tax accountants Attorney’s etc.InvestmentAnalysis
Types of InvestmentProperties AgriculturalBusiness OpportunitiesCommercialIndustrialOfficeResidential Condominiums Villas Single family homes Apartment complexes
Individuals pooling theirresources for investment Professionally managedportfolio Real property Office buildings,apartmentcomplexes, retailcenters Mortgages secured byreal property Similar to mutual fundReal Estate InvestmentTrust (REIT)
Static vs. Dynamic Risks Dynamic risk Associated with general market conditions Cannot be shifted to an insurer Static risk Can be transferred to an insurer E.g. fire, theft or vandalism
Dynamic risk comes in manyforms Business Financial Inflationary Interest rateDynamic Risks Liquidity Market
Use of borrowed funds, orOPM - other people's money;(AKA "trading on the equity") Positive leverage Rate of return greaterthan interest rate(increased return byborrowing) Negative leverage Rate of return less thaninterest rateLeverage
Reconstructed Operating StatementPotential Gross IncomeVacancy and Collection loss allowanceOther IncomeEffective Gross IncomeOperating ExpensesNet OperatingAnnual Debt ServiceBefore Tax Cash FlowIncome TaxesAfter Tax Cash Flow --PGIV&COIEGIOENOIADSBTCFTXATCF(or GI)(% or )
Fixed Expenses Property Taxes Hazard InsuranceVariable Expenses Maintenance Utilities Management feesReserve for Replacements Noncash expense Use in the future to replaceworn out componentsFEVEROperatingExpenses
OperatingExpense RatioOperating ExpensesEffective Gross IncomeProvides for comparison withsimilar properties
LoanValueLoan to Value RatioShows the % of value the lenderagrees to lend
Made Profit or loss %PaidAn investor paid 300,000 for aparcel of land and sold it for 200,000. What was thepercentage of profit or loss?( 100,000)loss 300,000 33% lossCalculating Profit onInvestment
Deductions from Gross Income Depreciation - allows investor to recovercost of improvements Land (Site) does not depreciate Deduction, but not expense Not appraisal depreciation Straight-line method Recovery Periods27.5 Years Residential39 Years Non-residential
Deductions from Gross Income EXAMPLE: A residential rental property sells for 225,000; closingcosts were 17,000 and the land represents 20% of the value. What is the annual straight line depreciation allowance?Solution 225,000 17, 000 242,000Total acquisition cost 242,000 x 80% 193,600Basis for depreciation 193,600 27.5 7,040Annual cost recovery
Capital Gains Tax Short term Property held for 12 monthsor less Taxed at taxpayer's ordinarytax rate Long term Property held for more than12 months 15% tax rate 20% tax rate Single 400,000 annualincome Married, joint return 450,000
Three categories of income Active: salary, tips andcommissions Passive: income fromactivity in which investordoes not activelyparticipate, including anyrental activity - even ifinvestor actuallyparticipates Portfolio: dividends,interest, and capitalgainsIncome Classification
An investment that shieldsincome from taxation Positive Cash Flow asproperty appreciates is idealTax Shelter Tax shelter obtained bydeducting interest anddepreciation - especiallydepreciation - from netoperating income
Capital Gains and Losses Amount Realized Capital gain Sold for more than paid Taxed in the year earned Sale Price – Expenses ofSale Capital Loss Sold for less than paid Loss may be carriedforward to future years(passive income)
Like Kind Exchange Investment real estate forinvestment real estate Tax deferred Boot Any unlike property receivedin exchange Taxable now e.g. cash1031 Tax Deferred Exchange
Installment Sale Gain Received over a number of years Percentage received is taxable that year Reduces tax due in any year
Analyze financial statements Reconstructed operatingstatements Balance sheets Income statements Business brokers Sale, purchase or lease of abusiness Must hold real estate license Business Enterprises Transactions over 200,000 Business Opportunities Transactions under 200,000Business Brokerage
Sales frequently involve Shares of stock Limited partnershipinterests Securities Be carefulBusiness Brokerage May violate securitieslaws Requires separatelicense
Comparable Sales Approach Cost-Depreciation Approach Income Approach Liquidation Value Approach Value a failing business Sell assets, pay liabilities Minimum value of aprofitable businessAppraisal Methods
Appraisal Methods Going Concern Value Value of an established,profitable business in excessof the value of the physicalassets Includes: Real estate Personal property Licenses Franchises, Non-compete contracts
Sale / Purchase, etc. Obtain loan / insurance Condemnation Buy-sell agreements Property settlements Estate settlement Assign values for stockoption plansReason for a BusinessAppraisal
Assets Tangible & intangibleresources Liabilities Short-term & long-termobligations Owners' equity Assets minus liabilitiesAccounting Terms Capital Owner's equity or networth
Tangible assets Buildings, furniture,equipment, etc. Intangible assets Stock shares Trademarks Copyrights Research & developmentexpenses Franchises GoodwillAccounting Terms
Acquire the listing List the assets Valuation Deduct liabilitiesSteps in the Saleof a Business Valuation of stock Legal compliance Close the transaction
Auctioning Real Estate Licensed under DBPRBrokers do not need separate licenseBy-biddersDrive up the price with no intention of buying
Coffee Break15 Minutes
CHAPTER 17 Real Estate Investments and Business Opportunity Brokerage SALES ASSOCIATE COURSE Most important consideration: Economic soundness Land use controls Zoning Deed restrictions Permitting requirements Economic force Population growth Foreign capital
