Download - © 2008 by South-Western, Cengage Learning Chapter 27 Chapter 27 Charles J. Jacobus Thomas E. Gillett
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Chapter 27Chapter 27
Charles J.Jacobus
Thomas E.Gillett
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Georgia Real Estate Georgia Real Estate An Introduction to the ProfessionAn Introduction to the Profession
Seventh EditionSeventh Edition
Chapter 27Chapter 27
Investing in Real EstateInvesting in Real Estate
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Investing BenefitsInvesting Benefits
Appreciation Increase in property value over time
Mortgage reductionRental income used to reduce
loan balance
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Investing BenefitsInvesting Benefits
Cash FlowAnnual dollars remaining after payment of rent, operating expenses & mortgages payments
Positive cash flow
Negative cash flow
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Investing BenefitsInvesting Benefits
Annual Rent Receipts $30,500
Less operating expenses 10,000
Less mortgage payments 20,000
Equal cash flow $ 500
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Investing BenefitsInvesting Benefits
Net spendableAmount of spendable income produced
Cash-on-cash
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Investing BenefitsInvesting Benefits
Tax ShelterTax deductible expense generated by investment property
Interest
Maintenance
Insurance
Property taxes
Depreciation
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Investing BenefitsInvesting Benefits
Annual Rent Receipts $30,500
Less operating expenses 10,000
Less mortgage payments 20,000
Less depreciation 8,000
Equal cash flow $ (7,000)
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Investing BenefitsInvesting Benefits
Passive InvestorDeduct loss against other passive investments
Active InvestorUp to $25,000 to offset income
$100,000 adjusted gross income
Eliminated at $150,000 adjusted gross income
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Investing BenefitsInvesting Benefits
Eligible taxpayers
More than 50% services in real property trade or business
More than 750 hours of service in real property trade or business
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Investing BenefitsInvesting Benefits
Depreciation CalculationStraight-line depreciation
Building value divided by number of years
Accelerated depreciationAny rate faster than straight line depreciation during the 1st few years
$275,000
27.5 years= $10,000 per year
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Capital GainsCapital Gains
Gain due to depreciation is “recaptured”
1031 Tax-Deferred ExchangeIdentify “like kind” property within 45 days
Purchase complete within 180 days
Qualified Intermediary
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At-Risk RulesAt-Risk Rules
Write-off limited to the amount actually invested plus…
Recourse financingAmount investor is
obligated to repay
Non-recourse financing Value of the real estate secures the
debt
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Investing in Real EstateInvesting in Real Estate
Installment Sales
Construction-Period Expenses
Rehabilitation Tax Credits
Low-Income Housing Credit
Watch List
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Calculating Equity BuildupCalculating Equity Buildup
Equity Market value minus all liens and charges
Equity buildupChange in equity over a period of time
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Calculating Equity BuildupCalculating Equity Buildup
Equity at Time of Purchase
Purchase Price
Mortgage Loan
Down Payment
(equity)
$200,000
- 140,000
$ 60,000
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Calculating Equity BuildupCalculating Equity Buildup
Equity Five Years Later
Market Value
Less loan balance
Current equity
$220,000
- 120,000
$100,000
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Calculating Equity BuildupCalculating Equity Buildup
Equity Buildup
Current Equity
Less beginning equity
Equity buildup
$100,000
- 60,000
$ 40,000
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LeverageLeverage
Impact of borrowed funds on investment return
$250,000 Cash
- 250,000 Cost of building
0 Leverage
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LeverageLeverage
$500,000 Cost of building- 250,000 Cash
250,000 50% Leverage
$2,500,000 Cost of building- 250,000 Cash
$2,250,000 90% Leverage
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LeverageLeverage
Use of leverage depends on:
Amount of expected: Cash flow Tax benefits Mortgage reduction Appreciation
Willingness to take risk
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Investment TimingInvestment Timing
Point in the property’s life
the investment is made
Idea stage: riskiest
Finished & rented: least riskyRisks & expenses increase as building ages
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Limited PartnershipsLimited Partnerships
General PartnersOrganize & operate
Contribute capital
Full financial liability
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Limited PartnershipsLimited Partnerships
Limited PartnersProvide bulk of capital
Little say in day to day operations
Share in profits & losses
Liability limited to amount
of investment
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Limited PartnershipsLimited Partnerships
Before Investing in a partnership:
ProspectusDescribes the investment
Investigate
general
partners
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Effort and CourageEffort and Courage
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Key TermsKey Terms
Cash flow
Cash-on-cash
Equity build-up
Leverage
Negative cash flow
Prospectus
Straight-line depreciation
Tax shelter