Category Archives: For Investors

What are Pre-foreclosure, Short Sale and REO?

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Posted by Lily Lam on March 11, 2010 – 3:42 pm
Filed under For Buyers, For Investors, For Sellers

Pre-foreclosure just as its name suggests, it is the time before Foreclosure. It happens when owners fail to pay the loan principal and interest on schedule and the lender has been issued a Foreclosure notice. How long it takes to Foreclosure Auctions is determined by each state’s Foreclosure laws. As long as the owner pay all unpaid loan principal and interest before the auction (in accordance with the amount of the loan contract expired, not all the principal) and they can cancel the Pre-foreclosure. Under this situation the total debt plus the owners sell costs (taxes and commissions and other expenses) it can be lower or higher than market prices. If the total debt plus the cost to sell is higher than the market price, it must get the lender’s approval to sell (because the total sale price was not sufficient to pay the bank loan). This is the Short sale process; if the total debt plus the cost to sell at below market price, the buyer don’t need to get the bank’s approval and can deal directly with the owner. Why is this good for buyer?  Because the property owners will get into the foreclosure process later, so the buyers may buy the house at below-market prices. This pure form of Pre-foreclosure situation are relatively more common in previous years rather than Short Sale, but now more and more cases need to go to Short sale situation.

Short sale is as described above, the owner owed the bank more money than the property market prices. In order to sell the property, the property owners must get approval through the bank. Let us repeat the concept: Short sale is a Pre-foreclosure status. However, Pre-foreclosure does not necessarily have to enter into short sale. Because there is still one condition that the owner’s total debt are still below the market price of the house. Only the original owner could not afford or ignore to pay overdue interest and principal of the loans, they were issued a Foreclosure notice. That is why the Pre-foreclosure may be a short sale, or may not be a short sale.
 
Foreclosure Usually we are talking about Foreclosure refers to Foreclosure auction. Not mean before Foreclosure auction nor after the Foreclosure Auction. These Foreclosure auction are required buyers carry the full amount of the cashier check to attend the auction. Those who do not need to take full of cash to the auction are not Foreclosure auction, they are only variety of real estate auctions.
 
REO (also known as Bank Owned) The situation occurred after the lender’s foreclosure auction and no one bought the property at the auction for whatever reason, the banks then release the property back to the market (MLS). Because the bank is not a real estate investor, so the bank aims to sell the properties. However, how much the banks are willing to reduce the price it’s depends on the local market (e.g. how many REO properties on the market), the number of REOs bank hold and bank’s own financial position etc.

How to Measure Return on Investment (ROI) Before I Buy or Exchange

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Posted by Lily Lam on March 10, 2010 – 4:09 pm
Filed under For Investors

Return on Investment or ROI is a performance measure used to evaluate the financial return on investment property. To calculate ROI, the return of investment is divided by the cost of the investment.  The result is expressed as a percentage or a ratio.

Most Investors determine this ratio by using various indicators.  One method is the Capitalization Rate (also known as the CAP Rate).

The CAP rate is calculated without considering the debt. Determining the return on an investment before the debt isolates the merits of the investment on its own.  A second useful metric is to determine the Cash on Cash percentage return on the investment’s down payment.

The following are simplified formulas in determining the CAP rate and Cash on Cash returns:

First, determine the Net Operating Income or N O I

(Gross Annual Income – Annual Expenses)

1- Total all scheduled gross Annual Income of the building.

2- Total all Annual Expenses including: Taxes, Insurance, Utilities, Trash, Landscaping, Professional fees, Management fees, any annual Maintenance fees, etc. Do not include debt expenses.

3- Subtract Annual Expenses from the Gross Annual Income.

The result is the Net Operating Income of a property.

C A P  Rate (NOI /Sales Price) Divide the NOI from the Sales Price.

This provides the Capitalization Rate of a property.

Cash On Cash Return (Cash Flow / Down Payment)

1- Estimate the Annual Income of a property.

2- Subtract all Annual Expenses and Loan Payments.

3- This totals your Annual Net Cash Flow.

4- Divide the Annual Cash Flow (#3) by the Down Payment.

The percentage is the Cash on Cash return is on your down payment.

Things to Consider:

  • The higher the CAP Rate, the greater the cash flow. Your goal should be to locate properties that have higher CAP Rates.
  • Seasoned buyers look for properties where rents can be raised, thus creating a greater cash flow.
  • The condition and location of the investment.
  • The ability of the property to appreciate in time.
  • A new or adjusted Depreciation schedule to help shelter income.

We highly recommend you consult with a Real Estate and Tax professionals to help you determine if a particular property makes sense for you.

If you have any questions regarding this matter or any of your real states need, please feel free to call me at any time (626) 215-2671

What is My Investment Property’s Cash on Equity Return?

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Posted by Lily Lam on February 23, 2010 – 3:27 pm
Filed under For Investors

Would you put your money in the bank for a low interest rate?  Probably not. But unfortunately many investors who have owned their investment properties for a long time have exhausted depreciation (a major tax benefit), and are earning a poor annual return on their equity.  The Return or growth on Investment (ROI) has done well over the years. However, the Return on Equity (ROE), your income from it, has not been exposed by a tax professional or financial planner is usually poor.

Here is a simplified example of computing your ROE:

A)  Annual Gross Income

Monthly rent times 12 = $___________= annual income.

B)  Annual Expenses

Include Monthly Mortgage payments times 12, then add Insurance, Property Taxes, Maintenance and other Expenses annually spent.   $____________

Now subtract B from A, and that equals…

C)  Annual Net Income $____________

D) Estimate the Net Equity in of your Property $____________  (your Realtor will assist you with this)

Take C (Net Income) and divide by D (your Estimated Net Equity). This is your approximate Cash on Equity annual percentage return on the equity (ROE).

Surprised?  If your annual percentage rate of equity return is disappointing, perhaps it’s time to consider…

2 possible solutions for better cash flow;

1-    Refinance the property and acquire additional investment real estate which can grow in both ROI and ROE;

- or -

2-    Sell and acquire superior properties via a §1031 Tax Deferred Exchange.

The §1031 Tax Deferred Exchange is one of the last tax shelters allowed by the Internal Revenue Service.  It is a transaction in which a taxpayer exchanges any investment real estate for any investment property (also known as like kind), which defers the payment of Federal Capital Gain Taxes, the Recapture of Deprecation Taxes, and California State Taxes.  The IRS defines like-kind property as real property held for investment purposes, or the productive use in a trade or business, anywhere in the USA. This basically includes any real estate held for investment except your primary residence and second family home.  Now you can acquire more profitable investment property with a greater percentage of equity return (ROE) and a new adjusted depreciation schedule.

For more information, just call me at (626) 215-2671

One of The Last Tax Shelter

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Posted by Lily Lam on February 17, 2010 – 2:41 pm
Filed under For Investors, Uncategorized

The §1031 Tax Deferred Exchange is one of the last tax shelters allowed by the Internal Revenue Service.  It is a transaction in which a taxpayer exchanges investment property for like- kind investment property, which defers the payment of capital gain taxes and the recapture of Deprecation taxes.  The IRS defines like-kind property as all real property held for investment purposes, or the productive use in a trade or business.  This basically includes any real estate held for investment except your primary residence and second family home. There are some important rules which must be followed to effectuate a valid exchange: • The exchange must be opened before the close of Escrow on the relinquished (sale) property. • The taxpayer must identify the replacement (acquired) property within 45 days after the close of the relinquished (sale) property. • The taxpayer must close Escrow on the replacement property within 180 days from the close of the relinquished property, or, before the date the tax return filing is due for the tax year in which the relinquished property was transferred – whichever comes first. • The taxpayer must reinvest all net proceeds into the replacement property. • The taxpayer must obtain a debt of equal or greater amount on the replacement property. By following these rules, the taxpayer shelters capital gains tax into the replacement property, and defers the recapture of depreciation tax.  This creates more buying power for the taxpayer than if the capital gains tax was paid.  Also, by deferring the payment of capital gains tax, the taxpayer gets to invest the taxes into the replacement property interest free from the IRS.  The 1031 Tax Deferred Exchange also avoids the California Withholding Tax.

7 Important Questions Every Investor Needs to Ask

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Posted by Lily Lam on February 16, 2010 – 4:18 pm
Filed under For Investors

Real Estate Investors continue to look for ways to manage their investment portfolio and to create the most of its potential.

Here are 7 essential questions to consider:

1-   (a) How can I maximize the equity which has grown    in recent years and leverage it into a better real estate            portfolio, with more cash flow? (b) What is the actual “Cash on Equity” income or     return or rate of return on my investment property?

2-   How can I reduce the stress and time spent    managing my properties without sacrificing income or   growth potential?

3-   How can I utilize the same strategies employed by       large institutional real estate investment firms?

4-   Am I utilizing all the depreciation deductions I can?

5-  Can I reduce my investment risk factors including      market  adjustments by diversifying my portfolio?

6-  Am I holding Title to my properties in a way to protect me and my estate?

7-  How can I minimize or defer the tax burden for myself and my heirs, and still grow my asset base?

In most situations, investment properties amount to our most important and lucrative investments.  Doesn’t it make sense to maximize their growth and potential?

If you’re not sure of the answers, please feel free to call (626) 215-2671.  As real estate professionals, we are here to provide you the direction in these areas.

5 Types 1031 Exchange

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Posted by Lily Lam on February 12, 2010 – 3:04 pm
Filed under For Investors
  1. Simultaneous- When both relinquished and replacement properties closed escrow the same day.*
  2. Delayed- After the relinquished has closed escrow, the replacement property must be identified within the first 45 days, and purchased within 180 days.*
  3. Reverse- Allows the purchase of the replacement property to close escrow before the relinquished property closes escrow. The relinquished property must be identified within 45 days after escrow has closed on the  purchase property, and the sale must close escrow on later than 180 days.*
  4. Build to Suit- Allows the taxpayer to construct improvements on the replacement property during the course of exchange.*
  5. Personal Property- An exchange involving personal property, (e.g. airplane for an airplane, boat for a boat or a restaurant business for a restaurant business), to be used for investment or the productive use on a trade or business.

*Each type of Exchange involves special rules and requirements promulgated from the IRS. Remember, all 1031 Tax-Deferred Exchanges must be set up prior to the close of escrow. Please call me at (626) 215-2671 to discuss the details of your Exchange. I am always pleased to answer any questions you might have regarding your Exchange.