Archive for May, 2009
Real Estate Investment Terms—Part Three: Financial Terms
Posted by: | Comments
What will this green one do?
The real estate investment arena is filled with its own language and often features terms from property law, banking concepts and feudal times. As a continued segment to help you navigate the real estate investment lingo, we will be periodically posting commonly used real estate investment terms and definitions provided by many sources including www.investorwords.com and www.creonline.com.
This posting will focus on terms you will encounter regarding the financials of your property.
5 C’s of Credit
The five C’s of credit are the important factors a borrower must have to obtain credit. They include conditions of the economy and borrower, collateral to secure the debt, capital, capacity (cash flow to pay the obligation) and character. As the economy changes, lenders focus on different c’s.
Absorption Rate
The absorption rate is the rate by which properties are leased or sold in an area.
Amortization Schedule
The amortization schedule is the schedule of payments to complete a loan.
Assignments of Rent
Assignments of rents are written documents or contracts that transfer the owner’s ability to collect rent to the lender upon default of the mortgage.
Basis Points
Basis points are generally used to note changes between yields on fixed income securities. They equal one hundredth of a percentage point.
Current Production Rate
The current production rate is the highest interest rate allowed on current GNMA mortgage-backed securities, which is generally half a point below the current mortgage rate.
Debt Service Coverage Ratio (DCR)
Debt service refers to the measurement of a property’s ability to generate enough revenue to cover the cost of the mortgage payments. To calculate debt service, divide net operating income by total debt service.
Liquidity Risk
Liquidity risk refers to risk generating from the inability to sell an asset. When secondary markets are insufficient, liquidation of the asset can be minimal or limited. Real estate is generally considered a highly liquid asset with a high liquidity risk.
Negative Amortization
Negative amortization is a gradual increase in the mortgage debt that stems from the monthly payment being insufficient to cover interest. This results in the balance due growing.
Retrocession
Retrocession refers either to the voluntary act of returning property that was previously ceded to its original holders. It can also refer to purchasing reinsurance by a reinsurance company, which limits the risk a reinsurance company can face.
Right of First Offer
A right of first offer is a contractual right that requires the seller to provide the opportunity to purchase the asset to the first offer holder before entertaining any other offers. A first right holder provides consideration to the seller (i.e. funds to hold the option). The first offer contract does not dictate the terms of the transaction, but does require the seller to first negotiate with the first offer holder.
Second Lien Debt
A second lien debt refers to the place in line a secured party sits to receive compensation in the event of bankruptcy or default. Second lien holders follow first lien holders, which means if the first lien holder exhausts the available funds, the second lien holder will not be entitled to compensation.
Net Income—What Do You Really Take Home?
Posted by: | Comments
Net Income....what net income?
Defining Income
The best way to maximize your investments is to understand what constitutes true income. This means that you need to examine both the gross income (all incoming dollars before expenses) and net income (the money you have left after paying expenses). Knowing what you actually earn can help you determine what expenses could be lessened to help increase your net income.
Understanding The Balance Sheet—Tips from the IRS
When you prepare your tax filings, you need to include all gross income from rent. The IRS defines rental income as any payment you receive for use or occupation of the property. The IRS will allow you to deduct expenses in the same year you pay them.
In preparing your filings, you need to report income for the year you actually or constructively receive it. This includes advance rents (any amount received before the period it is due), security deposits (only if you plan to keep the money because the tenant fails to properly hold up the lease), and expenses paid by the tenant (if the tenant pays any expenses).
What Are My Expenses?
Rental expenses include a wide variety of payments you make as owner to maintain the property. These can include repairs, vacancies, debt service, insurance, accounting, janitorial services or management.
The common definitions of these expenses are:
1. Repairs refer to any part of the property that you have physically changed either by necessity or cosmetic choice. They can include fixing a broken water heater, repairing broken windows or changing the locks for enhanced security.
2. Vacancies are the expenses incurred by the owner from not having an income from a unit because it is unoccupied by a paying tenant. For example, if an owner has a four-unit apartment building with each unit renting for $500 per month, the owner would receive $2,000 a month if the building were fully occupied. If only three units are occupied, then the owner receives $1,500 per month leaving a $500 per month expense.
3. Debt service refers to the series of interest and principal payments required on an obligation over a set period of time.
4. Insurance refers to the promise made by an insurer of compensation for specific potential future losses in exchange for payment. Insurance is designed to protect the financial well being of the insured.
5. Accounting refers to any payments made to a person or firm to prepare financial statements, create and maintain billing systems or otherwise perform general bookkeeping duties.
6. Management and Janitorial services refer to any payments made to staff to manage or clean the units.
Definitions and IRS tips are provided by investorwords.com and irs.gov.
What am I left with?
The remainder of the income after paying your expenses is your net income. Many real estate experts recommend at least a 75/25 net to gross income ratio. If you are receiving less net income, examine your expenses and programs. Now may be a good time to look at technologies to help cut costs and streamline your income process.
Maximizing Rental Property Income—Get The Most From Your Investments!
Posted by: | Comments
- What do you say you pay your rent before I start to beg?
Rental Property Income Generators—The Basics
One of the biggest perks to owning rental property is that it generates income. Income can come from a wide variety of sources when you have a rental property, but the main generators this article will highlight are rents, applications and ordinary fees.
Rents—How Do I Appropriately Structure Rents on My Units?
As with all investment real estate ventures, make sure to do your homework. If you price your units too high, you won’t attract tenants. If you price your units too low, you won’t make the profits you could.
Before you begin your research, take a critical look at your property.
1. Do you have attractive landscaping to promote curb appeal?
2. Do you offer updates in the units?
3. Are your units cosmetically appealing or run of the mill?
4. Is the property in a desirable school district?
5. Is the property easy to get to from interstates?
6. Is the property close to shopping, hospitals, groceries or other desirable locations?
7. What are the demographics of the people living in the neighborhood?
Once you really take a look at what you have to offer, you can see how your property compares to what is currently available. Both site visits and online research are smart strategies to accurately price your rentals.
The best place to start with online research is to look at local listings. Get a feeling for what rates other similar properties are being offered. Make sure to see what tenants are responsible for, i.e. water, maintenance, etc. Also, be sure to check what amenities are offered.
When conducting site visits or phone calls with owners, act as if you were a renter. Find out exactly what each property offers and what tenants are responsible for. If you can tour the properties, you can get a clear idea of what is considered an upgrade or a must-have in your area. This will allow you to price yourself appropriately.
Applications—What should I charge for an application fee?
After you have researched your market, you can get a good idea of what other comparable properties are charging for application fees. A smart landlord runs a credit check with every application, which is an expense. A good rule of thumb is to set up an agreement with an online provider or local provider for a bulk discount in credit checks. Once you know how much each credit check will cost you, you can add an additional amount to compensate for your time. Many property owners will charge 30%-50% more than the actual credit check expense for the applications.
Once you have run the credit check and interviewed the applicant, you can determine what other fees are necessary. Some fee 
options include:
1. Rental deposits—These are common ways of securing money for property rehabilitation if the tenant damages the property. Rental deposits also allow you to have partial rent payment should the tenant default.
2. Pet deposits/fees—Many property owners that allow pets in the units require additional payment for the pets. While some of the money may go to removing pet odor or damage, this can also create significant income opportunities.
3. Noise/waste violation fees—Many property owners create a “quiet enjoyment” clause in their rental contracts. If tenants violate this clause, property owners can assess a fee.
Late Fees
As with any payment-based contract, if one party fails to perform (pay), the other party can assess a fee. When you set up your rental agreement, be sure to plainly set out the late fee amount and the time period that will elapse before the fee is assessed.
Automating Generators
To fully realize the income generators from rental properties, it is imperative to set up an automated system. If you schedule appointments with your online calendar, set reminders or appointments to generate fee statements or payments for demand. Software programs for money management and income management also are available to purchase. Investment real estate should focus on working smarter, not harder. Be sure to have a system that is easy for you to work with and does not require a significant investment.