Archive for real estate
Real Estate: Banks, Dubai And The Black Swan
Posted by: | CommentsGreetings from New Mexico….
I found out today that New Mexico is not LAST in everything. We are first is DWIs as well as the first state to adopt a Real Estate Recovery Fund…which has now been adopted by most states. So…yes…we do have pride in being first….or maybe we have pride in being last?
Anyway…
Quick thought….
A while back I was reading a book by Nassim Nicholas Taleb called The Black Swan. Great book by the way. Anyway…I remember Mr. Taleb talking about banks and how over the years…the banks have gotten bigger all over the world (smaller banks being absorbed by the big ones). What was more interesting was how he stated that all the banks are tightly connected in a dangerous way. More specifically, how if one big banks goes down how it impacts all the other banks.
Now…we all saw this when big banks started failing in the United States….but have we really been impacted by failing banks in other parts of the world? I am sure we have in one form or another…but what is happening in Dubai brings Mr. Taleb’s words back to life. If…by some chance the ordeal with Dubai explodes. Will we see another big bank fall? Which we all know is possible. If another big bank falls…what will be the impact to us Americans? ….to the world?
I am sure I am showing my ignorance…but in the big picture of things….I do know this is a dangerous situation. Chances are someone will save the day ….for now….but I am sure we have not heard the last of this situation.
Read more here on the situation in Dubai:
Dubai Scrounges for Cash as New Deadline Looms
Until next time…..rob
Real Estate Investment Terms—Part Three: Financial Terms
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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?
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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.