Chapter 1 HOW REAL ESTATE INVESTING GOALS HELP YOU FORMULATE EFFECTIVE FINANCING STRATEGIES

Question 1

What is the goal of this chapter?

Answer 1

To impress on the importance of establishing worthy and measurable goals for investment efforts.

Question 2

Why is having measurable goals important in real estate investing?

Answer 2

A goal without a method of measurement leaves investors adrift in doubt about their progress towards achieving goals.

Question 3

What is the typical method of investing used by most investors?

Answer 3

The ‘shot gun’ method, where time, energy, and resources are spread over a wide range of tasks.

Question 4

List the eight factors that lead to success in real estate investing.

Answer 4

• Know what you want to accomplish
• Ascertain what you need to maximize abilities
• Put a timetable on success
• Find the specific type of real estate
• Learn everything about that property
• Take action and gain control
• Conduct due diligence
• Final decision time

Question 5

What is essential for ultimate success in real estate investing?

Answer 5

A clear focus on the desired result.

Question 6

What is a critical factor that affects real estate value?

Answer 6

Location, specifically a well-defined area chosen for investment.

Question 7

True or False: Real estate is a universal commodity like stocks.

Answer 7

False.

Question 8

What should investors be vigilant about regarding local government?

Answer 8

Changes in building regulations and zoning ordinances that can impact land values.

Question 9

What is the significance of timing in real estate investment decisions?

Answer 9

Timing is crucial; for opportunities to be recognized, one must act decisively.

Question 10

What strategy can buyers use to maintain control in real estate transactions?

Answer 10

Get the other party to commit before being locked into the deal.

Question 11

Who is generally more motivated in a real estate transaction?

Answer 11

The seller.

Question 12

What is included in due diligence investigations?

Answer 12

• Property inspections
• Review of existing leases
• City code violation inspection
• Zoning and environmental issues

Question 13

Fill in the blank: Every property and location has different factors that need to be checked, thus there is no set or _______ list of due diligence items.

Answer 13

[specific]

Question 14

What should a private due diligence checklist be based on?

Answer 14

Local factors specific to the category of real estate and personal needs.

Question 15

What should you do after recognizing a potential opportunity in real estate?

Answer 15

Act quickly to tie up the property.

Question 16

What happens if you delay in making a decision on a property?

Answer 16

You risk losing the opportunity to other prospective buyers.

Question 17

What should you do quickly if a property looks good to you?

Answer 17

Tie up the property.

Question 18

Why is it important to act quickly when considering a property?

Answer 18

Other prospective buyers may also be interested.

Question 19

What is the relationship between ownership, debt structure, and investment goals?

Answer 19

Ownership and debt structure may vary, allowing for goal adjustments.

Question 20

What are the 11 goals of financing in real estate?

Answer 20

• Enhance the value of a property
• Consolidate existing debt into manageable debt
• Attract more buyers to a property for sale
• Increase the market potential of a property
• Increase the return on cash invested in income properties
• Generate immediate cash that is often tax-free
• Maximize equity build-up of a long-term investment
• Help solve tax problems
• Create tax-deferred transactions
• Open new doors for the investor to expand an investment portfolio
• Provide a professional touch to a good marketing plan

Question 21

What is a critical aspect to consider when using financing tools?

Answer 21

Improper use can negate the positive result needed.

Question 22

How can financing enhance the value of a property?

Answer 22

By providing best terms that fit ownership goals.

Question 23

What might differ for buyers and sellers regarding financing?

Answer 23

The definition of ‘best value’ and terms that suit their goals.

Question 24

What can a seller do if they need to attain a high market price?

Answer 24

Provide favorable financing terms to soften the economic impact.

Question 25

In a buyer's market, whose goals are prioritized?

Answer 25

The buyer's goals.

Question 26

What does the phrase 'I'll pay your price, if you'll take my terms' imply?

Answer 26

Price can fluctuate based on the terms of the sale.

Question 27

What can happen if a seller insists on an all-cash deal?

Answer 27

The property could be difficult to sell.

Question 28

What is the primary goal of consolidating existing debt?

Answer 28

To reduce the total annual or monthly payment of existing debt.

Question 29

What can refinancing a property do in a market with lower interest rates?

Answer 29

Convert a high-interest loan into a more affordable loan.

Question 30

What is an example of how refinancing can provide cash flow?

Answer 30

Refinancing to a lower annual payment results in extra cash flow.

Question 31

What should you be aware of when consolidating debt?

Answer 31

The combined constant rate of payment of the loans.

Question 32

What is a potential downside of consolidating debt?

Answer 32

It may not benefit long-term goals.

Question 33

True or False: The lowest interest rate always leads to the best financial decision.

Answer 33

False.

Question 34

Fill in the blank: Financing can be used to ______ existing debt.

Answer 34

[Consolidate]

Question 35

What is a common mistake individuals make regarding consumer debt?

Answer 35

Carrying high-cost credit card or installment loan interest rates.

Question 36

What is a creative form of financing mentioned for debt relief?

Answer 36

Interest-only schedule or deficit payment loan.

Question 37

What should you consider when deciding to refinance?

Answer 37

How it affects your long-term financial goals.

Question 38

What is the effect of a longer payback at lower interest rates?

Answer 38

It may benefit you compared to paying off debt.

Question 39

What can happen if you wait too long to refinance?

Answer 39

You may miss the opportunity due to market changes.

Question 40

What is the total current interest obligation when the interest payment on the real estate loan is $9,000?

Answer 40

$12,600 ## Footnote Total current interest obligation includes both real estate loan interest and consumer loan interest payments.

Question 41

What is the new loan balance if refinancing includes a $120,000 existing loan and a $20,000 consumer loan?

Answer 41

$141,500 ## Footnote This includes $120,000 existing loan, $20,000 consumer loan, and $1,500 in loan origination cost.

Question 42

What is a key point of using consolidation techniques?

Answer 42

Reduce existing debt payments ## Footnote This involves refinancing existing debt so future payments do not exceed prior payments.

Question 43

True or False: Refinancing can sometimes increase total payments but is necessary to meet current obligations.

Answer 43

True

Question 44

What is one reason a property may not be readily marketable?

Answer 44

Present financing structure ## Footnote A change through refinancing may provide a more favorable result in the marketplace.

Question 45

What is a cash-out situation in refinancing?

Answer 45

Mortgage above present financing levels to access cash ## Footnote This should be done without overburdening the property.

Question 46

What is the primary goal when financing a property for sale?

Answer 46

Make property more salable ## Footnote This may involve maximizing cash flow or equity build-up.

Question 47

What financing technique can be used to attract buyers to a property?

Answer 47

Offer mortgage financing below market interest rates ## Footnote This makes the property more attractive and affordable.

Question 48

What is one method to increase the market potential of a property?

Answer 48

Make it available to more buyers ## Footnote This can include converting a property into condominiums or cooperatives.

Question 49

What is IRC Section 1031?

Answer 49

Tax-free exchange provision ## Footnote It allows buyers and sellers to reduce tax liability in property transactions.

Question 50

Fill in the blank: The goal of increasing the return on cash invested in income properties is usually the _______.

Answer 50

most important goal ## Footnote This goal is critical for both buyers and sellers in the market.

Question 51

What is the net operating income (NOI) if gross rents are $76,000 and operating expenses are $23,000?

Answer 51

$53,000 ## Footnote NOI is calculated as gross rents minus operating expenses.

Question 52

What effect does financing have on cash flow in the context of an investment property?

Answer 52

Can significantly increase cash flow ## Footnote For example, using debt can enhance the return on investment.

Question 53

What is the annual debt service if a buyer borrows $800,000 at an 8 percent interest rate?

Answer 53

$64,000 ## Footnote This is the total annual payment including both principal and interest.

Question 54

What happens to cash flow after the debt is paid off in 30 years if NOI increases by 3 percent annually?

Answer 54

Cash flow reaches $180,000 per year ## Footnote This includes the original NOI plus a 90% increase over 30 years.

Question 55

What is the significance of understanding your investment goals when selling a property?

Answer 55

Helps in accepting flexible terms ## Footnote Knowing your goals allows for better decision-making in transactions.

Question 56

What is the total cash flow per year mentioned?

Answer 56

$180,000

Question 57

What type of buyer pays more for a property that produces greater cash flow?

Answer 57

Cash-oriented buyer

Question 58

What is the main goal of an equity-motivated buyer?

Answer 58

Maximize debt pay-off and equity enhancement

Question 59

What happens if local financing is not viable at the best rate or terms?

Answer 59

Payments would reduce potential cash flow

Question 60

What does OPM stand for in real estate investing?

Answer 60

Other people's money

Question 61

What is a common misconception about buying real estate with no cash?

Answer 61

It can be counterproductive to a healthy attitude about real estate

Question 62

What is essential for increasing cash flow from marginal properties?

Answer 62

Recognizing inflexible sellers

Question 63

What can a seller's ignorance of creative financing lead to?

Answer 63

A brick wall in the way of the deal

Question 64

What can refinancing allow an owner to do?

Answer 64

Obtain additional cash after repayment of the old loan

Question 65

What is the monthly payment for a $150,000 mortgage over 15 years at 9.5%?

Answer 65

$1,554

Question 66

How much immediate cash can be obtained by refinancing to a new mortgage?

Answer 66

$29,275

Question 67

True or False: Borrowed money through financing creates income tax liability.

Answer 67

False

Question 68

What happens when the borrower sells the property after refinancing?

Answer 68

Adjustment is made to determine taxable amount exceeding basis

Question 69

What is a potential consequence of borrowing above tax basis?

Answer 69

Taxable income when sold

Question 70

What technique allows cash needed to buy property from the first property owned?

Answer 70

Pyramiding

Question 71

What is one benefit of maximizing equity build-up?

Answer 71

Improved and enhanced income of the property

Question 72

What should be considered in long-term investment strategy?

Answer 72

Sacrifice of cash flow

Question 73

What are two parties that can benefit from solving tax problems in a transaction?

Answer 73

Buyer and seller

Question 74

List three items to consider when reviewing tax advantages in real estate transactions.

Answer 74

* Items to depreciate * Date of closing * Option payment establishment

Question 75

What is the purpose of a long-term lease with an option to buy?

Answer 75

Delay capital gains tax payment

Question 76

What is a benefit of an IRC Section 1031 exchange?

Answer 76

Avoid triggering capital gains tax

Question 77

What is essential for successful real estate investing?

Answer 77

Understanding use and utility of the property

Question 78

What can sound study and expertise in an area lead to for an investor?

Answer 78

Recognition of overlooked opportunities

Question 79

What is the relationship between financing tools and investment portfolio expansion?

Answer 79

Better understanding of tools allows for effective expansion

Question 80

What is essential to recognize opportunities in property investment?

Answer 80

Sound study of the area and development of expertise ## Footnote Understanding the local market can lead to identifying unique opportunities.

Question 81

How does knowledge of financing tools impact an investor?

Answer 81

Reduces risk and expands portfolio potential ## Footnote Knowledge of financing tools allows investors to navigate their investments more effectively.

Question 82

What is the relationship between risk and value in investments?

Answer 82

Both are relative to the investor's ability and capability ## Footnote Savvy investors can recognize opportunities, reducing perceived risk.

Question 83

What should a successful marketing plan for a difficult property include?

Answer 83

Maximum appeal to the marketplace and various financing approaches ## Footnote Anticipating the needs of potential investors can enhance the marketing strategy.

Question 84

What can influence the success of obtaining heavy financing?

Answer 84

Past history of dealing with lenders ## Footnote A good relationship with lenders can facilitate future financing opportunities.

Question 85

What are the limitations of financing tools?

Answer 85

They may not solve every problem and can sometimes maintain status quo ## Footnote Incorrect application of financing techniques can lead to negative outcomes.

Question 86

What should you consider when reviewing different investing techniques?

Answer 86

How you would approach a technique in your own circumstances ## Footnote Personal context can significantly impact the effectiveness of various techniques.

Question 87

What is a common dynamic in real estate transactions?

Answer 87

Each party holds onto potential 'cards' that could sweeten the deal ## Footnote Negotiation often involves undisclosed options that may influence the final agreement.

Question 88

List the six tips for solving real estate financing needs.

Answer 88

* Different points of view exist between buyer and seller * Financing results affect parties differently * Theories must work in real life * Many parties may be involved beyond buyer and seller * Each party must be addressed if they impede transaction goals * Stay close to long-range goals for constant success.

Question 89

What is the advantage of being a real estate broker in financing?

Answer 89

Acting as a fiduciary while having access to useful investment techniques ## Footnote Brokers have a dual role that can enhance their effectiveness in transactions.