PowerPoint Class 2 Flashcards
A Quick Tour of Possible Ownership Forms
Sole Proprietorships
Partnerships
Limited Liability Companies
Corporations
advantages of sole proprietorship
Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
disadvantages of a sole proprietership
Unlimited liability
Limited to life of owner
Equity capital limited to owner’s personal wealth
Difficult to transfer ownership
General Partnerships (at least TWO GPs)
Partners agree to unlimited liability
Any partner may be sued for the entirety of a partnership’s business debts
Limited Partnerships (at least ONE GP & at least ONE LP)
General Partner (active partner): unlimited liability
Limited Partner (passive or silence partner): limited liability
Limited Liability Partnerships
Each partner is not responsible or liable for another partner’s misconduct or negligence (eg: law firm, accounting firm)
advantages of a partnership
Limited Partner (Passive investor & Limited Liability)
Two or more owners
More human and financial capital available
Relatively easy to start
Taxed once as personal income
disadvantages of a partnership
General Partner (Active investor & Unlimited Liability)
Partnership dissolves when one partner dies or wishes to sell
Possible disagreements between partners
Difficult to transfer ownership
advantages of corporations
Limited liability
Unlimited life
Separation of ownership and management
Easier to raise capital
Transfer of ownership is easy
disadvantages of corporations
Agency issues
Double taxation (income is taxed at the corporate rate and then dividends are taxed at the personal rate)
More expensive to establish and maintain
Forms of Co-Ownership in Real Estate
Direct Co-Ownership
Indirect Co-Ownership
Direct Co-Ownership types
- Tenancy in common
- Joint tenancy
- Tenancy by the entirety
- Condominium
Indirect Co-Ownership types
- Limited Liability Co.
- Partnership
- Corporation
- Real Estate Investment Trust (REIT)
Indirect Co-ownership
Entity holds title
Ownership passes through the entity
Undivided interest
Tenancy in Common
Buying properties with a friend or business partners
Ownership transferred to estate or third party according to the will (death)
Each owner can sell or mortgage their interest independently
Joint Tenancy
Buying properties with a spouse or a partner
“Rights of survivorship”
Ownership transferred to survivor (death)
Tenancy by the entirety
Joint Tenancy (husband + wife)
Condominium
Common areas are jointly owned
Cooperative
in between direct and indirect co-ownership
Corporation owns property
Each owner holds shares and a proprietary lease (no term and no rent)
Cannot mortgage individual interests
Owner’s mutually liable for any specific liens
A Mortgage
a borrowing arrangement where the
principal amount of the loan borrowed is typically repaid (amortized) over a given period of time making equal and periodic payments
Both principal and interests are retired in each payment. (Blended payment)
basically an annuity
As time passes, a greater amount of your PMT goes into principal repayment and a lower amount goes into interest repayment of the mortgage
true or false
true
the latter payments become more and mor principal because we own more more equity
Amortization period
the time that it takes that your loan is fully repaid (i.e., amortized or retired)
Payments are based on amortization period
Mortgage term (or loan term)
period for which investors can “lock in” at a fixed rate, which might be revised or renegotiated after the term ends
Five Key Features of a Mortgage
Present Value of the Loan Payments
Payment
Remaining Balance (at any point in time)
Lender’s Yield (internal rate of return – IRR)
Borrower’s Effective Borrowing Cost (EBC)
Lender’s Yield (IRR)
The actual yield after loan modifications
Implicit interest rate received on a loan
Also lender’s expected IRR on loan
What is the Lender’s Yield (IRR) based on?
- Actual cash loaned out by lender
2. Actual cash payments received by lender
Effective Borrowing Cost (EBC)
Third-party expenses
up-front expenses incurred by borrower but not paid to lender
Types of Effective Borrowing Cost (EBC)
Mortgage insurance premium
Lender’s title insurance
Charges to record your mortgage (county)
Appraisal
Survey
Any effects of Effective Borrowing Cost (EBC)
Borrower net less cash at loan closing than lender’s actual net disbursement to borrower
EBC > Lender’s yield / IRR
Basically, the effects of the Lender’s Yield do not affect the Lender
–> he lends the same amount after his own addition expenses that mess up the borrower
On the other hand, the borrower is getting roasted and gets even lesser mounts of the loan all the while respecting the mortgage payments that were set at the beginning (without any loan expenses being considered)
What does a prepayment of the loan cause to the Lender’s yield and the Borrower’s EBC
They both dramatically increase compared as to when there is no repayment of the loan
Interest-only mortgage
Not typically observed with home loans
More common with income property (CRE) loans
Partially amortized mortgage
Loan maturity/term is shorter than amortization period
Results in balloon payment at the end of term
Very common in CRE lending
FV =/=0
Early payment mortgage
Most home loans allow borrowers to make unscheduled “extra” payments along with their monthly payment
These extra payments go toward reduction of the principal balance
would not reduce current PMT
when we have ARM mortgage payments, what are caps
caps are the percentage we add to the initial interest rate in our contract in a certain year for our mortgage payments
what are ARM mortgage payments
payments that change yearly based on a changing interest rate seton a contract
could be based on a specific addition to the Index (one year treasury security yields) or caps
when do we choose caps vs adding a specified percentage to the Index (one year treasury security yields) in ARM mortgage payments?
we choose caps when the amount, added to the initial interest rate, is lower than the percentage added to the index