Real Estate Investment Flashcards
“Boot”
If the properties being received in a 1031 exchange are worth less than the property being exchanged then the investor will receive a “boot.” The “boot” is the extra money that is left over from the original sale. This boot is taxed, and for this reason most investors will only trade up and never trade down in value.
Cash Flow
Cash flow refers to the profit generated by an investment property after all revenues have been collected and operating expenses (which includes taxes and any other fees or costs) and mortgage payments have all been paid.
Equity
Equity is technically the investment property’s market value, with debts subtracted.
Intrinsic Value
Intrinsic value is a subjective analysis of a piece of real estate for investment purposes, which, combined with fair market value, helps an investor decide whether or not to include the particular property in their investment portfolio.
1031 Exchange
Section 1031 covers the ability to exchange property for another property of like kind without paying any taxes. This formerly was used to exchange chattel (personal, movable property), but this changed in recent tax revisions to limit any exchange to real estate only. 1031 exchanges can be used to help invest in property and to avoid paying taxes until a later date.
Real Estate Investment Syndicates
A real estate investment syndicate is essentially a joint business venture between passive investing individuals with common investing goals who pool their resources to purchase or develop real estate for profit. (This topic will be touched upon again in the Agency section of the course.) Combining the buying power of a group of individuals, instead of just individual investing, allows for groups to make bigger purchases, with substantially more profits that just individual investors could do.
Real Estate Investment Trusts
A real estate investment trust (REIT) is an organization that owns and manages income producing real estate, real estate related assets, or both.
Investors purchase stock in an REIT which, in turn, provides a means for individual investors to reap the gains from real estate investment without having to actually own the real estate or the real estate related asset.
Equity REIT
An equity REIT is the most common and make most of their money for investors from rents collected on its real estate properties. Unlike other real estate companies, a REIT must acquire and develop its properties primarily to operate them rather than to resell them after they are developed. The REIT may buy or construct buildings, develop real estate projects, lease properties for rental income, and place mortgages on its holdings.
Mortgage REIT
A mortgage REIT lends money directly to real estate owners and may invest in existing mortgages secured by real property. Income is essentially derived from interest on these mortgages. From the investor’s viewpoint, this type of REIT is similar to bond mutual funds.
Hybrid REIT
A Hybrid REIT combines both of the Equity and Mortgage types by owning and operating income-producing real estate along with investing their assets in mortgages.
Real Estate Mortgage Investment Conduits
Real Estate Mortgage Investment Conduits (REMICs) are special purpose investment vehicles that are used to pool mortgage loans and issue mortgage-backed securities which then trade on the secondary mortgage market.
