Real Propert Ownership Interests Flashcards
Estate in severalty
one person owns the property, and all other interests are severed
Tenancy in common
Each person is entitled to possession of the whole. If one dies, that person’s ownership is inheritable, and doesn’t necessarily pass to the other owner(s).
Joint tenancy
equal ownership with undivided rights of possession and requires unity of four separate conditions:
-All owners must have the same type of interest in the property, all must receive their title at the same time from the same source
-All must have the same percentage of ownership
-All must have the right to undivided possession in the property. Joint -Includes the right of survivorship, meaning when one joint tenant dies, that person’s share automatically goes to the other surviving joint tenant(s).
Tenancy by the entirety
-Has the right of survivorship.
-Only available to married couples
-This form of ownership also includes unity of time, title, interest, possession, and marriage.
Key to this form of ownership is that creditors of one spouse can’t attach liens to or sell the interest of the debtor spouse. Only creditors with claims against the couple may attach and sell the interest of the property owned in this manner.
-One spouse can’t transfer interest in the property without the consent of the other spouse.
-Cn’t be reduced to tenancy in common or joint tenancy. Such a change of ownership would require divorce, an annulment, or for the couple to amend the title.
Community property
Property acquired during marriage is considered to be owned by both
Dower and curtesy rights
Dower ensures that a widow received support and a portion of her husband’s property when he passed on
Curtesy grants a husband interest in his wife’s property upon her death. Also prevents husband from conveying his wife’s estate to anyone else but their children
Corporation
an independent legal entity defined by law and owned by shareholders
General or “C” Corp
A C corporation is the most common form. Elected officers govern the company’s affairs, while the designated licensed broker is directly responsible for the real estate transactions.
Ownership in a general corporation is easily transferable through stock. The corporation must pay corporate income tax to the IRS. The shareholders in a C corporation see double taxation: once at the corporate level, and again at the shareholder level.
S Corporation
Permitted to function as a corporation but taxed as a partnership -Dont pay corporate income taxes, so they avoid double taxation. In addition, shareholders in a Subchapter S may deduct losses on their income taxes representing their share of the corporation’s losses.
General partnership
conveys personal liability to partnership debts that exceed the partnership assets. General partners are jointly and separately liable for these debts.
Limited partnership
-always has one or more general partners who assume liability. The other limited partners are limited in their liability and authority by the amount of money theyʼve contributed.
-To protect their immunity from partnership debts, they may not participate in managing the partnership (and are thus sometimes called “silent” partners).
Limited partners who do act as a manager may become generally liable. Limited partnerships are a common form of holding real estate. Usually the general partner is the one who discovers the investment opportunity and brings in limited partners for their funds. The general partner does the work, and the limited partners see aprofit or loss from their investments according to the partnership agreement, and the success or failure of the project. Both limited and general partnerships are taxed as partnerships
LLC
a non-corporate entity. Owners participate in business profits and losses without taxation to the company.
Dont need a board of directors, and their owners (called members, not shareholders) can participate directly in the management of the company or they may elect officials to handle day-to-day business operations.
Owners canʼt be held personally liable if their co-owners or employees commit wrongful acts during the course of conducting business. If found liable for the actions of its owners or employees, the money or property can be taken to pay off the debt, but the owners canʼt be held personally liable. LLCs are popular forms of business structure for real estate brokers and brokerages.
Limited Liability Partnership (LLP)
a form of partnership that has no general partners. Partners share the company profits equally and report them as income on their individual tax returns. All partners have an equal say in how the business is managed, and each has limited personal liability for business debts.
-Protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. Tend to be formed by professionals, such as accountants, lawyers, and architects.
Joint Venture (JV)
A businessarrangement similar to a partnership—a temporary organization formed by two or more parties to invest in real estate (or other investments).
Participants may be corporations, partnerships, LLCs, or other entities, or the parties may hold title as joint tenants or tenants in common. Each party is responsible for the profits, losses, and costs associated with the project.
Syndicate
organizations with many investors who jointly participate in a real estate investment. When they meet the definition of “dealing in securities,” they must adhere to the rules and regulations of the Securities and Exchange Commission. An investment is a security, as defined by the Federal Securities Act of 1933, if itʼs:
An investment of money
A group enterprise
Intended to make a profit, and that profit is solely derived from the management effort of others
So ifyouʼre a “silent partner” in a group investment whose intention is to make a profit, and you sit back while others manage the project (things like cooperatives or condominium projects), this may well meet the definition of syndicate. Taxation depends on the syndicateʼs form. Syndicates can be corporations, general or limited partnerships, or LLC
Testimony trust
one created according to the terms of the will of a deceased person. Itʼs often used to establish care for minor children.This trust doesnt avoid probate.
Living trust
created during a personʼs lifetime, and is often used when minor children are involved. Property may be placed within the trust for their use in their lifetime or when they reach the age determined by the personwho creates the trust. Does not involve probate bc they are alive
Grantor retained income trust (GRIT)
an interesting method of conveying or granting title to an income-producing property to another, generally a family member, via a trust. It is usually set to a specified number of years before it becomes the grantee’s (the trust’s beneficiary).
This trust allows for the grantors to retain the flow of income from the property up until the end date of the trust.
REIT (real estate investment trust)
were designed to give investors opportunities to invest in real estate while maintaining certain beneficial aspects of other investments, such as mutual funds, which spread their risk over many properties. One of the major advantages is the single tax, imposed at the beneficiary level. They are sold just like stocks are on the open market.
REMT ( real estate mortgage trust)
invest in real estate debt; buy commercial and residential mortgage-backed securities. Many focus on buying mortgage securities backed by Freddie Mac and Fannie Mae. They make money by interest on these investments
Fair housing: Investors who own ____________ single-family homes and don’t use real estate licensees to assist in the sale of property are exempt
3 or fewer
Fair housing: Owners of _________________ who live in one of the units and don’t use real estate licensees to assist in the sale are exempt.
Two to four-unit multi-family homes
Income tax shelters for single-family detached homeownership: Points deduction and penalty-free early IRA distribution for first-time homebuyer: Acquisition
Points deduction and penalty-free early IRA distribution for first-time homebuyers
Income tax shelters for single-family detached homeownership: Ownership
Property tax and mortgage interest deductions
Income tax shelters for single-family detached homeownership: Reversion
Tax breaks and capital gains or losses
Strip malls/strip centers
Offer a variety of shops, services, and commodities and have one anchor tenant.
Neighborhood shopping centers
Offer necessary goods and services to meet the needs of people who live in the immediate area and have one anchor tenant.
Community shopping centers
Offeranywhere from 15 to 40 stores (clothing and shoe stores, large appliance stores, drug stores, home improvement/furnishing stores), generally two anchors, and serve a trade area of approximately three to six miles.
Regional shopping centers or malls
Offer a wide variety of general merchandise and fashion and have two or more anchor tenants.
Gross Lease
All expenses covered by rent
Net Lease
The tenant pays rent plus some of the property expenses separately
Percentage lease
The tenant pays base rent plus a percentage of gross sales
Loft lease
Lease of open space
Lease clause: subordination
Notifies the tenant that the lease is subject to a mortgage
Lease clause: non disturbance
Notifies tenants that they won’t be evicted if they meet lease terms.
Lease clause: Attornment
Notifies the tenant that the lease will still be in effect even if building ownership changes.
Lease clause: Estoppel
Verifies facts already in writing.
Lease clause: Sublease/assignemnt
Notifies the tenant whether sublease or assignment is permitted.
Gross income
Income received before deducting operating expenses
net operating income formula
Gross income – operating expenses
Capital gains tax
Applies to the investor’s tax return.
Recaptured depreciation
The sales price of a depreciated asset is more than the tax basis or adjusted cost basis. The difference is a gain on the sale of a depreciated asset that must be reported as income on the investor’s tax return.
Americans with Disabilities Act (ADA) Title 1
Deals with employment requirements
Americans with Disabilities Act (ADA) Title III
Deals with public accommodations
Owners of free-standing buildings often require their tenants to sign:
Triple net leases
Components of a feasibility study:
Market analysis, including an economic study and social/community study
Property analysis, including site evaluation, a political study, and environmental analysis
Financial analysis
Economic issue analysis
Market/business cycles
Inventory rates
Price levels
Sales volume
Community issue analysis
Local economy
Community acceptance
Available infrastructure and amenities
Environmental analysis
CERCLA and hazardous waste or materials
Wetlands and endangered species
Environmental impact statement (EIS
Price
what a buyer pays for a property and what the seller has accepted. That’s what you deal with most in the real estate business
Value
what a property is worth
time value of moneyis understanding the differences between?
Price, value, cost
Return on Investment formula
Annual cash flow ÷ initial cash investment
What is a discounted cash flow
A valuation method that estimates the value of an investment using its expected future cash flow
IRR ( internal rate of return)
A investment should be pursued if it’s ______ is greater than the minimum required rate of return
Variable expenses
Expenses that change, depending on occupancy level
Fixed expenses
Consistent monthly expenses
Reserves
An accumulation of funds for a future purpose
Simple interest
An interest charge that borrowers paylenders for a loan
Addon interest
Interest fo be paid on a loan by combining total principal amount borrowed + total interest due × number of years for repayment
An ____________ is a deductible allowance from net income.
Income shelter
Compound interest
When y9u earn interest on the money you’ve saved and on the interest you earn along the way
Nominal interest rate
The interest rate before inflation
APR annual percentage rate
The total yearly cost for borrowing money as a percentage
Effective rate of interest
The real return when the effects of compounding over time are taken into account t
Annuity
A series of payments made at equal intervals
R x V = ?
Income
On 1-4 units
Sales price ÷ monthly Gross rent = ?
GRM (Gross rent multiplier)
Five or more units: Sales price ÷ annual gross income = ?
GIM (Gross income multiplier)
Simple interest = _____ x _____ x ____
Principal x rate x time
the main supply of funds for ______________ is demand deposits—also known primarily as checking accounts. These funds create the capital necessary to participate in the mortgage process as a source of funding.
Commercial banks
With an organization similar to credit unions, depositors in __________ are owners, and the boards of directors are made up of local businesspeople. These banks have individual charters that vary from state to state and set limitations on lending activities, such as property types and the percentage of funds that may be used. Investments made by these banks are on the conservative side. Funds from those investments help finance long-term real estate loans backed by mortgages. More than 70% of the assets come from savings accounts.These banks prefer to keep mortgage lending local so they can closely monitor the loans.
Mutual savings banks
______________ are in business for the long-term rewards, although they do participate in real estate funding, they donʼt fund single-family dwellings.often participate indirectly in real estate funding bypurchasing blocks of mortgagesfor single-family dwellings from the secondary mortgage market.
Life insurance companies
Non profit, fewer regulations, insured by NCUA. They finance mostly personal property loans (e.g., auto loans) and traditional mortgages. They also participate in the secondary mortgage market by pooling their mortgages into real estate mortgage investment conduits (REMICs).
Credit unions
Mortgage bankers
Can have varying interest rates.
Stay involved with the loan for its entire life cycle.
Are mostly private enterprises.
Are paid through fees from origination and servicing loans (typically a salaried position).
Originate their loans.
Limit loan offerings to those offered in-house.
Mortgage Brokers
Work with many lenders.
Have many potential interest rates.
Don’t service loans beyond placement.
Get paid a placement fee for matching a borrower with a lender - when the loan closes.
Seldom invest in a loan
Mortgage REIT
companies that own, and usually operate, incomeproducing real estate.
Make loans secured by real property
Are owned by stockholders and enjoy certain federal income advantages
Allow small investors to pool their money to participate in larger real estate transactions and help make financing available for large real estate developments, such as apartment complexes, shopping malls, and office buildings
Are all registered with the Securities and Exchange Commission
REMT (real estate mortgage trust)
don’t buy properties, but instead invest in real-estate debt. Some used to make loans but now most primarily buy commercial and residential mortgage-backed securities. Many focus on mortgage securities backed by Freddie Mac and Fannie Mae. Make money by incurring short-term debt to acquire longer-term mortgage securities, earning the spread between the two rates.
Private loan companies
Take a risk by covering riskier loans that commercial banks won’t touch. To compensate for that risk, they charge higher fees and interest to the borrower.
A debtor’s contractual promise to repay
Note
Deed of trust
the borrower conveys title for the property to a trust, which holds it as security for the lender
Contract for deed
An agreement to buy property
Prepayment clause
if the borrower pays down or pays off the mortgage early, usually within the first five years of the loan, a penalty will be levied
Assumption
A buyer agrees, in writing, to take over the sellers’ loan payments
Exculpatory clauses
part of a contract that prevents one party from holding the other party liable for damages related to the contract
ARM
A mortgage with a rate that adjusts based on changes in a market index
The _______________ is used to defer paying capital gains taxes on one investment property when there’s an almost immediate repurchase of a “like-kind” property.
1031 tax deferred exchange
For single taxpayers, the amount of gain that’s excluded is __________;for married couples filing jointly, it’s _____________
$250,000 and $500,000
____________ and ____________ may help avoid paying capital gains tax
Federal gift and estate taxes
Through installment sale _________, the seller only pays tax proportionate to the gain collected each year
Deferment
Tax rate =
Total funds required ÷ total assessments of all RE in the jurisdiction
Tax levy
A formal action to impose property tax ( the amount of tax to meet budgetary needs for the coming year)
Appropriation
The authorization for how tax funds are spent and collected
Mill =
1/10 ; one tenth of a cent
