Section 17 Flashcards
Expenses (including property and income taxes, insurance, mortgage, debt payment, and improvements made)
=
Cash Flow
defined as being equal to the original purchase price plus the fees to buy
cost “basis”
basis plus capital improvements made to the property less depreciation taken on federal taxes.
Adjusted basis
Sale Price - Selling Expenses - Adjust Basis =
Capital Gain
Value
–
Debt
=
Equity
Investments are often measured by how easy and quick it is to
liquidate
One advantage of owning real estate is that real estate investments may act as a
tax shelter
There are five investment categories in real estate. These areas include:
residential commercial industrial agricultural business
Advantages of investment in real estate include:
rate of return tax advantages hedge against inflation leverage equity buildup
a company created for the purpose of owning multiple real estate rental properties
Real Estate Investment Trust (REIT)
Disadvantages of the investment in real estate include:
Illiquidity market is local in nature need for expert help need for management risk
Risk includes:
business risk
financial risk
purchasing power risk
interest-rate risk
the fact that a business can fail
Business risk
when expenses outpace increase in profits
Purchasing -power risk
Increase in the amount of interest rate charged on an investment by a lender that outpaces the rents being charged to tenants is known as
interest-rate risk
the overall analysis of how safe an investment is by comparing market risk with the risk of default.
Safety risk
the risk that the market may fail to hold value for the investment made (Drops in the sale prices of real estate.)
Market risk
when the income for the rental property fails to cover the cost of debt payments and the loan may default.
Risk of default
There are two basic similarities between selling real estate and business:
- Both usually involve real property
2. A real estate license is required to assist in the sale of both
There are three main differences:
- Businesses often involve the sale of personal property and goodwill;
- The value of the business may be less than, equal to, or greater than the value of the real estate as Going Concern;
- Businesses draw from a market wider in geographic scope.
a process of valuing assets of the property should the business be dismantled
Liquidation analysis
Steps to sell a business include:
identifying all the real estate and personal property included; Valuation methods are applied; The business is marketed; A non-disclosure agreement is signed; A contract is entered into
the agreement to keep confidential information private
non-disclosure agreement
the gain in value that is achieved because the economy is getting better and things are worth more.
Appreciation
Anything that has value is considered a(n)
asset
The amount the property is sold for minus the selling expenses such as real estate commissions and
minus the adjusted basis (not already depreciated on federal taxes)
capital gain/loss
Your cash flow is defined as the remaining income after you deduct expenses (including taxes) and debt repayment from the income generated from the investment
cash flow
The amount an owner has invested in a property above and beyond what is owed on the property
equity
The reputation of a business is often a huge part of the value and sale of a business. This is known as
goodwill
refers to how fast something can be turned into cash
liquidity
includes any property that is not real property
Personal property (or chattel, or personalty)
Investing in something that will shield some portion of income from taxes.
tax shelter
