Archive for June, 2009
Wake Up Does Your Investment Property Still Measure Up? Take The Return On Equity Challenge!
THE PURPOSE OF THIS ARTICLE is to give a friendly whack upside the head to people who own rental property. You probably made a good investment when you first bought the property. But have you owned it too long? Depending on how long you’ve held your property it might not be a good investment anymore. I didn’t say not a good property; I said not a good investment. Read on to find a simple way to determine if your property is still measuring up. You may be in for a surprise!
First let’s quickly review the four financial benefits of owning investment real estate:
1.CASH FLOW: After you pay all expenses and loan payments cash flow is the money left over.
2.PRINCIPAL REDUCTION: The loan is paid down with money collected from tenants.
3.INCOME TAX SAVINGS: IRS rules allow property owners to take depreciation deductions which shelter the cash flow and principal reduction. Any leftover depreciation creates a paper loss which in many cases can be used to shelter other income such as salary from your job.
4.APPRECIATION: Over time the property increases in value. These four benefits are powerful! You earn taxsheltered cash flow your tenants buy you the building you get to tell the IRS you’re losing money and allthewhile the property goes up in value. What a country! So why am I challenging you to reconsider whether your property is still a good investment? Simple! Your “return on equity” is probably low and getting lower by the year! Let me show you an example. Don’t get all tangled up in the numbers. Just concentrate on the big picture and how it applies to you.
Return on Equity Drops from 18 to 7 Percent
Assume you bought a rental house 16 years ago for 70000. You invested 10000 and borrowed the rest. Your goal is to retire in another 15 years and use the rental house to provide retirement income. A great plan!
So how good was your investment 16 years ago? Let’s total your benefits. Assume the cash flow principal reduction and tax savings added up to 1800 that first year. You were earning 18 percent 1800 divided by 10000 on your investment. Not bad. Plus the rental house was appreciating. You’re an investment genius!
Fastforward 16 years to the present. Let’s assume the following: Your yearly cash flow has increased to 5000 and the principal reduction is 2000; a total of 7000 just from the first two benefits! In addition let’s assume the net value of your rental house has appreciated over the years so it’s now worth 120000 and your loan has been paid down to 40000.
However because you’ve owned the property so long the depreciation deductions assume they’re 3000 are no longer enough to shelter the 7000 of cash flow and principal reduction. That leaves 4000 of unsheltered taxable income. Instead of saving tax you have to pay tax. If you’re in a 35percent bracket combined federal and state you pay 1400 tax.
So your benefits from the rental house now look like this: 5000 cash flow plus 2000 principal reduction minus 1400 tax paid. A total of 5600.
This is all summarized on the “Return on Equity Worksheet” on the next page. The blanks in the right column are for you to use on your own property.
It’s no wonder you consider yourself an investment genius if you measure the 5600 against your original 10000 investment: that’s a 56 percent return. But that’s where most people go wrong!
Your Original Investment Has Nothing to Do with Today’s Rate of Return!
Your investment is not the amount you originally invested years ago. You’ve got way more than 10000 “tied up” today! Your investment is the amount you could get out of the property if you sold it today.
That’s called your “net equity.
Over the past 16 years your property has increased in value and your mortgage has been paid down. The current difference between the property’s net value after selling expenses and your mortgage balance is 80000. In other words if you sold the property today you could walk away with 80000.
However if you keep the property in effect you’re reinvesting the 80000 into the property. Now how does your investment look?
Not so good. You’re earning 5600 in benefits on an 80000 investment that’s only 7 percent! What if a REALTOR called you up and said “I’ve got a great real estate investment for you. You’ll earn a measly 7 percent.” You’d hang up on them! Well you already own it!
If you wouldn’t buy a property like that why would you continue to own it?
What if you did this instead? Use your 80000 equity as the down payment on a different property one that produces 18 percent again? With that down payment you could probably afford a 400000 rental property. Once you’ve owned that property for a few years your equity will have grown again and your rate of return fallen so you repeat the process. The goal is to maintain the highest possible rate of return which will make a huge difference in your future wealth.
You’ll maximize your wealth by wisely moving your equity from your current property to another as soon as your rate of return would be greater in the next property.
Just for fun take out your calculator and figure how much money you’d have in 15 years if you leave the 80000 invested at 7 percent. Then calculate what 80000 invested at 18 percent grows to in 15 years. 1 could give you the answer but you might not believe me check for yourself. ..it’s gigantic!
Three Ways to Move Your Equity
Here’s a key point. If you decide it’s time to “move your equity” be sure to explore all your options. There are three common ways to move equity.
1.SELL: You could sell your current property and buy another. The problem with selling is you have to pay capital gains tax.
2.REFINANCE: You could refinance your cur rent property and use the loan proceeds to buy another property. The problem with refinancing is you’re probably not able to borrow the entire 80000 equity.
3.EXCHANGE: The third and best way to move your equity is to exchange. Exchanging allows you to move your entire 80000 net equity to another property without paying tax. It’s wealth building’s most powerful tool.
So what does this all mean? Well if you own rental property congratulations. Your investment brilliance shines brightly. However the longer you own that property your glow begins to fade. The wise thing to do is reevaluate your property every year. In essence make the decision to “rebuy” the property. As soon as the rate of return on your equity could be higher in another property it’s time to take action.
I challange you to take the return on Equity Challenge Worksheet after you read this article. Send me an email and I will send you one you will be suprised what your return is. I will bet you a steak dinner on it.
I cannot take credit for this article I got permission from the author below. I thougt it was so good I had to reprint it.
This article was reprinted with permission from Copyright Tom Lundsedt Seminars
About the writer: Brice Sheppard is an author teacher investor and owner of a leading mortgage/real estate brokerage specializing in investment real estate. Brice and his team helps investors make informed decisons when buying refinancing or selling their investment property. He can be reached at bricesheppardfinancial.com or visit www.SheppardGroupLLC.com for tons of FREE articles tips and investment tools.
Vegas Is All About Staging
In a city that plays host to some of the biggest and most famous stages in the world the reality of home staging has hit home. This system of preparing a home for sale has done wonders for the resale home industry as people have gotten the idea that selling a home is akin to putting it on a stage for the entire world to see. This is especially true in a major market like Las Vegas where investors have been known to buy homes and properties over the phone sight unseen. For this reason it is vital that your home command attention and awe when it is listed and the pictures must do justice to the beauty that your home possesses.
In putting your home on a stage you will have to be attentive to the daily wear tear of living. Nothing is more stressful then having buyers arrive just after you have finished eating dinner of doing laundry. So the plan is to make sure that you home is spotless at all times and make sure that any showings are scheduled ahead of time. Now as with many sales you may have those people who simply show up with their agent and want to look at the home. In a situation like this the choice is yours but you should always let your realtor know that someone has arrived and is asking to look and the realtor that they are with.
Staging is about much more than simply cleaning and scrubbing down the home. It is about the total presentation of the home as a product. Every little aspect of the home must be attended to to create an environment that leaves buyers simply wanting to make an offer on your home. Strategic placement and even removal of furniture is a key element to home staging as the layout of furniture for show and for living can be drastically different. In fact it is a good idea to lean towards a minimalist feel. This kind of arrangement can serve to highlight the home as opposed to what is in it. After all people are not buying the furniture and art in the home so it’s best if they can get a feel for the home itself with little getting in the way. This same principle should be applies to all areas of the home including closets and cupboards. Buyers will instinctively look through these areas to ensure that there is enough space for all their things so keeping them sparsely populated is a good idea.
About the writer: Mark Hostetler is a certified Las Vegas Realtor: who is known in the community for his honesty and hard work. Mark’s knowledge of the Las Vegas real estate market is invaluable in the purchase or sale of a new home or condo.For more information contact Mark or visit him on the web at www.welcomehomenevada.com.
Understand Foreclosure Lingo Before Purchasing An Arizona Foreclosure Property
Arizona foreclosure listings will provide you with area properties which are
in foreclosure. However did you realize that there are several stages to
foreclosure and each stage has its own separate rules to follow. The
world of foreclosures has its own language in this article we will attempt to
discuss the words most commonly used when dealing with foreclosures
and foreclosure listings.
Preforeclosure This is the initial stage of foreclosure. At this point in the
foreclosure process the home or property owner has defaulted or fallen
behind on payments. At this point the homeowner can be approached in
an attempt to conduct a sale. An independent appraisal viewing of the
property as well as inspections can be easily arranged. Many times a
distressed homeowner will be very open and cooperative as the
homeowner is attempting to avoid the negative affect of a foreclosure on
his credit rating.
Auction or Trustee Sale C The lender is attempting to sell the property via
auction. Buyer beware many times the property is not open for viewing
independent appraisals nor inspections. Additionally properties sold at
auction or a trustee sale must be purchased with cash only. At times the
homewoner has refused to leave the property also causing additional grief
for the new owner. A redemption period may also be attached to a
property in the auction or trustee phase of foreclosure. Auctions may be
the place to get a good deal however it does not come without risks.
Redemption Period C This is a time period afforded to homeowners
following the sale of their property at a auction. During this time the
homeowner is allowed to secure funds or other financing to maintain
ownership of their home prior to relinquishing residency and legal
ownership.
REO or Real Estate Owned REO properties are properties which were
placed on the auction block however did not have a winning bidder.
These properties are then returned to the lender who will take on the
responsibility to sell the property or have a real estate agent sell the
property.
Arizona foreclosure listings should give you accurate timely information and
should inform you of which stage of foreclosure the property is residing.
About the writer: Bob Smith regularly writes for EForeclosureSearch. If you want more information on Arizona Foreclosure Listings and other real estate related topics you can visit www.eforeclosuresearch.com/.
