Successful real estate investors never rely simply on what others tell them. Once a prospective real estate investment has been located, prudent investors conduct a close examination of the rental property’s income, expenses, cash flow, rates of return, and profitability. Regardless what overzealous agents or sellers say, vigilant real estate investing demands a validation of the numbers.To achieve this, real estate investors rely on a variety of reports and rates of return to measure an income property’s financial performance. And in this article, we’ll consider a few of these reports and financial measures.ReportsThe most popular report used in real estate investing circles is perhaps the Annual Property Operating Data, or APOD. This is because an APOD gives the real estate analyst a quick evaluation or “snapshot” of property performance during the first year of ownership. It does not consider tax shelter, but an APOD created correctly can serve as the real estate equivalent of an annual income and expense statement.A Proforma Income Statement is also popular amongst analysts. Although comprised of speculated numbers, a proforma provides a useful way for real estate investors and analysts to evaluate an investment property’s future, long-term cash flow, performance. Proformas regularly project numbers out over a period of ten to twenty years.Certainly one of the most important documents for a real estate analysis is the Rent Roll. This is because a property’s sources of income and income stream are vital to making wise real estate investment decisions. A rent roll typically lists currently occupied units with current rents along with vacant units and market rents. During the due diligence, of course, rents shown in the rent roll should be confirmed by the tenants.Rates of ReturnCapitalization rate, or cap rate, is one of the more popular rates of return used by real estate analysts. This is because cap rate offers a quick first-glance look at a property’s ability to pay its own way by expressing the relationship between a property’s value and its net operating income. Cap rate also provides real estate investors with an easy method for comparing similar properties.Cash-on-cash return measures the ratio between a property’s anticipated first-year cash flow to the amount of investment required to purchase the property. Though cash on cash return does not account for the time value of money or for cash flows beyond the first year, this shortcoming is often overlooked because it does provide an easy way for real estate investors to compare the profitability of similar income-producing properties and investment opportunities quickly.Internal rate of return is more complex because it requires a computation for time value of money and therefore requires a financial calculator or good real estate investment software. Nonetheless, it is widely-used by analysts because internal rate of return reveals in mathematical terms what a real estate investor’s initial cash investment will yield based on an expected stream of future cash flows discounted to equal today’s dollars. In other words, internal rate of return converts tomorrow’s dollars to today’s dollars and then computes your return on investment.Here’s the point.Take the time to conduct a thorough real estate analysis. Create the reports and returns and hold the numbers up to the light. This is the only reasonably certain way of making the right investment decision on any prospective real estate investment. If you do your real estate analysis correctly you’ll know whether the investment makes good financial sense or not, and almost certainly guarantee your real estate investing success.
Disclaimer: This article is not intended to be legal advice. Legal advice depends on each and every person’s particular circumstance. If you have a related issue, you should consult with your lawyer who practices law in your state regarding your particular circumstance. This article is for informational purposes only.Whoosh… SLAM!He marched into my office after he slammed the door shut behind him.His face was grim and his fists were balled up. He plopped down in the chair across from my desk, and he took several deep breaths and exhaled slowly. After he calmed down, he looked at me and flashed an apologetic smile.After a few seconds, he then demanded: “Just who did he represent?! I thought he was representing ME!”I smiled at him cautiously. Then, I carefully asked him: “Who? Who did you think was representing you?” “The Realtor!” he bellowed. “I was the buyer-and he called himself the buyer’s agent-but he was not representing me! He was supposed to be representing me!””What made you believe that he was representing you?” I asked.”He’s a real estate agent. He was the agent for the buyer-and I was the buyer. That means he was representing me, right? He had to protect my interests over everyone else’s right?””It’s… not… that…. simple….” I replied slowly, attempting not to anger him further. “Let me see your contract with your real estate agent and all the disclosures your real estate gave to you.”After reviewing his paperwork, I replied “No, your real estate agent was a transactional broker-he did not owe you a duty of loyalty. In other words, he did not have to put your interests ahead of his own.””You’ve got to be kidding!””No. I’m not….”WHAT IS THE PROBLEM?Many potential buyers and sellers work with real estate agents. These buyers and sellers hire realtors with the thought that these professionals “represent” them. These buyers and sellers believe that these professionals must protect their best interests over everyone else’s in the transaction.However, this is simply not the law in states like Florida. In Florida, Florida Statutes §475.278 clearly provides that the presumption is that a realtor acts as a “transaction broker”-and does not owe a fiduciary duty to its client.Just what is a fiduciary duty?A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviationfid) is expected to be extremely loyal to the person to whom he owes the duty (the “principal”): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. Wikipedia, http://en.wikipedia.org/wiki/FiduciaryTherefore, generally, since a realtor is not a fiduciary in states like Florida, a Florida realtor (1) is not legally required to be loyal to its customers, (2) can legally put its own interests ahead of its customers, and (3) can legally profit at the expense of its customers.As we witnessed in the above scenario, since most of the public believes otherwise, a real property transaction can go unexpectedly wrong at the expense of the buyer and/or seller.WHAT IS THE SOLUTION?Don’t walk into the transaction confused or misinformed! Often, buyers and sellers believe that have something that they don’t actually have. This mistake in expectation can cause substantial problems in real property transactions. Therefore, know where you stand before deciding on a particular realtor:
Before working with a real estate agent, understand what the law in your jurisdiction provides about the type of relationship you will enjoy with your real estate agent. In states like Florida, unless you require your realtor to agree otherwise in writing, your real estate may only represent the transaction–and not your best interests.
Ask your realtor what the applicable state law provides about the potential relationship with him or her. If you don’t understand the real estate agent’s response, consider posing a few hypothetical questions to the real estate agent to attempt to gain an understanding.
Decide what type of relationship you want to have with the realtor. In many instances, you may want your real estate agent to be loyal to you. However, sometimes, you may not. Your particular circumstances will dictate whether you may want a duty of loyalty from your real estate agent or not.
Be prepared to negotiate exactly the type of relationship you want with the real estate agent. However, be forewarned: if you want a stronger relationship with your real estate agent, he or she may ask for more compensation. Therefore, be prepared to negotiate all of the terms of your relationship!
Make sure that your agreement with your real estate agent is in writing. If you negotiate a specific relationship, it is probably a good idea to put it in writing.
If you are unsure about your relationship and/or contract with your real estate agent, consider consulting with an attorney in your particular jurisdiction regarding the matter. Many attorneys in my jurisdiction charge less than $250 (the cost of a consultation) to review standard real estate contracts and to discuss a party’s rights in such transaction.
Just because a realtor (1) is not legally required to be loyal to its customers, (2) can legally put its own interests ahead of its customers, and (3) can legally profit at the expense of its customers–doesn’t mean that he or she will! I have worked with many real estate professionals who have put their clients interests ahead of their own interests. Therefore, work hard to find a professional that you can trust one of largest assets with: your home!
Harness the power of real estate and alternative asset investing in an IRA to make tax-free or tax-deferred profits for the rest of your life!After completing a successful real estate transaction, do you ever wish a chunk of the profits didn’t have to go back to the IRS for taxes? Do you ever dream about how many more real estate deals you could do or how many more properties you could buy if profits weren’t split with the government because of taxes?Well dream no more. Realizing tax-free or tax-deferred profits on real estate and alternative asset investing is a reality.Government sponsored retirement plans such as IRAs and 401(k)s allow you to invest in almost anything (including real estate), not just stocks, bonds and mutual funds. And all the benefits those plans provide, tax-deductions and tax-free profits, apply to whatever investment you choose, including real estate.The Power of Tax-Deferred and Tax-Free Profits”The most powerful force on Earth is compounding interest.” – Albert EinsteinOne of an IRA’s greatest features is that it allows Americans to enjoy the true power of tax-deferred compounding interest. Compound interest occurs when interest is earned on a principal sum along with any accumulated interest on that sum. In other words, you are earning interest not only on your original investment sum, but also on the interest earned from the original sum.Compound interest can occur with any investment you make, but the “true” power of compounding interest is obtained when you make an investment in a tax-deferred environment, like an IRA.By taking advantage of an IRA’s tax-deferred status, you do not have to pay tax immediately on your earnings (like the sale of a property or rent collected). Thus, you are able to enjoy the power of compounding on ALL of your profit, not just what is left after taxes.Now apply those benefits to your real estate or alternative asset investing. Tax-deferred profits on your real estate transactions allows greater flexibility to make more investments, or to just sit back and watch your real estate investment grow in value, without worrying about taxes.Is This for Real?Most investors don’t know this opportunity exists because most IRA custodians do not offer truly self-directed IRAs that allow Americans to invest in real estate and other non-traditional investments.Often, when you ask a custodian/trustee, “Can I invest in real estate with an IRA?” they will say, I’ve never heard of that” or, “No, you can’t do that.” What they really mean is that you can’t do this at their company because they only offer stocks, mutual funds, bonds, or CD products.Only a truly self-directed IRA custodian like Equity Trust Company (www.trustetc.com) will allow you to invest in all forms of real estate or any other investments not prohibited by the Internal Revenue Service.Is This Legal?It sure is. For more than 33 years and through the management of $2 billion in IRA assets, Equity Trust has assisted clients in increasing their financial wealth by investing in a variety of opportunities from real estate and private placements to stocks and bonds in self-directed IRAs and small business retirement plans.IRS Publication 590 (dealing with IRAs) states what investments are prohibited; these investments include artwork, stamps, rugs, antiques, and gems. All other investments, including stocks, bonds, mutual funds, real estate, mortgages, and private placements, are perfectly acceptable as long as IRS rules governing retirement plans are followed (To view IRS Publication 590, please visit [http://www.trustetc.com/links/irspubs.html]).Getting Started“Is it hard to do?” is a common question about investing in real estate with a self-directed IRA. It is really simple and is very similar to the way you currently invest in real estate. The following five steps demonstrate how easy it is to invest in real estate, or just about anything else, with a self-directed IRA.1) Establish an account with a self-directed IRA custodian.
First, you must establish an account with a self-directed IRA custodian and Equity Trust Company is your best option. For more information on why Equity Trust is the right choice for your self-directed IRA needs, visit http://www.trustetc.com.Setting up an IRA account with Equity Trust usually takes only minutes to complete by filling out a simple application and sending (or faxing) it to our office.2) Fund your account.
Next you have to fund the account, and this is just as easy as opening a self-directed IRA account. There are two ways to fund your account.• Contributions
You can contribute to your account through a check or wire transfer and contribution limits range from $4,000-$50,000 depending on which account you choose.• Transfer/RolloverIn most cases, if you have an existing retirement plan such as an IRA, 401k, or 403b these funds can be transferred to a self-directed IRA allowing you to make real estate IRA investments.3) Investment found: You’re set to go!
Now that you’ve got your account established, funded and you’ve identified a real estate investment, you are ready to make an investment.Making a real estate investment with your IRA is straightforward if you remember a few simple rules. First, complete a Direction of Investment (DOI) form. A DOI instructs the custodian where and how to remit funds from your self-directed IRA for your real estate purchase.Information contained on the DOI includes the property address, cost, funding instructions (check/wire) etc. In addition to the DOI, the custodian will need accompanying investment documents to ensure proper titling of the investment.4) Ensuring proper title: You and your IRA are not the same.
One of the most common mistakes (and cause of delays) in real estate IRA investing is when the property is titled incorrectly. Frequently the IRA owner will incorrectly put their personal name on the title of the property.Remember you and your IRA are two separate entities, and as such, the property needs to be titled in the name of your IRA and not you personally.• The correct title for a real estate (or other asset) IRA investment is:Equity Trust Company custodian FBO (for benefit of) YOUR NAME IRA5) What happens after your IRA owns the property?
Now that your IRA has purchased the property you need to remember two things:• Expenses: Any expenses associated with the property (maintenance, improvements, property taxes, condo association, general bills etc.) must come from the IRA.• Cash Flow/Profits: All net profits must return to the IRA, meaning all income (rent) and profits (selling of property) are deposited back into your IRA account—tax-free!That is all there is to it, it’s as simple as 1-2-3. In no time at all you can be investing in real estate and other alternative assets receiving tax-free or tax-deferred profits for the rest of your life.Don’t delay in opening an account. Every day that passes is one less day your investment can benefit from the Earth’s most powerful force (at least according to Einstein), compounding interest.