Hello fellow Activerainers,
Often i am approached by customers that start off a conversation with them saying " You helped my friend build up their portfolio of rentals, and we would like you to help us." I get a strange look back often when I look at them and ask "What are your intentions, and what do you want out of your Investment?" For the most part the answer is always "Cash Flow." While one would want their properties to be positive in their cash return,it is important to remember that they should take into consideration the rate of appreciation ( What is the property going to be worth down the road) and alsowhat tax shelters may help them as well. By taking these into consideration an investor can plan for their investments to deliver a higher yield. For example, a buyer may put their multi or multi families into a LLC (LImited liability Company) because they were told that this would protect them if someone slipped and fell, and wanted to sue for damages. This could aid in not having their personal assets attacked,but there are other possible reasons to put their Real Estate into an Entity. They may start another corporation in order to pay for their services in reference to maintaining, managing, and other possible administrative and work related expenses. One corporation may own the subject properties, while another corporation may be the parent corporation. There may be a numberof partners that would benefit by having the right entity. It may be a situation of a Investment company owns Real Estate as only part of their portfolio. Another angle would be the need for having the appropriate write offs and deductions.
Appreciation is another factor that should be looked at a little bit more in depth at times. If an owner had a property that was a four family and the rents were respectively $600 per month per unit and totaled $2400 a month in Gross rents an individual could take their mortgage,monthly tax amount, and other monthly expenses , and calculate their remainder left which could represent their cash flow. Now what if a parent company was charging afee for managing, expenses, office expense, travel, public electric, sewer and water, and other possible expenses. The approach would be on paper to have the property be as far as possible in the red so the tax burden could possibly be less. There would, and could, be numerous reasons for a tax shelter.
If the rents were $2400 a month and there was a 6% appreciation rate per year on one property, and it was compared to another property that had $2300 a month in rent, however this property had a 8% appreciation rate per year, it doesn't take much to figure out that in a few short years the latter property is going to be worth more. Of course, maintaining one's rent increases is a variable. The factor here is to be priced accordingly with the market so you minimize your vacancy allowance.
Two forms that I often use are a APOD and a CFAT. This stands for "Annual Property Operating Data" and "Cash Flow after Taxes."
I am not a know it all, and all I wish to do is point out that Investments have, or could have different reasons for the way they are structured, purchased, and used. The appreciation rate is often not looked at as well as it should be. I have investors that doe not want a large yield on their property at first, or at all for that matter. They may purchase a property for the entire purpose of having a loss.
It can be looked at similar to a return on a bank account. The appreciation ( in the bank account it would be the interest ) is what determines the long term, and short term value. Of course, other variables such as vacancy allowance, amount of rents, shape of properties, quality of tenants can play a factor in the equation as well.
If any one would ever like a CFAT or APOD they could email me and I would be glad to forward a copy of each work sheet to them. There are other forms such as "Alternative Cash Flow" and more that may help an Investor.
Sincerely
Tom Braatz
Tom,
Great points. I always tell my clients there are only 2 main reasons to invest in real estate, cashflow or appreciation.
Hi Bill, Thanks for the compliment. I have lots of commercial forms and software if you ever need anything. Talk to you soon. Carpe Diem Tom |
Hi Jared, Thanks for the comment. Invest away. I told Bill I have lots of commercial material if you ever need anything. I belong to the national Commercial MLS. Check it out.It is www.xceligent.com Thanks Tommy |
Thanks Tom, it's good information and I appreciate your offer of the forms. I'll email you separately to request them.
Mahalo,
Richard
Tom, WoW! You really know your stuff. If I was in the market for buying commercial property, you would definitely be the man I'd be going to. Thanks for the very informative, enjoyable post.
Jo
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