Real Estate Investing: The Value Of Compromise

Investing in real estate, in general lines, involves compromise and is often more a matter of what an investor is willing to give up than what he admittedly wants.

If I were to ask "What is your speculation objective?" how would investors respond? Most likely the answers would range from "I want to retire at 55", to "I want to start my own enterprise within the next five years", or perhaps to "I want to have adequate money set aside for my children education". We all have many dissimilar ways of expressing what we are trying to accomplish when we set speculation objectives. When all is said and done, however, there are admittedly only three fundamental goals we admittedly intend to achieve. All goal-setting boils down to growth, earnings and liquidity.

We want our real capital assets to grow in value, that is to be worth more at some point in the future than they are today. Then, while we are in the process of accumulating whatever number of wealth we can, we need to originate income out of those assets to minimize costs of owning such as property taxes and maintenance and, possibly, to growth our own salaries or wages. And, finally, we want to be able to swiftly convert those assets into cold cash, should the need ever arise to get through some unexpected crisis, or if a best speculation opening suddenly comes in sight.

That's quite a lot that we want from our real estate investments. The truth is that only few of all investors will have situations so easy as to be able to accomplish all three goals in equal proportions. For the vast majority of us, it will be a matter of seeking compromise so as to couple in our investments only some elements of growth, earnings and liquidity, and not in exquisite equilibrium. This is due not only to the nature and type of the real estate speculation we decide to make at any given time, whether residential, commercial, multi-family rental or a compound of any of the above, or to the situation of the store at the time we make our investment, but also for a quintessential human trait tasteless to all investors.

We spend money on things we need, and we save money for things we want. Which is great, until such time as we decide to reclassify what is that we need and what is that we want. Human nature being what it is, when we see something that we suddenly decide we ‘need' and the money is readily available, our best intentions can wilt and disappear instantaneously. If the cash is not in the savings account already, we can pay an unexpected visit to our kindly neighbourhood banker who will be more than thrilled to develop the money secured by our real capital assets, or to refinance our existing real estate loans. This is, in greatest analysis, how consumerism works.

There is no doubt that the judicious use and administration of debt can accelerate the accumulation of wealth. In Finance, this is called ‘leveraging': the use of borrowed money to meet speculation objectives, particularly growth and income. However, financial leverage is a double-edged sword: using other citizen money to invest also increases the risk connected with the investment. It is bad adequate to lose one's own money if a real estate speculation sours. It is much worse, however, to lose the banker's money - one may swiftly contemplate how unfriendly, all of a sudden, the kindly neighbourhood banker may become.

Historically, leverage strategies work best and are more popular while times of low interest rates and high appreciation of property values. If, for example, an investor borrows money at 5 percent to buy an speculation that appreciates at the rate of 10 percent a year, obviously the investor will come out ahead. Additionally, in inescapable circumstances the interest charge is tax deductible, thus development the net return even higher. Unfortunately, however, while times of downward fluctuations leveraging may be a risky proposition, as the cost of borrowing may exceed the speculation yield even after deducting interest expense.

So, therefore, when is leverage appropriate? In Finance, the rule of thumb is that every dollar borrowed increases the risk of investing by 50 percent. This means that if an investor has 0,000 of his own money and decides to borrow an added 0,000, he increases the risk by 50 percent. If he borrows 0,000, he doubles the risk. If he goes as far as borrowing 0,000, he increases the risk by 150 percent. Therefore, if the real capital asset chosen by our investor would ordinarily yield, say, 10 percent, he should expect a return of somewhere in the area of around 10 + 5 = 15 percent to account for the extra risk, if he pays 0,000 for the real property he is acquiring, 0,000 of which are financed by a lender.

This ratio holds true for leveraged investments of higher or lower proportions too. For instance, if the investor matches each dollar of his own money with 50 cents from the bank, his startling return should be at least 25 percent higher than if he only used his own money, or 10 + 2.5 = 12.5 percent. Likewise, in the case of 0,000 financing the startling yield should be 20 percent. And then, of course, there is the real big one: the 100 percent leverage, also known as the zero-down option (the one they show on Tv at midnight), with the investor using none of his own funds (because he doesn't have any, since he just landed straight out of the Mongolian desert - like the chap on Tv). On a buy price of 0,000, the yield should hover to on or about 10 + 5 + 5 = 20 percent. On a buy price of 0,000 it should be in the range of 10 + 5 + 5 + 5 = 25 percent and so on.

Luigi Frascati

Real Estate Investing: The Value Of Compromise

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Fasb Proposed Lease Accounting Changes - Impacts on commercial Real Estate

Introduction:

The Financial Accounting Standards Board (Fasb) on August, 17, 2010 released their "exposure draft" requiring fellowships to description nearly all leases on their balance sheets as a "right to use" asset, and a corresponding "future lease payment - liability".  What does this mean to your company in layman terms?  This proposal in essence does away with operating leases; all leases (unless immaterial) would be capitalized using the present value of the minimum lease payments.  Therefore, businesses who in the past had off-balance sheet lease obligations, must now description these obligations on their balance sheet.

A key point to consider with regards to the proposed lease accounting changes is that, in all likelihood, existing operating leases, signed prior to the implementation of the new rules, will want reclassification as capital leases that must be accounted for on the balance sheet. This means that real estate professionals must immediately consider the follow that existing and planned leases will have on financial statements once the proposed rules are implemented. Since operating lease obligations can laid out a larger liability than all balance sheet assets combined, lease reclassification can significantly alter the businesses balance sheet.

The impact of recording these lease obligations on the balance sheet can have manifold impacts, such as: businesses needing to alert their lenders as they will now be non-compliant with their loan covenants, negotiating new loan covenants with the lenders due to the restated financial statements, ratios used to evaluate a businesses possible of credit will be adversely impacted and the restatement of a lessee's financial statement once the turn takes follow may follow in a lower equity balance, and changes to discrete accounting ratios

The conceptual basis for lease accounting would turn from determining when "substantially all the benefits and risks of ownership" have been transferred, to recognizing "right to use" as an asset and apportioning assets (and obligations) in the middle of the lessee and the lessor.

As part of Fasb's announcement, the Board stated that in their view "the current accounting in this area does not clearly portray the resources and obligations arising from lease transactions." This suggests that the final follow will likely want more leasing activity to be reflected on the balance sheet than is currently the case. In other words, many, possibly virtually all, leases now considered operating are likely to be considered capital under the new standards. Thus, many fellowships with large operating lease portfolios are likely to see a material turn on their corporate financial statements.

Part of the purpose for this is to coordinate lease accounting standards with the International Accounting Standards Board (Iasb), which sets accounting standards for Europe and many other countries. The Iasb and Fasb currently have gargantuan differences in their rehabilitation of leases; particularly noted is that the "bright line" tests of Fas 13 (whether the lease term is 75% or more of the economic life, and whether the present value of the rents is 90% or more of the fair value) are not used by the Iasb, which prefers a "facts and circumstances" approach that entails more judgment calls. Both, however, have the understanding of capital (or finance) and operating leases, any way the dividing line is drawn in the middle of such leases.

The Fasb will accept group comments on this proposed turn through December 15, 2010.  If Fasb makes a final decision in 2011 regarding this proposed turn to lease accounting, the new rules will go into follow in 2013.

Additionally, the staff of the Securities and change Commission reported in a description mandated under Sarbanes-Oxley, that the whole of operating leases which are kept off the balance sheet is estimated at .25 trillion that would be transferred to corporate balance sheets if this proposed accounting turn is adopted.

Commercial Real Estate:

The impact on the commercial Real Estate store would be gargantuan and will have a significant impact on commercial tenants and landlords.  David Nebiker, Managing Partner of ProTenant (a commercial real estate firm that focuses on assisting Denver and regional fellowships to strategize, develop, and implement long-term, total factory solutions) added "this proposed turn not only effects the tenants and landlords, but brokers as it increases the complexity of lease agreements and provides a strong impetus for tenants to execute shorter term leases".  

The shorter term leases create financing issues for property owners as lenders and investors prefer longer term leases to obtain their investment.  Therefore, landlords should obtain financing for buy or refinance prior to the implementation of this regulation, as financing will be considerably more difficult the future. 

This accounting turn will growth the executive burden on fellowships and the leasing superior for single tenant structure will effectively be eliminated.  John McAslan an join together at ProTenant added "the impact of this proposed turn will have a significant impact on leasing behavior. Lessors of single tenant structure will ask themselves why not just own the building, if I have to description it on my financial statements anyway?" 

Under the proposed rules, tenants would have to capitalize the present value of virtually all "likely" lease obligations on the corporate balance sheets.  Fasb views leasing essentially as a form of financing in which the landlord is letting a tenant use a capital asset, in change for a lease payment that includes the significant and interest, similar to a mortgage.

David Nebiker said "the regulators have missed the point of why most businesses lease and that is for flexibility as their workforce expands and contracts, as location needs change, and businesses would rather invest their cash in producing earnings growth, rather than owning real estate."

The proposed accounting changes will also impact landlords, especially company that are publicly traded or have group debt with audited financial statements.  Mall owners and trusts will required to achieve pathology for each tenant located in their structure or malls, analyzing the terms of occupancy and contingent lease rates.

Proactive landlords, tenants and brokers need to edify themselves with the proposed standards that could take follow in 2013 and begin to negotiate leases accordingly.

Conclusion:

The end follow of this proposed lease accounting turn is a greater compliancy burden for the lessee as all leases will have a deferred tax component, will be carried on the balance sheet, will want periodic reassessment and may want more detailed financial statement disclosure.

Therefore, lessors need to know how to structure and sell transactions that will be desirable to lessees in the future. Many lessees will realize that the new rules take away the off balance sheet benefits Fasb 13 afforded them in the past, and will settle leasing to be a less beneficial option. They may also see the new standards as being more cumbersome and involved to inventory for and disclose. Finally, it will become a challenge for every lessor and commercial real estate broker to find a new approach for marketing commercial real estate leases that make them more appealing than owning.

However, this proposed accounting turn to Fas 13 could potentially stimulate a lack luster commercial real estate store in 2011 and 2012 as businesses decided to buy property rather than deal with the executive issues of leasing in 2013 and beyond.

In conclusion, it is recommended that landlords and tenants begin preparing for this turn by reviewing their leases with their commercial real estate broker and discussing the financial ramifications with their Cfo, surface accountant and tax accountant to avoid possible financial surprises if/when the accounting changes are adopted. 

Both David Nebiker and John McAslan of ProTenant indicated their entire corporate team are continually educating themselves and advising their clients about these possible changes on a pro-active basis.  

Addendum - Definition of Capital and Operating Leases:

The basic understanding of lease accounting is that some leases are merely rentals, whereas others are effectively purchases. As an example, if a company rents office space for a year, the space is worth nearly as much at the end of the year as when the lease started; the company is simply using it for a short period of time, and this is an example of an operating lease. 

However, if a company leases a computer for five years, and at the end of the lease the computer is nearly worthless. The lessor (the company who receives the lease payments) anticipates this, and charges the lessee (the company who uses the asset) a lease payment that will recover all of the lease's costs, together with a profit.  This transaction is called a capital lease, any way it is essentially a buy with a loan, as such an asset and liability must be recorded on the lessee's financial statements. Essentially, the capital lease payments are considered repayments of a loan; depreciation and interest expense, rather than lease expense, are then recorded on the earnings statement.

Operating leases do not normally work on a company's balance sheet. There is, however, one exception. If a lease has scheduled changes in the lease payment (for instance, a planned growth for inflation, or a lease holiday for the first six months), the rent price is to be recognized on an equal basis over the life of the lease. The unlikeness in the middle of the lease price recognized and the lease no ifs ands or buts paid is considered a deferred liability (for the lessee, if the leases are increasing) or asset (if decreasing).

Whether capital or operating, the hereafter minimum lease commitments must also be disclosed as a footnote in the financial statements. The lease commitment must be broken out by year for the first five years, and then all remaining rents are combined.

 A lease is capital if any one of the following four tests is met:

 1) The lease conveys rights to the lessee at the end of the lease term;

 2) The lessee has an choice to buy the asset at a deal price at the end of the lease term

 3) The term of the lease is 75% or more of the economic life of the asset.

 4) The present value of the rents, using the lessee's incremental borrowing rate, is 90% or more of the fair store value of the asset.

Each of these criteria, and their components, are described in more detail in Fas 13 (codified as section L10 of the Fasb Current Text or Asc 840 of the Codification).

Fasb Proposed Lease Accounting Changes - Impacts on commercial Real Estate

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Real Estate Investing Using private Money Loans - The greatest Win-Win Situation

If you are like most starting real estate investors, the amount one road block you face as you get started is acquiring the cash you need to fund your deals. Many habitancy have problem reasoning exterior of the box and arrival up with creative ways to finance their properties. With stringent qualifying guidelines, tons of restrictions, and large down payments, a lot of investors don't have the means critical to get a loan from a customary bank. Luckily, there are other strategies you can use to finance your real estate transactions, the best being secret money. Using secret money allows investors to act faster on possible deals enabling them to beat out the competition and help many distressed homeowners by taking a question asset off their hands.

What is secret Money?

Private money is a very tasteless term used in reference to the act of lending money to a real estate investor by a secret person. When a secret money loan is made, a asset is purchased and the lender receives a first or second mortgage or deed of trust (depending on your state) on that property, securing their legal interest. After the purchase, the real estate investor will then use the remainder of the loan to renovate and sell that single property. These loans will all the time be made on a low Loan-to-Value ratio, commonly 75% or less, which increases the security of the investment. For example, if a asset is valued at 0,000, a secret lender would never loan more than ,000 on that property. After the renovations have been unblemished and the asset resold, the secret lender will be paid back the critical of the loan plus interest earned determined by the previously agreed upon rate.

The Real Estate Investor

Using secret money loans is the single best way to fund the growth of any real estate investing business. The advantages of using secret money cannot be matched by any other type of creative financing. The amount one presuppose that using secret money is such a advantage to real estate investors is because it streamlines the asset buying process, allowing more transactions to be completed faster, resulting in increased profits. Being able to offer a fast closing with cash in case,granted by secret lenders will motivate sellers to take your offer over the competition. This will also entice them to take a much lower price than they would from a accepted buyer. Also, since real estate investors find and buy properties so far below market value, these secret loans commonly cover 100% of the buy price as well as some or all of the renewal costs. Furthermore, with no down payment, and many times no monthly payment on the loan, it's easy to see why this strategy is the amount one recipe for financing real estate investment deals. Since using secret money is such a advantage to real estate investors, they are willing to offer lenders high interest rates.

The secret Lender

So why should habitancy chose secret lending over more customary investments such as the stock market? Well the sass is simple: more control, higher yields, and microscopic risk. When you chose to be a secret lender, you operate the terms of your investment, settle on the distance of your term, your interest rate, and when you receive payments. Depending on each single investment, you can chose to lend funds everywhere from a few days up to 5 years. Real estate investors using secret loans many times will offer yields that are much higher than almost any other investment vehicle, typically earning everywhere from 8%-12% and sometimes up to 15%. You chose when to receive interest payments either it be monthly, quarterly, annually or at the time of loan maturity. Risk is minimized with a promissory note providing your collateral, a deed of trust or mortgage securing your legal interest, and an insurance procedure protecting you from accidents. There are many separate sources secret lenders can use to take advantage of this type of investment. With the potential to use cash, an Ira, 401k, home equity, credit cards and more, secret lending with real estate investors is an anticipated investment opportunity. High fixed returns secured by real assets, insured against accidents, with the potential to be completely tax-free within your withdrawal account.

Diversity is a very foremost component to any investment portfolio. With the benefits secret lending provides combined with the volatility of other more customary investments like the current stock market, there might not be a better time than now to seek this type of investing. So what are you waiting on?

Real Estate Investing Using private Money Loans - The greatest Win-Win Situation

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