1. ©OnCourse Learning. All Rights Reserved.

2. Investing in Real Estate ©OnCourse Learning. All Rights Reserved. Chapter 24

3. ©OnCourse Learning. All Rights Reserved. In This Chapter You will be introduced to the benefits and dangers of investing. Cash flow, tax shelters, loss limitations, capital gain, tax law changes, equity buildup, and leverage are just a few of the topics covered.

4. Benefits of Investing Appreciation – increase in property value over time. Mortgage reduction – the decline of the mortgage balance as payments are made. Cash flow – money left each year after paying property operating expenses and debt service. Tax shelter – tax deductible expenses generated by an investment property. ©OnCourse Learning. All Rights Reserved.

5. Rent receipts for the year$30,500 Less operating expenses $10,000 Less mortgage loan payments $20,000 Equals cash flow$ 500 Cash Flow Picture ©OnCourse Learning. All Rights Reserved.

6. Rent receipts for the year$30,500 Less operating expenses $10,000 Less interest on loan $19,500 Less Depreciation $ 8,000 Equals taxable income($ 7,000)* *In accounting language, parentheses indicate a negative or minus amount. Taxable Loss ©OnCourse Learning. All Rights Reserved.

7. Tax Shelter Tax deductible expense generated by an investment. Loss limitation – active investor can deduct up to $25,000 of losses to offset other income. Straight-line depreciation.  Residential 27.5 years  Commercial 39 years  Recapture rate of 25% ©OnCourse Learning. All Rights Reserved.

8. Capital Gains & Investing Held longer than 1 year = Long Term Capital Gain Maximum tax rate of 20% Asset held for 5 years qualifies for 18% At-risk rules Installment sales Rehabilitation Tax Credits Low-income housing credit ©OnCourse Learning. All Rights Reserved.

9. Equity at Time of PurchaseEquity 5 Years Later Purchase price$200,000Market value $220,000 Mortgage loan -140,000Less loan balance -120,000 Down payment $ 60,000 Equals current equity $100,000 Equity Build-Up Current equity $100,000 Less beginning equity -60,000 Equals equity build-up $ 40,000 (equity) Calculating Equity Build-up ©OnCourse Learning. All Rights Reserved.

10. Leverage The ability to use borrowed funds to purchase investment property. ©OnCourse Learning. All Rights Reserved. Purchase Price$100,000 Cash Down $20,000 Loan $80,000 Leverage 80% Investor only needs $20,000 to control $100,000 property

11. Property Selection Vacant land Houses & Condominiums Small Apartment Buildings Medium-size & Larger Apartment Buildings Office Buildings Other property types ©OnCourse Learning. All Rights Reserved.

12. APPRAISER’S VIEWPOINTINVESTOR’S VIEWPOINT The appraiser solves for value. The investor solves for return. Value = Net Income Return Return = Net Income Price Comparative Appraisal and Investment Objectives ©OnCourse Learning. All Rights Reserved.

13. Developing a Personal Investment Strategy Risk Taking Debt Repayment Valuing an Investment Ownership Property Management Disclosure Laws ©OnCourse Learning. All Rights Reserved.

14. Lifetime Income and Consumption Patterns ©OnCourse Learning. All Rights Reserved.

15. Investment Considerations Risk Taking Debt Repayment Valuing an Investment ©OnCourse Learning. All Rights Reserved.

16. Limited Partnerships Property Purchase Methods Property Management Financial Liability Investment Diversification Service Fees Pitfalls ©OnCourse Learning. All Rights Reserved.

17. Disclosure Laws Prospectus Blue-Sky Laws ©OnCourse Learning. All Rights Reserved.

18. EFFORT AND COURAGE There is no “get rich quick” formula, so don’t expect one. If you have a good, informed investment strategy & the courage to take the risks, the rewards are certainly attainable. ©OnCourse Learning. All Rights Reserved.

19. Key Terms Cash Flow Cash-on-cash Downside risk Equity build-up Investment strategy Leverage Negative cash flow Prospectus Straight-line depreciation Tax shelter ©OnCourse Learning. All Rights Reserved.