The Perfect Realtor for Triangle Real Estate Investors

Triangle real estate investors, whether residential, multi-family, commercial or industrial oriented, will find that the pool of real estate professionals best qualified to serve them is actually somewhat small.  The vast majority of Realtors are residentially and consumer oriented, and that’s not a bad thing.  Someone has to serve them, pointing out neighborhood amenities and home features like a gourmet kitchen and a great garage workshop.  Problems may surface however when a real estate agent is not qualified for real estate investment services.

Rodney McNabb with MainStreet Realty Services understands the unique needs of the real estate investor.  Even when the desired property is a single family residential home, Triangle real estate investors have a very different set of concerns and evaluation criteria than the family buying a residence.  Sure, some of the same things apply, like the neighborhood amenities and home features. Renters want the same things that buyers do, but that’s where the similarities in evaluation end.

Triangle real estate investors love the numbers, not the home

Rodney has also done some real estate investing, and we have a firm grounding in the characteristics that make a property a good real estate investment.  Let’s use residential rental property investment as an example.

  • Potential rental income:  We are constantly monitoring the Raleigh rental home market.  Each neighborhood is unique in certain ways, and rents can vary considerably.  Before any signatures on offers, the sharp investor must know with reasonable certainty the monthly income the property will generate.  Cash flow is a primary concern.
  • Rental potential in the future:  Another factor in monitoring the market is to have a handle on the economy, job prospects, business movements and other factors influencing rental demand.  MainStreet Realty Services helps our Triangle real estate investors to assess the future performance of their rental properties.
  • Costs of ownership:  Sure, the consumer home buyer does have some concern about taxes and other costs of ownership, such as insurance.  However, those go into escrow and are minimized by the desire to just know the monthly mortgage payment.  The investor must quantify these costs and factor them into the ROI calculation, and also have some clue as to how these costs may change in relation to the market and rents they can charge in the future.
  • Management & marketing costs:  Raleigh real estate investors want to keep their vacancy costs down, as well as their non-payment costs.  There are costs involved, such as background checks, marketing and advertising, and professional fees.
  • Discount to current market value:  Successful investors know that starting out right means equity when they leave the closing table.  This provides a value cushion, but it’s also just good business.

The property acquisition process is more aggressive

Rodney understands that Triangle real estate investors often work with a strategy of multiple offers to sift through and bring out the best bargains.  He isn’t hesitant to work with investor clients to make offers on as many homes as desired.  He can support the active investor in their quest for that one deal they can get at the deepest discount to value.

Rodney also understands that the sharp investor will be making lower offers than the average buyer.  We’re not hesitant to support their investing style and help them to add profitable properties to their portfolio.  We also understand the 1031 Exchange process and know how to facilitate our investor client property upgrades.

Triangle real estate investors have come to know Rodney McNabb with MainStreet Realty Services as a top notch resource for their business.  Contact Rodney at Rodney@MainStreet-Realty.net should you have any questions about real estate investing, or are ready to acquire your first (or next) property.

How to Evaluate Real Estate Property

A lot of novice Triangle real estate investors waste time in running the numbers when evaluating real estate properties. Some people perform laborious calculations all day long and still not come up with real value of the real estate property. The problem is that most newbie investors make the mistakes of focusing too much on math without knowing the correct way to evaluate real estate property.

Current low prices of real estate properties have been alluring investors into the market. If you are also one of those investors hoping to make it big in the real estate investment, you should continue reading as here I will reveal to you under-the-wrap secrets about the effective ways to evaluate real estate property. Knowing the correct way to evaluate real estate properties will make the difference between finding yourself in a bankruptcy court and becoming the next Donald Trump.

Methods to Evaluate Real Estate Property

Accurate assessment of market value is essential when investing in the real estate market. There are 5 basic methods of appraising the real estate property. The appraisal methods differ in the approaches but have one common goal – to find the true value of the real estate property.

1. Income Approach

Income approach is an effective method to evaluate and determine value of the real estate property. Through this method, you capitalize your required rate of return by the net operating income (NOI) produced by the property. Using this method, you can correctly assess the real market value of the property based on its income stream and your required ROI.

For example, let’s say that the return you desire from your cash investment is 9%. You estimate that the net operating income (NOI) of the real estate property to be around $50,000. Therefore, the value of the real estate property using the income approach is $588,235 ($38,500 / 8.5%). You should be willing to pay this amount for the property that is based on your required ROI and net income stream of the property.

2. Cost Approach

The cost approach method estimates value of the real estate property by determining the cost to replace the entire real estate property. In other words, the cost approach method assesses what it would cost to purchase the land and build an identical property. The first step is to find out the land value. Secondly, you must determine the cost of installing landscape elements like lawns, shrubs, trees etc. Finally, you must compare what would be the cost building the real estate property of identical size and design.

Suppose that the subject property stands on the land that is valued at $8 per square foot. In case the property is standing on a land of 15,000 feet, the land is worth $120,000. Next, you assess that the landscape elements can be replaced at the cost of $20,000. Finally, you determine that the cost of replacing the real estate property is $100,000. So, the value of the real estate property using the cost approach comes to around $240, 000 ($120,000 + $20,000 + $100,000).

3. Assessed Value Approach

The assessed value method is another way to evaluate the real estate property. The assessed value is the value placed on the property by the town or city’s tax assessor for tax purposes. A team of qualified assessors fix the properties after a detailed analysis of the property and interviewing the property owners. Tax assessors’ assess the whole town during a period of four to twelve periods. The properties are re-assessed once the city council deems that the value has become outdated and require reassessment.

The problem with this approach is that the assessed value varies dramatically from one area to another. Also, each tax assessor office has its own unique approach of valuing the property within the jurisdiction. Sometimes the information is outdated and does not reflect the correct value of the real estate property. The approach is only helpful if you want a quick overview of the property value for making comparison. For accurate and detailed assessment of the property, you should use other property valuation methods.

4. Previous Sale Price Approach

Another quick method to determine the real estate property is the last sale price of the house. This is the price of the property that was paid by the current owner of the property.

However, you should not rely on this method if the transaction occurred too far in the past. In such cases, the sales prices of the property may not reflect its current value.

5. Market Data Approach

The market data evaluation method compares a list of properties that are identical to the subject property. The approach is also known as the “Comparable Sales” approach. Licensed professionals and real estate appraisers use this approach for evaluating real estate properties.

When determining property value using the market data approach, you should look to appraise identical houses in the same neighbourhood that have been sold recently. In other words, the unit property value is determined by comparing the subject property with those that are sold recently and located in similar areas with almost the same amenities, sizes, rent structures and appearances.

A simple example will help you understand how to determine market value using the market data approach. Suppose you create a list of seven comparable condominiums that are located in the local area and sold for an average of $70,000 per unit. You arrive at market value of the property by multiplying the $70,000 average unit price with the number of units in the subject property. So, if there are eight units then the market value of the condominiums using the market data approach comes to around $56,000.

Another variant of the market data approach is to determine the real estate property value through assessing the range within which identical real estate properties have been sold in the neighbourhood. Suppose that five identical properties exist in the area that have been sold recently for $75,000, $60,000, $69,000, $65,000, and $71,000. Then, the value of the subject real estate property would lie in the range of $60,000 and $75,000. You can set listing price in any of these price ranges.

However, as with the listed price approach, this is not a reliable way to assess real estate value. The selling price may not be actual worth of the real estate property. Commissions, urgency of the sellers, ignorance of buyers about the real estate value, taxes and other factors influence final sale price of the real estate property.

Request for Property Profiles

In many states, you may obtain a “Property profile” document that contains different general property information.  Some of the information that is included in property profile document include:

  • owner’s name,
  • size of the property,
  • legal identification number,
  • sale date and amount,
  • mortgage date and amount,
  • legal characteristics, and
  • land information e.g. value, square feet, acreage etc.

Moreover, the property profile document may contain various other property related reports like comparative market analysis, subdivision statistic, nearby schools and businesses. It may also contain aerial images, demographic sketch vectors and parcel maps when evaluating real estate property.

Actual format of the property profile differs from state to state. The amount of information contained therein may also differ slightly as well. But they all contain comprehensive information regarding the real estate property. On the first page you can find zoning information, lot size, the year it was built, square footage, number of rooms etc. You can utilize the information contained in the property profile document to evaluate real estate value using the above methods.

Most insurance companies will give you the property profile for free in the hope that you will purchase title insurance from them. Just ring up the customer relations department of the nearby insurance company and ask them about the property profiles. You should know the address of the property before calling the customer relation personnel. Once you inform them about the address of the property, they will retrieve the information from the database, print out the property profile document and send it over to you by mail or fax.

In case the property profile document is not available, you can also request for Multiple Listing Service (MLS). The Triangle MLS contains real estate property information that is used when selling the real estate property. But you have to hire a real estate broker to get the listing for you as it is not available for the general public.

Final Remarks!

Finding the current market value is not an exact science but an educated guess. When assessing real estate value, you try to determine the most likely price at which you should buy or sell the property. What you should be looking for when assessing real estate property is a reasonable value of the property that reflects the land value and cost of setting up the property at the site.

As you have learned, there are various methods to assess value of the property. You should choose a method that provides the most accurate representation of the property value. When analyzing the real estate property, some newbie real estate investors complicate the process for themselves. You should try to avoid the complexity and stick to basic principles when assessing the value of the real estate property.

One important point to note is that you should never assess the real estate property based on a real estate firms’ listed price. Although a real estate agency may assess the property correctly, they may not give accurate quotation when listing the property. The listed price is not the real value of the property. The initial asking price of the listed property is often inflated.

Real estate agents list the property at a price that is several thousand dollars above the actual value of the property. The listed price may also reflect the price that the owner wants for the property that may have nothing to do with actual worth of the property. You should do your own homework and consult a reliable professional broker if you want help in evaluating the real estate property.

Call Rodney me at (919) 322-3960 ext. 7 or email Rodney@MainStreet-Realty.net if you want to get in touch with an experienced real estate broker with years of experience in helping clients buy, sell or rent real estate property.

Why You Should Be Investing in Real Estate

Investing in Real Estate

Investing in real estate can be a very lucrative business. Do you know what Donald Trump, David Walentas, Jeff Sutton, and Donald Bren have in common? They all made billions from investing in the real estate market.

The profit potential by investing in real estate is tremendous. With investment of just a few thousand dollars, you can build a large real estate empire within decades. All that is needed is the acumen for appraising future productivity of the real estate asset you are considering to purchase.

Real estate business is one of the few investment options where obtaining a bank’s loan is not that difficult. When investing in the real estate market, you put your money to work today and make it grow to earn money in the future. You have to earn enough profit to cover the costs and the risks you take on owning the real estate property.

The best thing about investing in the real estate market is that your investment grows tax-free. You do not have to pay any money to Uncle Sam unless and until you cash out your real estate property.

If you had the chance of meeting with a real estate investor, they would tell you about the thrill of chasing down a real estate deal or their last remodel. They pursue the addictive feeling and are always on the lookout for the next opportunity to win great deals.

How Can You Make Money from Real Estate?

You can make money in real estate in several ways.

  1. Rental Income: Rental income from real estate is a common way to earn from the real estate property. You buy the real estate property and rent it to the tenant. You will receive a stream of cash in the form of a rent that the tenant pays you for using the property for a specific period of time. The rental income can be generated from both residential and commercial properties such as car washes, office building, storage units, rental houses and more.
  2. Appreciation in Real Estate Value: This is another popular way to earn from the real estate property. Every real estate property consists of intrinsic value, which is the value of the land where the real estate property is located. The intrinsic value of the property appreciates and depreciates according to the demand. Greater is the demand, more would be the intrinsic value of the property. The contrary happens in case of low demand of the property. Some of the factors that affect real estate value include easy commute, amount of traffic, safe environment, close proximity to shopping centres, schools, parks etc. Moreover, price appreciation can also occur due to renovations and capital improvements.
  3. Real Estate Income Through Flipping: Flipping is a real estate appreciation strategy where the real estate investor purchase a “hot” property and quickly sells (flips) it for a profit. The profit earned from flipping real estate can come through different ways.
  • Simple Flip: This is a simple flipping strategy and refers to buying properties at low prices and quickly selling them at higher prices. The strategy is usually used in a rapidly rising market.
  • Fix and Flip: The flipping strategy refers to buying a house that needs repair, fixing it and then selling it for a profit.

Investors purchase the property at a discounted price that is much below the house’s market value. The discount may be due to deplorable condition of the house or urgency of the owner to get rid of the property. The former is known as fix and flip, while the latter is simple flipping. After purchasing the property, the investor then performs the necessary repairs if required and then sells it at or above the market value.

Types of Real Estate Investments

Now that you know how easy it is to generate income from real estate property, let us delve further and find out about the type of real estate properties that you can invest your money in to earn real estate income.

  1. Residential real estate investments: Residential properties include single-family housing, multi-family units (4 plex and less), condominiums, townhouses and mobile homes. Residential zones use smaller FAR (floor area ratio) than business, commercial, or industrial zones. These properties offer homes in a narrow range of prices and sizes, thus providing great investment opportunity for low-income investors.

Various factors affect the property value of residential properties. In many cases, the property value does not remain fixed. The factors that can cause a residential property to gain or lose value includes location, accessibility, neighbourhood, and adding aesthetic features to the properties such as fences, trees, or other hardscape elements.

  1. Commercial real estate investments: Commercial properties consist of building or land that is intended to generate profit through rental income or capital gain. Office buildings, farm lands, industrial properties, hotels, medical centers, malls, hotels, warehouses, garages, retail complexes, multifamily housing buildings are all different types of commercial properties.

In many states, a residential property that contains more than a certain number of units is classified as commercial property for loans and tax purposes. Normally, real estate properties containing five units and above are considered commercial properties.

Commercial real estate property is valued differently than residential real estate property. It costs a ton more than residential real estate properties, but also has a greater return prospective. In addition, investing in commercial real estate property allows you to diversify the risks. For instance, if you own an apartment complex and a tenant leaves the apartment, you lose only percentage of the income of that property. However, if you lose a tenant from a residential unit, you lose the entire rental income. Moreover, the cash flow generated from commercial property is often higher per square foot than it is in residential property.

  1. Real Estate Investment Trusts: Real estate investment trusts or REITs refers to a portfolio of real estate or real estate mortgages that are traded similar to stocks. REITs derive at least 75% of its gross income from mortgage, gains from sale of real estate property, and rental income. A typical REIT contains at least 100 shareholders and distributes around 90% of its annual taxable income (minus the capital gains) as dividends.

REITs allow investors to purchase a portfolio of real estate properties and manage them by a professional real estate team. Purchasing REITs can significantly limit personal risk.  Owners of REITs do not have to worry about paying back mortgage loans or maintenance of the property. The REIT management company takes care of that for the owners.

  1. Mixed-use real estate investments: Mixed-use real estate investments is an investment strategy that combines two or more types of properties into a single project. The investment strategy consists of purchasing properties that are used for various purposes. For instance, an investor may took out a lease on a three story office building. The ground floor could be leased to a health insurance company. The remaining floors could be utilized for other businesses such as a membership gym, an upscale retail shop, hair salon or a virtual golf range. The benefit of mixed use real estate properties is that they have the ability of diversification and are effective in controlling risk.

Basic Real Estate Investment Advice and Tips

Before we delve further into the realm of real estate investment, let me take a moment to explain that you should never invest in real estate property in your own name. Most experienced Triangle real estate investors use a special legal structure such as LLC (Limited Liability Company) or LP (Limited Partnership). The reason is that you will be on the hook for anything above the insurance settlement if someone gets hurt on the real estate property and sues you for the injury. This may lead to financial bankruptcy or at the very least great financial suffering.

The legal real structure can be set up by paying only a few hundred dollars or a few thousand dollars if done through an attorney. The paper work required for forming a real estate company isn’t that difficult. You may also opt to set up different company for each real estate project. This is known as “asset separation” that would help you in case you get into trouble with one of the property as you can put it into bankruptcy without hurting the others.

Before you make a clear determination as to the type of legal entity you want to set up as Triangle Real Estate Investors, I strongly encourage you to speak with both a legal as well as tax professional.  As I am neither, they can more accurately guide you through this process.

Having cleared this point let us find out what the best way is to invest in the real estate market.

  • Buy Low, Sell High, and Rent Smart
  • Do not Wait Too long to take Advantage of Low Prices
  • Never invest in Buying a High Value Dream Home
  • Utilize social media tools for real estate listings
  • Remember the Rule: Fixed mortgage, Affordable payments and Long-term hold

On a final note, real estate investment is certainly not easy. In order to succeed in real estate investment you have to thoroughly understand the market and act opposite the herd. Consider getting in touch with a reliable real estate agency for successful real estate investment. A real estate broker is a person or firm that acts as an intermediary between the buyer and the seller of the real estate property.

Whether you want to buy or sell a real estate property, you should hire an experienced real estate broker that has the required experience, skills and tools necessary to make the process simple for you.

If you are a Triangle Real Estate Investor, contact me by calling (919) 322-3960 ext. 7 or email me at Rodney@MainStreet-Realty.net if you need any help buying or selling real estate investments.

You may also begin your own search for residential real estate investment properties by clicking on the link.

How to Value a Rental Property

There are three common formulas for valuating a rental property, and they are as follows:

Gross Rent Multiplier 

The Gross Rental Multiplier (GRM) is the ratio of the price of a real estate investment to its annual rental income before expenses.  The GRM is easy to calculate, but isn’t a very precise tool for ascertaining value since it does not take into account either expenses or financing. It is, however, an excellent first quick value assessment tool to see if further more detailed analysis is warranted. In other words, if the GRM is too high or low compared to recent comparable sold properties, it probably indicates a problem with the property or gross over-pricing.

The formula here is Cost divided by Gross Operating Income = Gross Multiplier

So take the cost (or Sales Price) of the property and divide that number by the Gross Operating Income (annual income less vacancy rate) and you have your GRM.


Capitalization Rate (or Cap Rate)

By using other properties’ operating income and recent sold prices, the capitalization rate is determined and then applied to the property in question to determine current value based on income.

The formula here is Net Operating Income divided by Cost = Cap Rate

The Cap Rate needs to be higher than your loan amount to help ensure you are in a financial position to afford your mortgage.  The Cap Rate method is better than the Gross Rent Multiplier Method because it takes expenses into account.  This formula, however, is good for those Triangle Real Estate Investors who will be purchasing the property in cash.


Cash-on-Cash Formula (my personal favorite)

The Cash-on-Cash rate of return provides an easy way for real estate investors to compare the profitability of similar income-producing properties, or as a way to gauge one investment opportunity against another quickly

Cash-on-cash return measures the ratio between anticipated “first-year cash flow” to the amount of “initial cash investment” made by the real estate investor to purchase the rental property. Hence, cash on cash is always expressed as a percentage.

Terms

Cash Flow Before Taxes (CFBT) is the amount of money the property is expected to generate during the first year of operation (less real estate taxes).

The initial cash investment (sometimes called the cost of acquisition) is the total amount of cash invested by the investor to acquire the property such as down payment, loan points, escrow and title fees, appraisal, and inspection costs

The formula here is Cash Flow Before Taxes (CFBT) divided by Cash Invested = Cash on Cash

CFBT is the annual rent, less vacancy rate, less operating expenses and less annual debt service.

One shortcoming is the fact that cash on cash does not take into account time value of money.  As such, the return must be restricted to simply measuring an income property’s first year cash flow, and not its future year’s cash flows.

If the cashflow is good enough, all other factors should equal out.

Cost Recovery / Depreciation for Real Estate Investments

If you have purchased property that you intend to rent or converted a previously owner-occupied unit to rental property, you cannot deduct the entire cost of the property in the year in which you purchased it. The Internal Revenue Service, IRS, considers real estate a capital asset, meaning it has a useful life of more than one year. The cost of all capital assets must be allocated over the useful life of the asset as determined by the IRS. Current IRS regulations require you to depreciate all rental property with the Modified Accelerated Cost Recovery System, MACRS. Before you can calculate depreciation for real estate investments, you must determine the cost basis in the asset.

Cost recovery (depreciation) is the periodic allocation of the cost of qualified assets.  When a taxpayer, or in some cases a lessee, purchases a qualified asset they are allowed to recover the acquisition cost of the asset through certain deductions set forth in the Internal Revenue Code.  The method and length of recovery periods depend on the type of property purchased.  The IRS has produced cost recovery tables for the various types of property.

As of the time of this writing (Fall 2013), the following are the current depreciation categories and recovery percentages:

Recovery Percentages for Residential Rental Property
27.5 years

Recovery Percentages for Non-Residential Rental Property
39 years

Recovery Percentages for Land Improvements
15 years

Recovery Percentages for Personal Property
5 years

Land
Sorry, no depreciation is allowed for land

Depreciating Rules for Income Producing Properties

You can recover the cost of income producing properties through yearly tax deductions.  You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return.

Three factors determine how much depreciation you can deduct each year:  1) your basis in the property; 2) the recovery period for the property; and 3) the depreciation method used.  You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment as an expense.

You can deduct depreciation only on the part of your property used for rental purposes.  Depreciation reduces your basis for figuring gain or loss on a later sale or exchange.

What rental property CAN be depreciated?

You can depreciate your property if it meets ALL the following requirements:

  • You own the property
  • You use the property in your business or income-producing activity (such as a rental property)
  • The property has a determinable useful life
  • The property is expected to last more than one year

Property You Own:  To claim depreciation, you usually must be the owner of the property.  You are considered as owning property even if it is subject to a debt.

Rented Property:  Generally, if you pay rent for property, you cannot depreciate that property.  Usually only the owner can depreciate it.  However, if you make permanent improvements to leased property, you may be able to depreciate the improvements.

Property Having a Determinable Useful Life:  To be depreciable, your property must have a determinable useful life.  This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.

What Rental Property CANNOT be Depreciated?

Certain property cannot be depreciated.  This includes land and certain excepted property.

Land:  You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up.  But if it does, the loss is accounted for upon disposition.    The cost of clearing, grading, planting and landscaping are usually all part of the cost of land and cannot be depreciated.

Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use.  These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property.

An Example:  You built a new house to use as a rental property and paid for grading, clearing, seeding and planting bushes and trees.  Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot.  If you replace the house, you would have to destroy the bushes and trees right next to it.  These bushes and trees are closely associated with the house, so they have determinable useful life.  Therefore, you can depreciate them.  Add your other land preparation costs to the basis of your land because they have no determinable useful life and cannot depreciate them.

When Does Depreciation Begin and End?

You begin to depreciate your rental property when you place it in service for the production of income.  You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first.

Placed in Service:  You place property in service in a rental activity when it is ready and available for a specific use in that activity.  Even if you are not using the property, it is in service when it is ready and available for its specific use.

Example 1:  On November 22 of last year, you purchased a dishwasher for your rental property.  The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year.  Because the dishwasher was not ready for use last year, it is not considered as placed in service until this year.

If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year.

Example 2:  On April 6, you purchased a house to use as a residential rental property.  You made extensive repairs to the house and had it ready for rent on July 5.  You began to advertise the house for rent in July and actually rented it beginning September 1.  The house is considered placed in service in July when it was ready and available for rent.  You can begin to depreciate the house in July.

Example 3:   You moved from your home in July.  During August and September you made several repairs to the house.  On October 1, you listed the property for rent with a real estate company, which rented it on December 1.  The property is considered placed in service on October 1, the date when it was available for rent.

Conversion to Business Use:  If you place property in service in a personal activity, you cannot claim depreciation.  However, if you change the property use to business, or the production of income, you can begin to depreciate it at the time of the change.  You place the property in service for business or income-producing use on the date of the change.

An Example:  You bought a home and used it as your personal home for several years before you converted it to rental property.  Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home.  You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income.

Idle Property
Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle/not in use.  For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent.

Cost or Other Basis Fully Recovered
You must stop depreciating property when the total of your yearly depreciation deductions equals your costs or other basis of your property.  For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it.

Retired from Service
You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis.  You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events:

  • You sell or exchange the property
  • You convert the property to personal use
  • You abandon the property
  • The property is destroyed

Financial Benefits to Owning Triangle Real Estate Investment Properties

There are basically four financial benefits to owning Triangle Real Estate Investment Properties:

1) Income by CFBT, or Cash Flow Before Taxes

2) Principal Reduction

3) Tax Savings by Depreciation

4) Appreciation

I will address each individually below.

1.  CFBT/Cash Flow Before Taxes:  To calculate the CFBT, you first need to know what your Gross Operating Income is.

Gross Operating Income (GOI) = Annual Rent (based upon the unit being 100% leased for the year), less your vacancy rate.
So if your unit leases for $1,000 per month and you historically have a vacancy rate of 5%, then your Gross Operating Income will be:

$1,000,00 x 12 months = $12,000.00
$12,000.00 x 5% = $600.00
$12,000.00 – $600.00  = $11,400.00
GOI = $11,400.00

Now that you know your GOI (Gross Operating Income), you subtract from that your Operating Expenses.  Operating Expenses can include such costs as:

  • real estate taxes
  • repairs
  • homeowner association dues
  • leasing fees
  • management fees
  • homeowner insurance
  • utilities
  • advertising
  • supplies
  • miscellaneous (anything else).

Let’s now say that your annual operating expenses will run about $5,400.00 per year.

So, you take your $11,400.00 (GOI) and subtract the $5,400.00 (Operating Expenses), you now have $6,000.00…and this is known as your Net Operating Income.

From your Net Operating Income, you will now subtract your Debt Service.  Debt Service is just a fancy term for your mortgage.  It includes your mortgage (principal and interest) over a 12 month period.

Presuming you pay $3,600.00 per year in Debt Service (that’s $300.00 per month x 12 months), you will subtract that $3,600.00 from your Net Operating Income of $6,000.00 and you now have $2,400.00.  Another term for this $2,400.00 is your Cash Flow Before Taxes.

2.  Principal Reduction:  This is the decrease in the principal amount you owe on your loan.  When you make a payment to your lender every month, part of that payment is allocated to the principal, and part of it to the interest that the lender is charging you. So therefore you are ‘paying down’ or ‘reducing’ the amount of the loan each month with each payment.

3.  Tax Savings by Depreciation:  We will get into depreciation a little more in a different blog post, but basically, you are able to write off the Personal Property Value, Building Value and Land Improvement Value of your property over ‘x’ amount of time.  The ‘x’ amount is determinant upon each category.  So with this depreciation, you SHOULD be able to save money on your taxes each year.

4)  Appreciation:  This is where the value of your real estate investment increases each year.  The percentage amount has been kinda screwy these last couple of years, but once things settle down, the appreciation of your real estate investment should equate to at least 2% annually.