4. If you'll need a mortgage, time is of the essence: the first month of home ownership is free because you pay a mortgage in arrears. After that, every month that you own the property you will be making a mortgage payment. 5. List the house at market value because this will help ensure a quick sale.
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There is a lot of confusion about bank owned properties. Do you have to have 10% of the purchase price in cash? Are they sold in an auction? Are you able to see the house before bidding?
A lot of these questions are more specific to foreclosure auctions. What people may not know is that bank owned properties come on the regular MLS all of the time. Yes, you can walk through these houses with a REALTOR before purchasing the house. Most normal mortgage programs will finance a bank owned house but conventional is a safer bet. So, how do these sales compare to the regular market and should you be taking advantage of them? Number of Bank Owned Sales
First of all, it's important to know the short hand REO. It stands for Real Estate Owned and it means that the bank owns the real estate as a result of foreclosure.
As you can see, REO sales make up a very small percentage of real estate sales in our local market. Of the sales represented above, REO sales account for 5% of all sales. So what does this scarcity do to the price of REO properties? Median Sold Price
Over the past three years, REO properties are selling at 41% under the regular market. Keep in mind, bank owned properties often require repairs and updates. This means you need to analyze any potential deals for the repairs that need to be done and the future valuation.
In my experience, an REO will either be priced low and the price gets bid up above asking price or it will be priced high and buyers will make low offers or it will reduce in price. This is very similar to pricing regular homes but banks will price their homes on varying factors that often don't align with true market value. Now, how do the discounted prices of REO properties effect how long they stay on the market? Days on the Market
As you can see, REO properties do sell faster than the regular market. Obviously this will very from case to case but in my experience, when a bank owned property is priced low the property will usually sell quickly and above asking price. When the property is priced too high, the house will sit on the market for a while and likely have some price reductions.
Conclusions
REO properties can be a great way to find a good deal on the house, if you are familiar enough with housing to accept the risks that come a long with them. They are always sold as-is. Which means, you can do an inspection on the property but it is only for your information and the bank will not make repairs.
If you are not very experienced in housing and don't know potential risk and pitfalls, I would either avoid bank owned properties or be have a team of experts help you know what you are potentially purchasing. If have any questions, want to know what REO properties are currently on the market, and/or would like to receive alerts for any future REO listings, email or call me. Capitalization rate, commonly known as Cap Rate, is the Net Operating Income divided by the sales price. The Cap Rate tells you how well your invest performs if you bought the property in cash. This number is frequently used in commercial and investment real estate to determine the value and profitability of a property. To find the cap rate, you divide the NOI by the sales price.
NOI Sales Price Let's pull the example used in the NOI blog post and figure out what you would need to pay for a property that has a NOI of $55,000 to get a 10% cap rate. 55,000 = 550,000 .1 So, we'd need to purchase an investment property, with a NOI of $55,000 at $550,000 to get a 10% cap rate. Let's double check our math. 55,000 = .1 or 10% 550,000 This is the last post of a serious entitled: The Top 10 Terms of Commercial/Investment Real Estate. Here you will find an overview of deductibles you can use in relation to Real Estate. For more information, or advice, contact a CPA or tax attorney.
Click here to return to The 3 D's of Real Estate Tax. 1. Mortgage Interest- The interest paid on a balance of up to 1 million dollars can be deducted. 2. Private Mortgage Insurance- If a homeowner pays PMI, it can be a deduction. 3. Home Improvement Loan interest- The interest on $100,000 and lower loans can be deducted. 4. Mortgage Points- An origination fee or mortgage points that a homeowner paid to obtain a better interest rate can be deducted. 5. Energy Efficiency Upgrades- The cost of energy saving materials can be deducted directly from your taxes instead of your taxable income. 6. Real Estate Profit- The profit of a real estate sale can be claimed as tax free. Individuals can claim up to $250,000 and married couples can claim up to $500,000. 7. Real Estate Selling Cost- Any profit exceeding the aforementioned maximums are taxable. However, you can add up fees paid at closing, the cost of improvements, marketing costs of selling your home, etc... 8. Home Office- Having a home office is deductible. The room must be solely used as an office and it must be the primary location you get your work done. Each SqFt is a $5 deduction, up to 300 sq ft. 9. Property Tax- As confusing as it sounds, you can actually deduct your property tax. Effectively, property tax is different than income tax and you can write off the property tax to reduce your taxable income. 10. Loan Forgiveness- The Mortgage Debt Forgiveness Relief Act of 2007 allows the forgiven debt after a short sale that took place between 2007 and 2013 to be tax free. In other words, if you sold your home in a short sale process and got $50,000 but owed $75,000 and the bank forgave you the $25,000. The government views that $25,000 as taxable income. The aforementioned act forgives the tax on the $25,000. 11. Depreciation- Click here for more information. Welcome to the list of the top 10 terms used in commercial/investment real estate. If you are thinking of getting into investing and/or commercial real estate. It will help to familiarize yourself with these terms as they are used frequently in the field.
The following is a summary. Click on the terms to get examples and more detailed definitions. 1. Gross Income $ Gross income is all of the income that you make on a property. This includes rent, laundry, storage fees, late fees, vending machines, etc. 2. Vacancy $ Any unit that is not occupied and not producing income is considered a Vacancy. Keep in mind that if a unit changes tenants in the same month, it is considered a turnover, not a vacancy. 3. Vacancy Rate % This is the number of vacancies divided by the total number of units. Vacancies Total Units 4. Effective Gross Income $ Effective gross income is a number that takes into account what you will be making with vacancies. Income - (Vacancy Rate (%) x Income) = Effective Gross Income 5. Operating Expenses $ The total annual expenses of an investment; including taxes, insurance, utilities, management fees, landscaping, maintenance, repairs, and advertising. 6. Net Operating Income (NOI) $ To get the NOI, take the Gross Income and subtract it by the Operating Expenses. Effective Gross Income - Operating Expenses = NOI 7. Debt Service $ Debt Service is the annual cost of your mortgage. Monthly Mortgage Amount x 12 = Debt Service 8. Cash Flow $ Most buy and hold real estate investors agree that cash flow is the ultimate goal. To calculate cash flow, you take the NOI and subtract it by the Debt Service. NOI - Debt Service = Annual Cash Flow 9. Cash-on-Cash Return % Cash-on-Cash Return is what you would use to compare your investment to other types of investments, like stocks. To calculate Cash-on-Cash Return, take the Annual Cash flow and divide it by the Down Payment amount. Annual Cash Flow Down Payment 10. Capitalization Rate % AKA Cap Rate, shows how well the investment performs if you pay all cash. To calculate a Cap Rate, you take the Net Operating Income and divide it by the Sales Price. NOI Sales Price Source: Commercial Real Estate for Beginners: The Basics of Commercial Real Estate Investing. By Peter Harris First of all, no apartment complex, for sale, is going to advertise their vacancy like the sign above. Why? Vacancy is any units that are not occupied. Obviously this means less rental income.
So should you avoid properties with vacancies? Not necessarily. If the property's price is based off of the income it makes (See Cap Rate), you may be able to get the property for a discount. Sometimes the units may be vacant because they are in need of repair. This would allow you the opportunity to fix the units, get the property fully rented, and quickly increase the value of the property. This is a continuation of a serious entitled: The Top 10 Terms of Commercial/Investment Real Estate. This is part three of a series. Click here to go back to "An Overview of the Three D's of Real Estate Tax"
Being able to defer paying taxes and instead use your profits to reinvest into real estate is one of an investors favorite tools. This deferment is available because the government is in favor of people investing in real estate. 1031 Exchange One of the most popular exchanges is the 1031 exchange. This allows you to sell a piece of real estate and reinvest all of the earned money into another property without paying taxes. For more information, click here. Roll Over an IRA The IRS allows you to roll over your IRAs into investment real estate. This could be a great way to diversify your portfolio. You could reinvest the cash flow you get from the property or use it for extra income. You would need to speak with an accountant and financial planner to get a better understanding of the limitations and potential. Click here to go back to An Overview of the Three D's of Real Estate Tax.
The IRS understands that overtime, your house costs money to maintain. They allow you to deduct money from your taxes to account for the costs of a depreciating house. The great thing is that all interest in Real Estate know that it generally goes up in value over a long enough period of time. So, while your investment goes up in value, you are still able to deduct from your taxes it's depreciation. If this article sparks your interest, I would recommend going straight to the IRS to get more information. Here is what you'll need to know. Have you been thinking about making a Real Estate investment? Is having rent come in once a month the only benefit to having an investment? Below I outline the four ways of making money with an investment property.
1. Cash Flow Cash flow is rent that exceeds the monthly mortgage payment. When looking to invest, talk to a mortgage adviser to see what your projected mortgage payments. Then, talk to a Realtor about going rental rates. 2. Appreciation in Value The average rate of appreciation is around 3%. Keep in mind, this fluctuates and you should be ready for a long term investment. Start getting to know areas around town where you may want to invest. Look for trends, does the neighborhood seem to be improving, or declining. Finding an up-and-coming neighborhood is a great way to accelerate appreciation in value. 3. Tax Benefits The government thinks it's beneficial for people to own homes. So, they offer tax benefits to home owners. You'll want to consult with a tax accountant about your eligibility for tax benefits. 4. Mortgage Payoff Finally, while your property is going up in value, you are enjoying tax benefits, and a monthly rental income, your renters are also paying down your mortgage. The rate at which your mortgage is paid down depends on your interest rate and the term of your loan. Theoretically, your renters could pay for the whole house aside from the down payment. Exit Strategies Developing exit strategies before you purchase a property is an important step to help ensure that you have options. You will want to consider different options. The more exit strategies, the better. An example of a property with a few exit strategies: A property that you purchase under market value, that can be improved upon, and is able to be rented. Exit Strategy 1: Flip You will want to be sure that you have the means to do the repairs and maintenance needed to increase the value of the home. It is important to factor in what the market value is of the home and what it will cost to sell the house. This is where a Realtor comes in handy. Cost of House Market Value after Flip Cost of Repairs - Cost of Flip + Cost of Selling Profit or Exit Strategy 1 Cost of Flip Exit Strategy 2: Hold Holding the property is another great long-term exit strategy. In this strategy, you hold the property for an extended period of time and then sell it for a profit. However, this is not the only way to make money on the property. In fact, there are 4 ways to make money on a property. 1. Cash Flow- Rental Income: you will want to talk with a Realtor to get an idea of what your property could bring. 2. Tax Benefits- Consult a tax adviser. 3. Appreciation- This fluctuates but on average, it's 3% a year. 4. Mortgage Pay Down- If you have tenants, they are doing this for you! |
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