Archive for the ‘Business’ Category
Compared with other types of investments, real estate investing involves a relatively favorable risk/reward profile, but with relatively low liquidity (ease of entry and exit). Let’s see some of the most important factors to be considered for investing in real estate.
- Location of the Property
Why is it important? The age old punch line “Location, Location, Location” still rules and remains the most important factor for profitability in real estate investment. Proximity to amenities, peaceful conforming areas, neighborhood status, scenic views, etc. are major factors for residential property valuations; while proximity to markets, warehouses, transport hubs, freeways, tax-exempt areas, etc. play an important role for commercial property investor.
What to look for? A mid-to-long term view, about how the locality is expected to evolve over the investment period. Today’s peaceful open land at the back of a residential building may be developed into a noisy manufacturing facility in future, making the residential valuations less profitable. It is advisable to conduct thorough check about ownership, type and intended usage of neighboring areas, establishments and free land in the locality.
- Appraisal of the Property
Why is it important? Real estate financing during purchase, listing price during sale, investment analysis, insurance premium and taxation – all depend on Real estate valuation.
What to look for? Commonly used Valuation Methodologies include:
– Sales comparison approach: Recent comparable sales of properties with similar characteristics– most suitable and common for both new & old properties
– Cost Approach: All cost summation minus depreciation– suitable for new construction
– Income approach: Based on expected cash inflows – suitable for rentals
III. Investment Purpose & Investment Horizon:
Why is it important? Given the low liquidity and high value investment in real estate, lacking clarity on purpose may lead to unexpected results including financial distress, especially if the investment is mortgaged.
What to look for? Identify which of the following broad categories suits your purpose and prepare yourself accordingly:
– Buy & Self-use: Savings on rentals, benefit of self-utilization and value appreciation
– Buy & Lease: Regular Income & long term value appreciation. Requires building a temperament of being a landlord – for handling legal issues & possible disputes, managing tenants, repair work, etc.
– Sell & buy (Short Term): Quick, small to mediocre profit – usually buying under construction properties and selling slightly high once ready
– Buy & Sell (Long Term): Large intrinsic value appreciation over long period of time; solution for long term aims like retirement planning, child’s education, etc
. IV. Anticipated Cash Flows & Profit Opportunities:
Why is it important? The investment purpose & usage influences cash flows and hence profit opportunities.
What to look for? Develop draft projections for the following modes of profit & expenses:
– Expected cash flow from rental income – Inflation favors landlords for rental income
– Expected increase in intrinsic value due to long term price appreciation
– Benefits of depreciation (and available tax benefits).
– Cost benefit analysis of renovation before sale to get better price.
– Cost benefit analysis of mortgaged loans vs value appreciation.
- Be Careful with Leverage – Know the Pitfalls:.
Why is it important? Loans are convenient but may come at a big cost – you commit your future income, to get utility today for a cost of interest spread across many years. Real estate financing needs higher amounts and hence has higher exposures. Understanding it properly allows you to benefit from it to the maximum, while ignoring the risks can lead to major pitfalls.
What to look for? Depending upon your expected & current future earnings and paying capability, consider the following:.
– Decide on type of mortgage loans (Fixed Rate, Adjustable Floating Rate, Interest Only or Zero Down Payment), whichever suits you best.
– Be aware about the terms & conditions and other charges levied by financiers.
– Hunt around and bargain for a better deal – lower interest rates, lower insurance premiums or processing charges waiver, as possible.
- Investment in New Construction vs Existing Establishments:.
Why is it important? New construction properties usually offer attractive pricing, the option of customization, clearly documented amenities and clear titles. The investor has to deal with only the construction company as a counterpart. Risks include delay in possession, increase in costs, no awareness about neighborhood, etc
. Those on resale have vice-versa factors and may need a more thorough check on ownership, documents and legal matters.
What to look for?
– Check past projects and the reputation of the construction company for new construction investments.
– Review property deeds, recent survey and appraisal report for old constructions.
– Be aware of monthly maintenance costs, outstanding dues & taxes from past owners. These costs can severely impact your regular cash flows.
– Investing in on-lease property (possessed by others)– Is it rent controlled, rent stabilized or free market? Is the lease about to expire? Does it have renewal options in favor of the tenant? Are interior items owned by the tenant or owner? etc. are some of the details to be aware of.
– Quality-check items (furniture, fixtures and equipment), if included in sale.
VII. Indirect Investments in Real Estate:.
Managing physical properties over a long term horizon is not for everyone. There are also a few alternatives to indirectly invest in the real estate sector and aim to reap the benefit.
What are the Options?
– Real estate company stocks– Equity stocks of real estate companies can be bought and sold on exchanges (e.g. Forest City Enterprises FCE.A listed on the NYSE).
– Real estate sector-focused mutual funds/ETFs– Sector specific funds like “Fidelity Real Estate Investment Portfolio (FRESX)” offer the benefit of diversification and professional money management, at the cost of fund expense charges.
– Mortgage bonds– Secured by physical property, they offer lower rates of return compared to corporate bonds.
– Real Estate Investment Trust (REIT)– offer high yields, tax consideration and high liquidity as they trade on stock exchanges.
The Bottom Line.
Real estate investments offer a good high value risk-return profile. Thoughtful consideration of the above mentioned factors in mind will enable investors to reap the benefits while mitigating the risks.
The age old punch line “Location, Location, Location” still rules and remains the most important factor for profitability in real estate investment. A mid-to-long term view, about how the locality is expected to evolve over the investment period. – Sell & buy (Long Term): Large intrinsic value appreciation over long period of time; solution for long term aims like retirement planning, child’s education, etc
. Real estate financing needs higher amounts and hence has higher exposures. – Investing in on-lease property (possessed by others)– Is it rent controlled, rent stabilized or free market?
For most people, a house will be the most important and expensive asset they will ever own. Most first home buyers know this, but not many understand the process of settling the home of their dreams.
After finding the right property, you will need to find the right home loan and get approved. Getting the right advice is essential!
Save a deposit
When setting out to buy your first home, having a large enough deposit should be your first priority. The size of the deposit required will depend on the value of the amount and the property you are borrowing, otherwise known as the loan to value ratio (LVR).
Organize your team
Putting together a team of experts should be done prior to negotiating on the price of the property.
To get the best advice, it’s ideal to have:
– A mortgage broker (that’s us!).
– A conveyancer/solicitor (or a settlement agent in Western Australia).
– Accountant (if you are a property investor).
Because they’re the cheapest, conveyancing costs can range from around $400 all the way to $2000 but it’s important not to choose a conveyancer just.
Most people know friends or family who have bought a house so they can recommend a solicitor for you.
Better still, have a look at our list of recommended conveyancers for each state.
A pre-approval means that your home loan is basically approved subject to the bank accepting the property that you plan to buy. Not every property is accepted by the banks, so take a look at our property types page before you make any offers.
You should aim to get pre-approval six months prior to buying a house!
Chances are, you’re already running a sole proprietorship. Now, educate yourself on the cons and pros, the tax implications, and the legal liabilities to determine if you want to remain a sole proprietorship.
The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as Nancy’s Nail Salon. The fictitious name is simply a trade name– it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business’s debts. If a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. The owner will have to pay the business debts with his or her own money if such suits are successful.
The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law. The sole proprietor owner will typically have customers write checks in the owner’s name, even if the business uses a fictitious name. Sole proprietor owners can, and often do, commingle personal and business property and funds, something that llcs, corporations and partnerships can not do. Sole proprietorships often have their bank accounts in the name of the owner. Sole proprietors need not observe formalities such as voting and meetings associated with the more complex business forms. Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner. Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.
Sole proprietorship taxation is quite simple because a sole proprietorship is indistinguishable from its owner. The income earned by a sole proprietorship is income earned by its owner. A sole proprietor reports the sole proprietorship income and/or losses and expenses by filling out and filing a Schedule C, along with the standard Form 1040. Your losses and profits are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the “bottom-line amount” from Schedule C is transferred to your personal tax return. Because business losses you suffer may offset income earned from other sources, this aspect is attractive.
As a sole proprietor, you must also file a Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment tax you owe. You need not pay unemployment tax on yourself, although you must pay unemployment tax on any employees of the business. Of course, you won’t enjoy unemployment benefits should the business suffer.
Suing and Being Sued
Sole proprietors are personally liable for all debts of a sole proprietorship business. Because the potential liability can be alarming, let’s examine this more closely. Assume that a sole proprietor borrows money to operate but the business loses its major customer, goes out of business, and is unable to repay the loan. The sole proprietor is liable for the amount of the loan, which can potentially consume all her personal assets.
Imagine an even worse scenario: the sole proprietor (or even one her employees) is involved in a business-related accident in which someone is injured or killed. The resulting negligence case can be brought against the sole proprietor owner and against her personal assets, such as her bank account, her retirement accounts, and even her home.
Consider the preceding paragraphs carefully before selecting a sole proprietorship as your business form. Accidents do happen, and businesses go out of business all the time. Any sole proprietorship that suffers such an unfortunate circumstance is likely to quickly become a nightmare for its owner.
He can bring a lawsuit in his own name if a sole proprietor is wronged by another party. Conversely, if a corporation or LLC is wronged by another party, the entity must bring its claim under the name of the company.
Advantages of a Sole Proprietorship
– Owners can establish a sole proprietorship instantly, easily and inexpensively.
– Sole proprietorships carry little, if any, ongoing formalities.
– A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
– Owners may freely mix business or personal assets.
Disadvantages of a Sole Proprietorship
– Owners are subject to unlimited personal liability for the debts, losses and liabilities of the business.
– Owners can not raise capital by selling an interest in the business.
– Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
Forming a Sole Proprietorship
You may already be operating a sole proprietorship. One of the great features of a sole proprietorship is the simplicity of formation. Little more than buying and selling services or goods is needed. No formal filing or event is required to form a sole proprietorship; it is a status that arises automatically from one’s business activity.
A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. The owner of a sole proprietorship typically signs contracts in his or her own name, because the sole proprietorship has no separate identity under the law. Sole proprietorships can bring lawsuits (and can be sued) using the name of the sole proprietor owner. Because a sole proprietorship is indistinguishable from its owner, sole proprietorship taxation is quite simple. Sole proprietors are personally liable for all debts of a sole proprietorship business.