The “In’s and Out’s” of Investment Properties

The “In’s and Out’s” of Investment Properties

By: Austin Wentworth

Investment properties are my main attraction to real estate. With opportunities to take properties that are not living up to their full potential and invest into them in hopes of a higher return is a challenging, yet rewarding task. Although there can be huge upsides to having investment/ rental properties, there are also commonly overlooked details that can really cost you in the end if you are not careful. There are many factors that investors should take into account for potential properties, and several details that need to be addressed in order to see the return you hope for.

When you make the conscious decision to find an investment property, it is an exciting, but also a strategic time in the search for the best property for you. You may find yourself not knowing every detail about purchasing a home, and think you need a real estate agent. It is better to wait on hiring a real estate agent until you have taken the time to educate yourself and make knowledgeable, unbiased opinions on perspective properties. Realtors are a great asset in purchasing a home, but they can also be incentive driven by their commission and at time, rush your decision. One of the most common mistakes made by investors is their property’s location. When purchasing a property, you must ask yourself whether you plan to personally manage the property or pay someone else to manage it for you. If your answer is, personally manage the property, and then you will want a location that is within a reasonable distance to where you live.

When deciding to purchase an investment property, everyone wants that property to be a profitable one. There are several factors that you need to analyze as an investors, some more obvious than others. A neighborhood in which the property is located is a crucial piece to what kind of property you are looking at, and also what kind of tenants you can expect to have. You need to pay particular attention to the situs; situs is considered to be the aspect of location that contributes to the market value of a real property, which will have a direct correlation with property value. Certain factors that can considerably increase a properties worth include: Good schools, parks, and accessibility to shopping centers, movie theaters, etc.

Now that you have found a property with all the measurable that you want, it is time to take a critical look at this property. . You will want to look at your prospective property extremely closely for cut corners in the past, and any work that will need to be done in the future. A property with high capital expenditures coming in the near future can kill any NOI you wished to have secured. Another issue that many investors face is a poorly written lease that is not specific enough. Be sure to draft a written lease that is specific, and clear on the expectations of the tenants and any recourse that will be taken if any clauses within the lease are broken. A common mistake that investors/ managers make is not properly accounting for vacancy within the year. If you own a property with multiple units, it is possible that you may have vacancy within the year, and you must account for this percentage so that you have assets put aside in case you experience a lower NOI than expected.

In closing, it is the investor’s responsibility to do all the needed work that is takes to properly evaluate potential properties. The more you put into the search for a property, the better protected you will be when you decide to purchase the best property for you. This work may seem like too much at the time, but the more you understand the risks and rewards of investment properties, the better prepared you will be to successfully manage your property.

Resources:

Simple Ways to Invest in Real Estate

http://www.investopedia.com/articles/pf/06/realestateinvest.asp

How to Avoid Common Mistakes Made by Rental Property Owners

            http://whiteglovepm.blogspot.com/2013/01/how-to-avoid-common-mistakes-made-by.html

Top 10 Features of a Profitable Rental Property

            http://www.investopedia.com/articles/mortgages-real-estate/08/buy-rental-property.asp

Ch. 13 Questions- Jason Davies

1. (T/F). Points are loan charges designed to cover the lender's costs of processing the application and loan.

2. (T/F). The primary motivation behind refinding a residential mortgage is to reduce the cost of borrowing.

3. (T/F). Commensurability describes strengths that compensate for a weakness when making a decision between options.

4. (T/F). Real estate is typically the second-highest business expenditure behind personnel costs.

5. (T/F). Individual borrowers can optimize their interest rate-discount rate selection if they know the lender's payoff assumption and are able to accurately anticipate their own payoff.

6. Which of the following terms describes a loan balance that is not shrinking through amortization but instead growing?
a. Negative Amortization
b. Reverse Annuity Mortgage
c. Adjustable Rate Mortgage
d. Interest Only Mortgage

7. Which of the following type of mortgages are less and more affordable for a greater number of potential home buyers?
a. Partially Amortizing Mortgage
b. Graduated Mortgage Payment
c. Interest-only Mortgage
d. Adjustable Rate Mortgage

8. Which of the following is not a benefit of being a homeowner?
a. Property Tax Reductions
b. Interest and property tax deductions for federal income tax calculations
c. Attractive exposure to taxable capital gains
d. Reduced risk in the real estate market

1. F 2. T 3. T 4. T 5. T 6. a 7. c 8. d

Ch. 12 Questions- Jason Davies

1. (T/F). The 5th step in the prescriptive appraisal process is the highest and best use analysis.

2. (T/F). A listing broker is the broker who brings a buyer to the transaction.

3. (T/F). Engineers are the people who actually construct physical space or directly manage those who do.

4. (T/F). A Gantt chart is a project managment technique used to schedule work and measure progress against expectations.

5. (T/F). A special agency is a listing agency relationship that grants the broker the right to collect a commission if the property is sold during the listing period unless the property owner brings the buyer to the transaction.

6. Some characteristics that describe a good subcontractor does not include which of the following?
a. Financially stable
b. Suitably insured
c. Have a record of quality and timely performance
d. Having a reputation of chasing money

7. Which of the following approaches would require an estimate of the market value of the land combined with an estimate of the reproduction price of all new improvements adjusted by depreciation?
a. Cost Approach
b. Sales Comparison Approach
c. Market Approach
d. Income Approach

8. Which of the following type of brokers is most likely to be involved in dual agency?
a. Selling Broker
b. Buyer's Broker
c. Cooperating Broker
d. Listing Broker

1. T 2. F 3. F 4. T 5. F 6. d 7. a 8. b

Ch. 11 Questions- Jason Davies

1. (T/F). A Tax Digest is a local government employee resonsible for calculating and maintaining property taxes.

2. (T/F). An Assessor's parcel number is the value used by the assessment office's to calculate tax for a specific parcel.

3.(T/F). An Assessment appeal is a property owner's right to ask for a change in assessed value.

4. (T/F). A homestead exemption is an exemption on real property that allows it to be taxed.

5. (T/F). The effective tax rate is the ratio  of the property tax to the property's ad valorem value.

6. What type of real estate does the zoning classification R2 represent?
a. Light Industrial
b. Low Density Residential
c. High Density Residential
d. Commercial

7. Which of the following terms describes a modication of the current zoning code at the request of a private landowner?
a. Zoning Variance
b. Legislative Change
c. Judicial Change
d. Subdivision Regulation

8. Which of the following valuations would you use to calculate property taxes?
a. Fair Market Value
b. Assessed Value
c. Taxable Value
d. Mass Valuation
1. F 2. F 3. T 4. F 5. T 6. c 7. b 8. a

Ch. 10 Questions- Jason Davies

1. (T/F). Hypothecation is the practice of leaving collateral in the borrower's possession while the debt is being paid.

2. (T/F). Mortgage documentation refers to the document issued by a trustee to return legal title to the mortgagor after meeting all the requirements of a promissory note.

3. (T/F). As interest rates fall, bond or mortgage values rise or "goes up".

4. (T/F). Debt service refers to the mortgage payment that comprises one component, which is principal.

5. (T/F). An origination point is a charge paid by the mortgagor at orinigation to reduce or buy down the mortgage contract rate.

6. A lender's effective yield can be described as which of the following examples:
a. NPV
b. IRR
c. TVM
d. FV

7. Which of the following terms would best describe a debt from a friend or credit card debt?
a. Secured Debt
b. Collateral
c. Unsecured Debt
d. Debt Service

8. Which of the following terms describes a situation which creates a good incentive to avoid missing a mortgage payment?
a. Prepayment Clause
b. Due on Sale Clause
c. Collateral Clause
d. Acceleration Clause

1. T 2. F 3. T 4. F 5. F 6. b 7. c 8. d

Ch. 13 by Albert Chang

Chapter 13: Consuming Activity


1.) Mortgage whose periodic payments are only sufficient to cover the interest due is partially mortgage. (T/F)

2.) GPM stand for Graduated payment mortgage? (T/F)

3.) Reverse annuity mortgage targets younger, working people? (T/F)

4.) Increase in outstanding mortgage balance that arises in ARMs and GPMs when periodic payments are less than interest due is Negative amortization? (T/F)

5.) Loan charges to cover lender's cost of processing the application is Points? (T/F)

6.) A variable rate or payment mortgage that periodically adjusts to a specific index.
a) Reverse annuity mortgage
b) Adjustable rate mortgage
c) Negative amortization
d) None of the above

7.) Lender's true yield once points and other fee are considered their IRR assuming borrowers holds the load to maturity.
a) NPV
b) APR
c) PV
d) None of the Above

8.)What are Points?
a) When some score in a game
b) Loan charges designed to boost lender's effective rate of return
c) When you pay off your bill
d) None of the Above







Answers: 1.) F 2.)T 3.)F 4.)T 5.)F 6.)B 7.)B 8.)B

Ch.12 by Albert Chang

Chapter 12: Professional Activity 

1.) Value in use derives from the attractiveness of a property to other who willing to trade assets. (T/F)

2.) Arms length mean the buyer and seller of the transaction have equal bargaining power? (T/F)

3.) Neighborhood is to share similar population characteristics and adjoining properties with comparable uses. (T/F)

4.) Cost approach is a there valuation techniques taught to real estate appraisers requiring estimating a market value. (T/F)

5.) GRM stands for Gross rent multiplier? (T/F)

6.) The process of converting an income stream into lump sum estimate present value.

a) Adjusted Grid

b) Capitalization 

c) Estimated Gross Monthly Rent

d) None of the Above

7.) A specific value an income producing asset that has a particular investor or potential investor.

a) Investment Value 

b) Market Value

c) Commercial Value

d) All of the Above

8.) A shortcuts employed by human problem solvers needing to minimize cognitive effect.

a) Calculator

b) Computer

c) Heuristics 

d) None of the Above

Answers : 1.)F 2.) T 3.)T 4.)T 5.)T 6.)B 7.)A 8.)C

Chapter 13 Questions

by Xia Vue

True/False
1) APR is known as the annual principal rate.

2) Points are loan charges designed to boost the lender's effective rate of return.

3) Origination fees are loan charges designed to cover the lender's costs of processing the application and loan.

4) A mortgage whose periodic payments are only sufficient to cover the interest due is known as interest-only mortgage.

5) Homes do always appreciate in value, as the recent bursting of the housing bubble has reminded us, but often they do.

Multiple Choice
6) A variable rate or payment mortgage that periodically adjusts to a specified index is:
a) adjustable rate mortgage
b) annual percent rate
c) reverse annuity mortgage
d) none of the above

7) Negative amortization is the increase in the outstanding mortgage balance that arises in some ARMs and GPMs when periodic payments are _____ than the interest due for the period and the shortfall is added to the principal balance.

a) more

b) less

c) equal

d) none of the above

8) A mortgage product designed to meet the needs of elderly homeowners by providing an annuity or line of credit secured by a mortgage to be paid off when the house is sold or refinanced or the state of probated is known as:
a) adjustable rate mortgage
b) graduated payment mortgage
c) interest-only mortgage
d) none of the above

Key
1) F 2) T 3) T 4) T 5) F 6) a 7) b 8) d

Chapter 12 Questions

by Xia Vue

True/False
1) Sales comparison approach is sometimes called the market approach.

2) Overall capitalization rate is commonly indicated by OCR.

3) Value in use originates from the worth or utility that a property has for a particular individual who uses it.

4) Capitalization is the process of converting an income stream into a lump sum estimate of present value.

5) There are 6 steps in the prescriptive appraisal process.

Multiple Choice
6) Which approach is taught to real estate appraisers for valuing property:
a) cost approach
b) sales comparison approach
c) income approach
d) all of the above

7) The broker who brings the buyer to the transaction is:
a) selling broker
b) listing broker
c) cooperating broker
d) buyer's broker

8) Which is NOT part of the prescriptive appraisal process:

a) city/regional analysis

b) neighborhood analysis

c) highest and best use analysis

d) all are part of the prescriptive appraisal process

Key
1) T 2) F 3) T 4) T 5) F 6) d 7) a 8) d

Chapter 11 Questions

by Xia Vue

True/False
1) The total amount of taxable property value of all taxable real estate with the county is known as tax digest.

2) Tax assessor is responsible for calculating and maintaining the tax digest.

3) Millage rate is a rate of 1 per 100, or 1/100.

4) Ad valorem value is the assessor-determined value used to calculate property taxes.

5) An appeal to a court for zoning relief by a property owner after administrative, legislative, or both types of relief have been denied is a legislative change.

Multiple Choice
6) A building code is a minimum required construction standard used to protect the:
a) health and safety of the public
b) property value
c) building and land
d) none of the above

7) Millage rate is a rate of 1 per:
a) 100
b) 1,000
c) 10,000
d) none of the above

8) The assessor-determined value used to calculate property taxes is:

a) ad valorem value
b) assessed value
c) taxable value
d) none of the above

Key
1) T 2) T 3) F 4) F 5) F 6) a 7) b 8) b

Chapter 10 Questions

by Xia Vue

True/False
1) A personal promise to pay back a loan is an unsecured debt.

2) A grantor is the buyer, while the grantee is the seller.

3) Debt service is the mortgage payment comprising of three components: interest, expenses, and principal.

4) The lender's effective yield is known as an internal rate of return.

5) One point is a charge of 2% of the mortgage amount that is paid by the mortgagor to the mortgagee at the loan origination.

Multiple Choice
6) The borrower's right, but not obligation, to prepay the entire loan balance without penalty is:
a) prepayment clause
b) acceleration clause
c) due on sale clause
d) none of the above

7) Deed of trust is a document transferring legal title to a:
a) mortgagee
b) mortgagor
c) trustee
d) none of the above

8) When calculating lender's effective yield, we're looking to solve for:
a) pmt
b) pv
c) fv
d) none of the above

Key
1) T 2) F 3) F 4) T 5) F 6) a 7) c 8) d

Chapter 13 Qs.

Lulu Carrizales

1. The size of the loan depends on the price of the home and:
   a.  GPM
   b.  Points
   c.  the down payment amount
   d.  none of the above
   
2. The initial fee charged by the lender each equaling 1% are:
   a.  Impact fees
   b.  Points
   c.  both
   d.  neither
   
3. The _____ is the lender's true yield once points and other fees are calculated.
   a.  ARM
   b.  APR
   c.  RAM
   d.  GPM
   
4. Origination fees are loan charges used to compensate for putting the loan in place. (T/F)
   
5. Negative Amortization is just another term for Amortization.  (T/F)
   
6. GPM is best for people who believe their salary will increase every year. (T/F)
   
7. RAM converts equity into cash flow (T/F)
   
8. RAM is also referred to as a "reverse mortgage" (T/F)
   

Key:
1.  C
2.  B
3.  B
4.  T
5.  F
6.  T
7.  T
8.  T

chapter 12 questions

Lulu Carrizales

1. Value In Exchange is the attractiveness of a property to others who would be willing to pay for its rights.  (T/F)
    
2. The exclusive right to sell is the most common listing (T/F)
    
3. The 3 most common approaches to appraisals are the cost approach, income approach and revenue approach (T/F)
   
4. The Value is Use is the value your neighboring business has. (T/F)
   
5. The Sales Comparison Approach is also known as the Market Approach (T/F)
   
6. The _______________ is viewed as the most authoritative and accurate approach for property appraisals.
   a.  Cost approach
   b.  Income approach
   c.  Sales Comparison Approach
   d.  All of the above
   
7. A value ratio calculated from historic sales is the:
   a.  Capitalization Rate
   b.  Break-even Ratio
   c.  NOI
   d.  Gross Rent Multiplier
   
8. Depreciation in context is the decrease in value caused by the diminished ability to:
   a.  Break even
   b.  serve users needs
   c.  sell
   d.  None of the above.

KEY
1.  T
2.  T
3.  F
4.  F
5.  T
6.  C
7.  D
8.  B

CH 11 Qs

Lulu Carrizales

1. Ad valorem value is the assessor's estimate of a property's _____________ for taxation purposes:
   a.  Market value
   b.  Fixtures
   c.  Collateral
   d.  None
    
2. Which of the following are NOT considered tax-exempt property:
   a. Non-Profits
   b. Bars
   c. Churches
   d. All of the above
   
3. Property Tax Savings from Exemptions =
   a.  Tax Digest x Interest Rate
   b.  Exemption Amount x Tax Digest
   c.  Exemption Amount x Tax Rate
   d.  None of the above
   
4. The Homestead exemption is a common assessed value deduction to temporary tenants. (T/F)
   
5. When an assessor determines a value that is used to calculate property taxes it is called assessed value (T/F)
   
6. Taxable value is the assessed value after all applicable exemptions. (T/F)
   
7. Millage rate is a rate of 1 per 1,000 (T/F)
   
8. A restaurant is a tax-exempt property (T/F)

KEY
1.  A
2.  B
3.  C
4.  F
5.  T
6.  T
7.  T
8.  F

Chapter 10 Qs

Lulu Carrizales

1. The Reference to a mortgage links the mortgage to the __________.
   a.  Debt service
   b.  prepayment clause
   c.  Collateral
   d.  None of the above
   
2. The requirement that the entire loan balance be paid off if the borrower sells the collateral is called:
   a.  Due on sale clause
   b.  Prepayment clause
   c.  Both
   d.  Neither
   
3. The seller is the ________ and the Buyer is the ________.
   a.  Grantee; Grantor
   b.  Grantor; Grantee
   c.  Lessor;  Lessee
   d.  Lessee; Lessor
   
4. The Landlord is known as the Lessor. (T/F)
   
5. The Deed of trust is a document transferring legal title to a lender.  (T/F)
    
6. The Equitable Title is the right to legal title if all obligations of the promissory note are fulfilled.  (T/F)
   
7. Amortization is the gradual reduction of a debt from balloon payments.  (T/F)
   
8. When interest rates go down, bond or mortgage payments do too.  (T/F)
   

KEY
1.  C
2.  A
3.  B
4.  T
5.  F
6.  T
7.  F
8.  F

Chapter 13 Questions

Chapter 13 Questions
By Michael McMinassian

1.)    The Interest-Only mortgage is a periodic payments are only sufficient to cover the interest due.

2.)     The ARM is a variable rate or payment mortgage that periodically adjusts to a specified index.

3.)    The Origination fee is the loan charges designed to cover the lender’s costs of processing the application and loan.   

4.)    The APR is the monthly interest payment.

5.)    The RAM targets older, retired people who already own a home free and clear of any mortgage and who need of income.

6.)    This is a residential mortgage structure whose payments begin below the fixed-rate, fully amortized mortgage payments but are systematically increased on a predetermined basis until later years the exceed the fully amortized payment.

                        A. Partially Amortizing Mortgage
                        B. Graduated Payment Mortgage
                        C. Interest-Only Mortgage
                        D. Negative Amortization

7.)  The __________ mortgage helps manage risk, this form was revived not as a means to  manage risk but rather as a method to reduce the size of mortgage payments and make loans affordable to a greater number of potential home buyers.

A. Interest-Only
B. Amortizing
C. Graduated Payment
D. Partially Amortizing

8.)  When making a choice between options, if for any given option, a weakness in some characteristics can be compensated for by strengths in other characteristics.

                  A. Commensurability
                  B. Characteristics
                  C. Building Envelope
                  D. Situs

KEY
1. T
2. T
3. T
4. F
5. T
6. B
7. A
8. A

Real Estate Agent Interview

 

Q.  How did you get into the field of Real Estate?

                A. I had purchased two houses and got to know some basics of the business during those transactions. I found it to be interesting and something I could see myself doing. A short time after that I had a girlfriend that was in the mortgage industry who urged me to take the classes and real estate exam. Within a few months I had my real estate license. I quit my secure job of 8 years and haven't looked back.

Q. What was the biggest surprise you found getting into Real Estate?

                 A. How many agents there are and how lazy they are. I also quickly discovered if you don't prospect for buyers or sellers consistently and learn how to close them you could easily go months without a paycheck.

Q. If you could give one piece of advice to people looking to get into Real Estate, what would it be?

                A. I would say to find a coach or mentor that has similar views and results you wish to achieve and follow their advice, and don't be scared to hear no from a potential client. You will hear ten times more "no's" for every one "yes" when prospecting for clients.

Q. If you could, would you pick the same career again?

                A. Yes. It is very self-driven as far as the results and income you receive. There really is no cap to the income you can receive. The harder you work and the more skilled you become at converting prospects into closings, the more you get paid.

I decided to interview an up and coming real estate agent in the Sacramento area, Josh Blackwood. Josh is a residential real estate agent working for Re-Max.

When I first started my interview with Josh, I made my questions very generalized because I wasn’t sure what I wanted to know about his experiences in the real estate world. However, by the end of our interview, I realized that I was just unsure of how my future in real estate would really be, and wanted reassurance of some kind of how someone got into the business themselves, and whether they looked back with any regrets or not. Talking with Josh really showed me that to get into real estate you have to be self-driven, ethical in all actions and sales you make, and love the profession.

Ch. 13 Questions by Jazmin Padilla

Ch. 13 Questions by Jazmin Padilla

1. Fifty to Sixty percent of a person's gross income should be committed to the mortgage of a home. 

2. A graduated payment mortgage (GPM) is a good option for someone who expects to increase their income each year as they progress in their career, an example being a recent college graduate. 

3. If a homeowner sells his or her home before positive amortization has offset the negative amortization, the seller owes more then they had initially borrowed. 

4. The intended purpose of the Adjustable rate mortgage (ARM) was to shift the risk from the lender to the borrower. 

5. The size of the loan depends on:

    a. price of the targeted home

    b. the down payment amount

    c. the origination fee

    d. both a and b

6. The purpose of a points is to increase the borrowers mortgage payments. 

7. The _____is the lenders true yield once points and other fees are calculated. 

    a. APR

    b. MRR

    c. Mortgage rate

    d. none of the above

8. If one strong characteristic can offset the weakness of another characteristic, then the concept of ______ should be used.

    a. commensurability

    b. heuristics

    c. recency

    d. RAM

Answers:

1. F

2. T

3. T

4. T

5. D

6. F

7. A

8. A

Chapter 12 Questions by Jazmin Padilla

Chapter 12 Questions by Jazmin Padilla

1. Real Estate appraisers base property values on the ________.

     a. Value in use

     b. Market rate

     c. Investment value

     d. Value in exchange 

2. One of the first four steps of the prescriptive appraisal process includes:

     a. City/Regional Analysis 

     b. Highest and Best Use Analysis

     c. Comparable Data Collection

     d. none of the above

3.  The _______ is also known as the market approach.

     a. Income approach

     b. Sales comparison approach 

     c. Cost approach

     d. Depreciation approach

4. One of the biggest concerns of the cost approach is its insensitivity to the time lags associated with real estate development and construction. 

5. The sales comparison approach is seen as the most authoritative and accurate approach for property appraisals. 

6. General data collection is essential during the descriptive appraisal process. 

7. Asset managers are responsible for the day to day operations of the property. 

8. The most common listing or brokerage agency is known as the exclusive right to sell. 

Answers:

1. D

2. A

3. B

4. T

5. T

6. F

7. F

8. T

Chapter 12 Questions

Chapter 12 Questions
By Michael McMinassian

1.     Depreciation in context to the appraiser is the a decrease in value suffered by a property because of diminished ability to serve the needs of its users.

2.     The Capitalization is the process of converting an income stream into a lump sum estimate of present value.

3.     Anchoring is a problem solving method that you make to tell an appraiser early about a reference point of the property value.

4.     A dual agency is when an agency exists when a broker represents both the buyer and the seller of a transaction.

5.     A buyer’s broker is a real estate broker representing the seller in a agent principle fiduciary capacity.

6.     The ___________is a value ratio calculated from historic sales as the sales price divided by monthly generated rent and is similar to the gross income multiplier.

a.     Gross Rent Multiplier

b.     Net Operating Income

c.      Adverse Rent Multiplier

d.     Capitalization Rate

7.     These approach is justified in paying more for a property than the cost of buying a similar site and constructing replacement improvements.

a.     Cost Approach

b.     Sales comparison Approach

c.      Income Approach

d.     Depreciation Approach

8.     This means the value is derived from the attractiveness of a property to others who would be willing to trade other assets such as money, to obtain the rights to it.

a.     Value in exchange

b.     Value in use

c.      Value by sense

d.     Value

Key
1.T
2.T
3.T
4.T
5.F
6.A
7.A
8.A