One of the most hotly debated topics I discuss with my clients is the concept of using a loan to assist in a purchase. The concept of using other people’s money in order to finance a purchase is called leverage….and there’s quite a few reasons why this topic is debated so frequently. Some of my clients are either in their later years near retirement and don’t want the responsibility of a mortgage payment. Some of them want to see a higher return and maybe don’t want to tie up all their cash to buy the type of property their interested in. Some don’t want a mortgage so they can have full control in case they do decide to sell later. Some just want to spread their investment around so it’s not tied up in one single project. I’m going to give you a quick rundown of what I personally feel is a responsible way to look at leverage…
As I discussed in my “Investing Terms Part 2” video, Net Present Value — or NPV — means to convert all the future cash flows into today’s dollars. Which even for me is still a bit of a confusing way to understand it. For a quick recap on how we calculate this figure, let’s look at a simple example.
When it comes to investing, some people prefer stocks. Other prefer bonds. And of course, there are those that prefer real estate. One common point I hear from stock traders is the fact that they would LOVE to buy real estate right now but they don’t want to sell their stocks. Maybe they have Apple and Google stocks? Maybe their stocks are paying good dividends. Whatever the reason is, they just don’t want to let it go, which is more than understandable! I wouldn’t want to either! But what if there was a way that you could still keep the appreciation from the stock, AND the dividend, but BORROW against it to fund the purchase of a property? I’m going to give you the basic overview of how this can be done with a securities based loan.
Bankruptcy…by just saying it some people feel ashamed. But did you know that in some circumstances bankruptcy can stall a foreclosure on your property? It can even be used if you owe more than what the property is worth. Of course, each state has its own set of laws with regards to foreclosure, but bankruptcy is federal — it’s rule is universal in each of the 50 states. I’m going to give you some information in regards to how some of my clients…even how some of my family and friends — have used bankruptcy to stall the foreclosure of their property.
If you own your own company, whether you are expanding your operations or simply staying where you are, one question has likely come up. Is it better to own our own space or lease it? With prices being the way they are, it might very well be the best time to buy your own real estate. However, owning MIGHT not be the best solution depending on what some of those intrinsic answer turn out to be. Why don’t we look at a few well-known brands to see what their lease v own model is…Starbucks and Chevron.
A Deferred Sales Trust is a financial strategy used by property owners when they dispose of their assets, usually because they can’t – or don’t want to – complete a 1031 exchange. It basically takes the concept of something that is very familiar with even novice investors. The concept of the seller carry back — or seller financing…that is when the seller has equity in a property and acts as the lender for the new buyer. The buyer then makes payments to the former owner as if they were the bank.
One type of service I offer is commonly called “Site Selection”. It’s where I use tools that analyze which location, or locations are best for a client’s place of business. This is all based on a multitude of factors including demographics, household incomes, lifestyle profiles and traffic counts — just to name a few – of the subject area. The subject area can be a 3 mile radius, a particular city or county or it can even be determined by a 10 minute drive time map.
No one can really tell you with absolute certainty what mortgage rates are going to be, but everyone’s going to try. Instead of listening to the media and every different news article try to make their predictions, how about I show you a simple way to determine where *SHORT* term rates are likely going?
A very common question I get from my clients is in regards to how they should hold title. Granted, I’m not an accountant or attorney, so I can get legal or tax advice, but I can give real estate guidance & opinions. If you’re single, you could always hold title as an unmarried or single person. Then of course there’s a few different ways to hold title when you’re married, such as community property or joint tenancy.
Living in the San Francisco Bay Area, I must admit I am a little biased on one issue. Be it from California, Berkeley or even San Francisco, we are advocates for using green technology. If it saves the earth or uses less electricity, these jurisdictions are for it. But are we getting ahead of ourselves? Are these huge pushes for “being green” really even worth it? Personal bias aside, I’m going to give you the facts on what’s happening with green technology, and why you likely SHOULD be acting now…not because it saves the earth, but simply because it can save you MONEY.
There’s a small niche market for a certain types of investors. The types of properties in this niche market are called Value Add properties, and these investors usually have three things. A great deal of cash…a sophisticated team including their real estate broker and contractors, and the stomach to take some big and risky leaps. Chances are you’ve seen these properties just in your daily commute. The empty office buildings, the rundown apartments and the retail center that USED to be nice but now it’s just so worn out. These are the type of properties that for the right price and the right investor can make huge amounts of income over time…if you have the right stomach for it!
One type of a loan you can get as a buyer or property owner is called a Hard Money Loan. A hard money loan is basically an expensive, short term loan used when typical lower rate financing isn’t available. As of this time, a typical hard money loan will run you about 10-15% or more and will cost anywhere from 4-7 points. Points are an upfront fee of the loan amount. Also, unlike typical financing Hard Money loans are very short term — usually under two years. Let’s look at how much larger a payment would be using a hard money loan vs. typical commercial financing.
Right now, there’s one particular asset class in commercial investment real estate that’s got everyone talking. Apartment’s. Whether it’s a small duplex or a 100 plus unit complex, these assets just seem to be the number one target of investor’s. Of course, there’s a few reasons for this. Financing is extremely favorable, almost more so than a primary residence. Add also the declining vacancy rate and surging rents, it’s no wonder apartments are so desirable. But are we creating a bubble? When everyone’s investing in the same thing – be in tech stocks back in 2000 or single family homes all through 2008 – doesn’t that cause everything to burst after becoming inflated? I’m going to give you a quick rundown as the positives and negatives of buying apartments, so you as an investor can make a more informed decision.
Welcome to part two of my investing terms video. We’re going to continue off of the same scenario we were speaking of in my “Investing Terms Part 1” video, which discussed NOI, Cap Rate and Cash on Cash. As a refresher of what the details were in regards to the property, we were looking at a $2m income property that made $150k NOI. We figured the cap rate was 7.5%, and that if we used leverage our cash on cash return jumped up to 8.775%.
One word you’ll hear thrown around a lot in the property buying process is the word contingency. The American Heritage Dictionary defines the word “contingency” as “An event that may occur but that is not likely or intended”….this might actually get you MORE confused AFTER you’ve discovered what the literal definition is, so let me give you a simple way to think of it. When you’re buying a property, think of it as a race. The start of the race is when your offer is accepted. The end of the race is when the deal is done. Money is exchanged and the deed is swapped. Whenever you buy a property, you practically always put a deposit with a third party escrow or title company. This deposit is refundable, so long as you have contingencies in place.
As I discussed in my “Common Real Estate Tax Benefits” video, one of the key qualities that make real estate investments stand out from other types of investments is the ability to depreciate the actual property — among other deductions. The rule is that if you own an apartment or multifamily building, you can write off the improvements in a straight line method over 27 in a half years. If you own any other type of asset such as an office or warehouse that is then written off over 39 years. Remember, you can ONLY depreciate the building, not the land. The tax code basically says that land never uses its value.
Most people are aware of the fact that when you sell a long term investment such as real estate or stocks, you have to pay taxes. And these taxes don’t come cheap – currently capital gains tax is 15%, and California has its own capital gains tax of 9.3%. To put this in perspective, if you bought a property for $500,000 and years down the line you sell the same property for $1M, on that $500k profit you have to pay $121,500…PLUS your cost recovery recapture. That’s a HUGE chunk of cash. …but did you know there’s a way you can defer that and not even pay a SINGLE PENNY?? It’s called a 1031 Tax Deferred exchange, 1031 exchange for short. A 1031 exchange is when you sell your property and buy another like-kind property within a certain time frame and follow specific rules.
Hi…my name is Davide Pio, and I’m a real estate broker. I love what I do, and I love helping my clients. My specialty is commercial and investment real estate. By this I mean I help my clients – who are usually investors – find properties that match their needs. The thing I love most about my job is the chance to enlighten my clients by showing them possibilities they never knew existed. And if my clients did know these possibilities existed, they were usually unaware of all the details and how best to capitalize on them.
One thing that’s commonly asked of me from non-commercial agents and investors alike is what all the different terms mean. Net Operating income (NOI), Cap rate, Cash on Cash, Internal Rate of Return (or IRR) and Net Present Value, or NPV. Knowing these terms and how to calculate them is essential to anyone who invests in real estate. This is especially true for new investors. If you’re learning or if you’re a bit unfamiliar with where to start, be sure to watch me “How to Start Investing” video. I’m going to explain each one of these the same way I explain it to my clients in my two part video. In this video we’ll discuss Net Operating Income, Cap Rate and cash on cash. In my “Investing Terms Part 2” video we’ll tie in the internal rate of return and net present value. To start off, let’s take a look at a make believe commercial investment property.
In the investment world, there’s many different ways you can invest your money. One would be stocks — You buy a small piece of a company, and if the company does well you’re piece is worth more…maybe it even pays a dividend. Then there are bonds — you along with others pool your money together to loan out to companies and they pay you a fixed rate over the long term. Definitely considered more “stable” than stocks, but with a much smaller return as well due to its safety over stocks. Of course there are gold, commodities such as oil, mutual funds and many others, but today we’re going to be talking about real estate.