Real Estate Math and Investment

Section

640 acres, more or less; 43,560 square feet per acre [P1-U4]

Two main factors affecting appreciation

Inflation and the property's present and future intrinsic value [P1-U5]

Installment sale

Allows an investor to defer taxes; income tax is paid only on the portion of the gain received in any year [P1-U5]

Tax-deferred exchange

Exchanging property for another of equal or greater value defers tax on the gain; total deferment only if no cash or other incentive (boot) is received [P1-U5]

Delayed exchange timeline

Identify the replacement property within 45 days and take title within 180 days of relinquishing the original property [P1-U5]

Depreciation

Allows an investor to recover the basis of an asset through tax deductions over its useful life; only improvements, not land, may be recovered [P1-U5]

Tax credit vs. tax deduction

A credit directly reduces the tax due; a deduction reduces the income on which the tax is computed [P1-U5]

Discount points

Charged at closing when the loan's interest rate is below the yield an investor requires; one point equals 1% of the loan amount and is prepaid interest [P1-U8]

Calendar year proration

Divide the yearly charge by 365 days (366 in a leap year) to get the daily charge, then multiply by the actual number of days in the proration period [P1-U9, P4-U10]

Statutory year proration

Divide the yearly charge by 360 days (the banking year: 12 months of 30 days) [P1-U9, P4-U10]

Prepaid expense items

Items prepaid by the seller but not fully used up (e.g., prepaid insurance); the buyer owes the seller for them at closing [P1-U9]

Who usually pays recording fees?

Buyer pays recording fees for the deed and for the deed of trust; seller pays recording fees to clear defects and obtain releases [P1-U9]

Loan-to-value ratio (LTV) formula

Loan amount ÷ the lesser of the sales price or the appraised value = LTV [P2-U2]

Value formula (income approach)

Net operating income (NOI) ÷ capitalization rate = value [P2-U3]

Gross rent multiplier (GRM)

Sales price ÷ gross annual rent; an informal version of the income approach used for single-family homes not usually rented but could be, and for smaller residential income properties [P2-U3]

Property manager's first step after signing the agreement

Draw up a budget of income and expenses (estimated variable and fixed), including agreed major renovations; combined with the building's condition and neighborhood rent patterns, it forms the basis for setting rental rates [P2-U9]

Debits and credits at closing

Debit (give): a charge the buyer or seller must pay at closing. Credit (receive): an amount entered in favor of the buyer or seller. In most instances, a debit to one party is a credit to the other [P4-U10]

Who owns the day of closing

In most states, charges are prorated as of the date of closing, with the seller responsible for the date of closing [P4-U10]