MUST KNOW FOR REAL ESTATE EXAM 3

Home Equity Loans

Available once we already own the home

Second mortgages, used to finance home improvements and other purchases

Homeowners borrow against the accumulated equity in the home

How much can one borrow in home equity loans

limited to total LTV

Equity

= home market loan - loan balance

HELOC

Borrow —> Pay back —> borrow again

Use for unexpected/occasional big expenses

What is a HELOC and how does it work

A home equity line of credit lets you borrow, repay, and borrow again. up to a set limit (like a credit card)

You pay interest only on the outstanding balance

Often used for unexpected or large expenses

Requires minimum monthly payments, often a % of the balance

Usually has an adjustable interest rate

Lenders often provide special checks to draw funds as needed

Key features of HELOC

Open-end credit: borrow —> repay —> borrow again

Interest only on what you use, like a credit card

Credit limit set at opening, money drawn as needed

minimum payment: often a % of outstanding balance —> long repayment term

Variable interest rate

Access funds via special checks provided by the lender

What kind of loan is HELOC?

Adjustable rate

Adjustable rate mortgage

a home loan with an interest rate that fluctuates based on a market index plus a fixed margin, allowing payments to increase or decrease and sharing interest rate risk between borrower and lender

Can we write off the interest on our HELOCs? On our taxes?

Yes we do. we can write off the interest on our taxes (deduct)

Tax advantages of HELOC

Interest can be deductible on one’s U.S. income tax return, and on many state income tax returns, for home mortgage loans used for home acquisition or improvement, including a home equity loan

1 point =

1% of loan amount

Which document dictates the future use of a property and all the tenants and owners must adhere to it?

Decs/CC&Rs (covenants, conditions & restrictions)

Restrictive Covenants

Impose the limits on the uses of land

Commission number and calculate how much we are taking home

Step 1: Total Commission = Sale Price × Total Commission %
Step 2: Your Side = Total Commission × Your Side %
Step 3: Take-Home = Your Side × Broker Split

• Sale Price = $500,000

• Total Commission = 6% (3%/3%)

• Your Side = 50%

• Broker Split = 50%

Take-Home Pay = $500,000 × 6% × 50% × 50% = $7,500

3 Cs of residential mortgage underwriting

Collateral, Creditworthiness, Capacity

Collateral

Property pledged as security for a debt

Creditworthiness

FICO credit score, higher score = lower interest rate

Capacity

Ability to pay

Calculate Loan to Value (LTV)

(loan amount/purchase price) x 100

Loan =

Purchase Price - Equity

Purchase Price =

Equity + Loan

What are the conditions that the REITs must have in order to be a REIT

at least 100 shareholders

75% of assets must be RE, cash, or government securities

75% of gross income must come from RE assets

90% of REIT taxable income must be paid out in dividends each year

REIT (Real Estate Investment Trusts)

a company or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT)

mutual funds for investing in RE

REITs are distinguished by

specialization

• geographically (by region, state, or metro area)

• property type (retail, industrial, office, apartments, ect.)

General Partnership

Flow-through taxation

Unlimited liability for all equity holders

Limited Partnership

Flow-through taxation

General partners: Unlimited liability

Limited Partners: Limited liability

C Corps

Double taxation

Limited liability for shareholders

S Corps

Flow-through taxation

Limited liability for shareholders

LLC (limited liability company)

can choose flow-through or corporate taxation (corp pays income tax)

limited liability for members

Tenancy-in-common

not a taxable entity

Each co-owner liable only for their share of property ownership

Flow-through taxation

owners, not the business, are taxed on profits and distributions

profits and losses flow through to the owners, who report them on their personal tax returns

Double taxation

corporation pays tax on its profits, and shareholders pay tax again on dividends they receive

Unlimited liability

every partner is personally responsible for all of the partnership’s debts and obligations

limited liability

owner’s personal assets are protected

they can only lose what they invested

What drives the choice of ownership?

taxes and liability

Phase 1 - Recovery

Declining vacancy

Rents start to increase

No new construction

Phase 2 - Expansion

Declining vacancy

Rents increasing

New construction

Phase 3 - Hypersupply

Increasing vacancy

Rents start to decrease

New construction continues

Phase 4 - Recession

Increasing vacancy

Rents decreasing

Completions only

When to buy and sell based off economic clock

Buy at the bottom of the cycle, when below replacement cost, and sell at/near peak of the cycle, above replacement cost

Buy: late recession and early recovery

Sell: peak expansion and early hyper-supply phase

LIHTC (low income housing tax credit)

Federal program giving tax credits to developers to build affordable rental housing

Credits are allocated by states and claimed over 10 years

Can you identify the 3 key interests and property rights?

Possession (right to occupy and use the property)

Use (the right to control how the property is used)

Conveyance (the right to sell, lease, transfer, or otherwise dispose of the property)

we make money on the

buy not the sell

buying and selling doesn’t give u any equity

bc you need it for 5 year (when principal payments increase) (amortization is slow in the beginning)

compound interest is the eighth wonder of the world. He who understands it, earns it.. he who doesn’t… pays it”

einstein

Cap rates

• A metric that measures the rate of return on a property based on its net operating income (NOI) relative to its purchase price

• Indicates the potential return of a property, independent of financing.

Used to compare different investment properties

Cash on Cash

• Aka equity dividend rate

• Calculates annual return on the equity portion of investment 

• it measures the annual pre-tax cash flow from an investment as a percentage of the cash you invested

• Shows how effectively your invested cash generates income.

Hotelling’s model of spatial competition

Firms tend to cluster together to capture the largest possible number of customers
(at the beach, ice cream cart goes to the middle no competition, but with competition, end up both being in the middle bc want the most customers. )

Socially Optimal Solution

Arrangement that maximizes benefit for all consumers
(at the beach, one vendor in the center of the south half, one vendor in the center of the north half. customers walk to the closest cart (no more than 1/3 mi, and both vendors sell to half of the beachgoers)

Nash’s Equilibrium

Where no competitor can improve their outcome by changing strategy
(both vendors end up back in the middle of the beach because they keep trying to outsell each other by moving towards the center of the beach where they can get the most customers) (but this is not the socially optimal solution)