Real estate investing

What will the IRS withhold when a foreign person sells a U.S. property?

15% of the gross purchase price

General or C corporation

A C corporation is the most common form. Elected officers govern the company's affairs, while the designated licensed broker is directly responsible for the real estate transactions. Corporations have a perpetual existence. Legally, corporations can't die until they're dissolved or the state revokes the corporate charter for non-compliance or other reason. Ownership in a general corporation is easily transferable through stock. The corporation must pay corporate income tax to the IRS. The shareholders in a C corporation see double taxation: once at the corporate level, and again at the shareholder level.

A trust is easy to convey

A beneficiary interest in the land can be conveyed without having to go through the formality of a deed. Beneficiary interest is considered personal property, even though the interest conveyed is in real property.

Close Corporation

A close corporation is one in which the company's stockholders, directors, and officers are typically the same people. Officers of a close (also called closely held) corporation typically want to remain a small, tight-knit group. Owners in a close corporation run the company directly, without the oversight of a board of directors. Transfer of stock is more complicated, given the closely held ownership nature.

Corporations

A corporation is an independent legal entity defined by law and owned by shareholders. Most corporations' profits are taxed to the corporation when earned, and taxed to the shareholders when distributed as dividends. Corporations have centralized management and separate liability. Ownership is conveyed through shares or stocks in the company.

General Partnership

A general partnership conveys personal liability to partnership debts that exceed the partnership assets. General partners are jointly and separately liable for these debts. So if you're in a general partnership, and one of your partners absconds with all the partnership funds, leaving behind creditors, you and all other general partners are liable to those creditors. Creditors don't care who took the money—they'll hold all partners responsible.

LLC

A limited liability company (LLC) Tax advantages of a partnership with the legal shield offered to corporations. non-corporate entity. Don't need a board of directors, owners (called members, not shareholders) can participate directly in the management of the company or they may elect officials to handle day-to-day business operations. LLC owners can't be held personally liable

Limited Partnership

A limited partnership always has one or more general partners who assume liability. The other limited partners are limited in their liability and authority by the amount of money they've contributed. To protect their immunity from partnership debts, they may not participate in managing the partnership. Limited partners who do act as a manager may become generally liable.

When Edmund died, he left several properties to his heirs. He owned a grocery store and a campground outright, and a strip mall that was held in a living trust. Which of the properties, if any, did NOT have to go through the probate process after his death?

A strip mall

Salvage value

A structure that's at the end of its useful life may be demolished, but some value can be realized if the improvements are sold.

_____ require the investor to make an effort to turn a profit.

Active real estate investments

Estate in severalty:

Although the name sounds like "several," don't let that fool you. The root word, "sever," means one person owns the property, and all other interests are severed.

Real Estate Syndicates

An investment of money A group enterprise Intended to make a profit, and that profit is solely derived from the management effort of others So if you're a "silent partner" in a group investment whose intention is to make a profit, and you sit back while others manage the project (things like cooperatives or condominium projects), this may well meet the definition of syndicate.

All trusts have three parties: the trustor, the trustee, and the ______.

Beneficiary

Shelly's real estate investment strategy is to look for smaller multi-family properties, fix them up, and rent them out. Her investment strategy most closely matches which of the following?

Buy and hold

Subchapter S Corporation

Corporations may also be Subchapter S (permitted to function as a corporation but taxed as a partnership). Subchapter S corporations don't pay corporate income taxes, so they avoid double taxation. In addition, shareholders in a Subchapter S may deduct losses on their income taxes representing their share of the corporation's losses.

A real estate investor purchased a three-bedroom home at below market price. She then spent $20,000 on improvements and renovations before selling the home at a profit. What type of investment is this an example of?

Fix and flip

Allen picked up remodeling skills from his family's construction business. Which of the following real estate investments is most suited to these skills?

Fix and flip

Active investments

Fix and flip Buy and hold Wholesaling Commercial Development Owner-user

Joint tenancy

Form of coownership, This is defined as equal ownership with undivided rights of possession and requires unity of four separate conditions: All owners must have the same type of interest in the property, all must receive their title at the same time from the same source, all must have the same percentage of ownership, and all must have the right to undivided possession in the property. Joint tenancy includes the right of survivorship, meaning when one joint tenant dies, that person's share automatically goes to the other surviving joint tenant(s). When there are only two joint tenants left, the death of one of the owners terminates the joint tenancy, and the survivor takes title in severalty (sole ownership).

three primary types of corporations that invest in real estate:

General or C Corporation Close Corporation Subchapter S Corporation

Disadvantages of investing

High risk Illiquidity High capital requirements Handling tenants Constant management required

Principles of real estate value

Highest and best use Anticipation Change Competition Supply and demand Conformity Contribution Regression Progression Substitution

Liquidation value

If a property is subject to foreclosure or a rapid sale, liquidation value comes into play. When properties are sold this way, it can affect the value of other homes in the neighborhood.

separate property:

Income earned by either partner before the marriage Capital gains on separate property, such as appreciated stock Any property obtained by gift or inheritance Personal injury damages for a physical injury, even while married (except for lost wages, which are community property

community property:

Income either partner earns during the marriage Property bought with income earned during the marriage Dividends, interest, and capital gains earned on community property Dividends and interest earned on either partner's separate property during the marriage

Fee Simple Absolute Estate (or just Fee Simple Estate)

Inheritable free- hold estate. • Most complete form of ownership and includes the entire bundle of rights in real property

Ancillary Probate

Inheritance of Fee Simple Estates If held in another state

Principle of change

Integration Equilibrium Disintegration Rejuvenation

Segments and submarkets

Investment properties represent a combination of submarkets within the segments of location, property type, and investor strategy.

What is an equity real estate investment trust?

Invests in equity by owning income-producing property.

LLP

Limited Liability Partnerships form of partnership that has no general partners. Partners share the company profits equally and report them as income on their individual tax returns. All partners have an equal say in how the business is managed, and each has limited personal liability for business debts. protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. LLPs tend to be formed by professionals, such as accountants, lawyers, and architects.

What REITs do

Make loans secured by real property. Are owned by stockholders and enjoy certain federal income advantages. Allow small investors to pool their money to participate in larger real estate transactions. Help make financing available for large real estate developments such as apartment complexes, shopping malls, and office buildings.

Types of real estate value

Market value Sales price Investment value Going-concern value Insured value Salvage value Liquidation value Assessed value Value in use

Inheritance of Fee Simple Estates

Must pass through the probate process before legal distribution to heirs.

Why is a trust formed?

Often it's because the beneficiary is a minor or infirmed. Quite often, parents will set up a trust to benefit their offspring. This benefits families and investors by ensuring continuity of ownership over one or more generations. It also means that a designated individual or professional will be entrusted to hold the trust and manage it.

partnership agreement

Partnerships are created by a contract called the partnership agreement. It spells out the ownership terms and contributions. Both limited and general partnerships are taxed as partnerships.

Savvy investor characteristics

Persistent Risk-taker Not impulsive Makes investment decisions using educated analysis Sets clear goals Makes a plan, including an exit strategy Treats investing as a business Selects a strategy and market to focus on Studies the market Cultivates a team of reputable professionals Behaves ethically in all dealings Schedules time to pursue and manage all aspects of their investments

For both homeowners and real estate investors, buying real estate is considered a good way to ______.

Preserve capital

Marcia Weinstein dies, and her property is not held in a trust. Thus, her estate will go through ________ to ensure her property is distributed to her heirs in accordance with her will.

Probate

Reasons to invest in real estat

Profit Preserve capital Tax shelter

Co-ownership:

Property with ownership by more than one person, also called concurrent ownership.

What does a mortgage real estate investment trust invest in?

Real estate debt

Passive investments

Real estate investment trusts (REIT) Limited partnerships Mutual funds with mortgage-backed securities

Securities and Exchange Commission (SEC)

Registers the Mortgage and equity REITs

Strategies and sources for trends in real estate investing

Reliable Internet sources Observe local investing neighborhood Network with appraisers and lenders

Investors often choose real estate because profit is typically earned through _______.

Rental income and resale value

Land trust

Similar to other trusts except that it's formed specifically to hold real estate—real property is the only asset within the trust. Usually the person who establishes the trust (the trustor) is also the beneficiary. owner directs a corporate fiduciary to hold title to the real estate and provides instructions for the management, control, and disposition upon the owner's death. Land trusts generally continue for a specified term, such as 10, 20, or 30 years. The trustee must either extend the trust term when it expires or sell the real estate and provide the proceeds to the beneficiary.

2007-2008 financial crisis

Subprime (higher risk) mortgages and unrealistic expectations were primary factors leading to the financial crisis. Unemployment and recession led to increased foreclosures. Legislation was used to stimulate the economy and help homeowners.

Here's what to remember related to taxation:

Syndicates = tax depends on form; REIT = trust; REMIC = partnership.

Advantages of Investing

Tax sheltering ability Potential for high yields Opportunity to leverage other people's money Personal control over the investment

Insured value

The amount it would cost to replace or rebuild a house that's damaged or destroyed.

Trust privacy

The identity of the trust owner is not made public. This can be helpful, for instance, when an investor wants to acquire several parcels of land without raising inquiries or cause a problem in negotiations for a specific property.

Partnership

The partnership form of business is designed for two or more people who wish to engage in business for profit.

Technical and Miscellaneous Revenue Act of 1988 (TAMRA)

The rules regarding establishing a GRIT The grantor (trustor) must be the only beneficiary of the income from the trust during the term of the trust and must not be the trustee. The trust term must not exceed 10 years.

Value in use

The value of a property as it's currently being used, which may or may not be its highest and best use.

Going-concern value

The value of the property as a functioning business.

Investment value

This gives a buyer information to determine if a property's rate of return will be as expected.

Market value

This is the price the property would be expected to sell for after suitable market exposure, assuming no exceptional factors are influencing the seller's decision, the buyer's decision, or financing availability.

Sole Proprietorship

This is the simplest business type—a business of one owner. The owner operates under their own name or acquires a DBA (doing business as) to operate under a trade name and bears sole responsibility for the risks and rewards of doing business. That includes taxes, because sole proprietorships are taxed as individuals.

Assessed value

This is what the local taxing authority thinks a property is worth.

Tenancy by the entirety:

This type of tenancy also has the right of survivorship. Only available to married couples, this form of ownership also includes unity of time, title, interest, possession, and marriage. Key to this form of ownership is that creditors of one spouse can't attach liens to or sell the interest of the debtor spouse. Only creditors with claims against the couple may attach and sell the interest of the property owned in this manner. Also, one spouse can't transfer interest in the property without the consent of the other spouse. Tenancy by the entirety can't be reduced to tenancy in common or joint tenancy. Such a change of ownership would require divorce, an annulment, or for the couple to amend the title.

A living trust is established to convey property and to ______.

Transfer ownership before death and avoid probate

Tenancy in common:

Type of coownership. Each person is entitled to possession of the whole. If one dies, that person's ownership is inheritable and doesn't necessarily pass to the other owner(s).

Characteristics of real estate as an investment

Uniqueness Immobility/fixity Permanence Longevity Influenced by government policy Slow to respond

Land trust prevents

a bank from accelerating the mortgage note when the property is put into an LLC.

Illiquidity

an inability to convert assets into cash quickly

REITs are companies that own...

and usually operate, income-producing real estate. many types of commercial real estate, including multi-family, warehouses, and retail.

Real estate syndicates

are organizations with many investors who jointly participate in a real estate investment. "silent partner" in a group investment whose intention is to make a profit, and you sit back while others manage the project, your group may well meet the definition of a syndicate. can be corporations, general or limited partnerships, or limited liability companies (LLCs), and different syndicates are taxed in different ways

Joint Ventures

aren't a business structure but are a business arrangement similar to a partnership a temporary organization formed by two or more parties to invest in real estate (or other investments). Each party is responsible for the profits, losses, and costs associated with the project.

How long is the process of probate?

can take up to a year or more before the property is disbursed to the heirs.

irrevocable trust

can't be changed once established until the purpose of the trust is achieved.

Hybrid REITs

combine equity and mortgage REITs get their income from property sales, rent, and interest earned from mortgages and mortgage-backed securities.

Testamentary trust

created according to the terms of the will of a deceased person. often used to establish care for minor children. DONT avoid probate.

Living trust

created during a person's lifetime often used when minor children are involved Property may be placed within the trust for their use in their lifetime or when they reach the age determined by the person who creates the trust.

2 types of trusts are...

discretionary irrevocable

REMTs, aka "Mortgage REITs"

don't buy properties invest in real-estate debt most primarily buy commercial and residential mortgage-backed securities.

real estate mortgage investment conduit (REMIC)

entity used to pool mortgage loans and issue mortgage-backed securities. hold commercial and residential mortgages in trust, and then issue interests of varying classes in these mortgages to investors.

There are two primary types of partnerships

general and limited. Both business types take responsibility for the risks and rewards of the business, but limited partners assume less risk, and receive less reward.

The state of incorporation (certificate or articles of incorporation)

is a document that creates the corporation and serves as the corporation's basic governing document.

Substitution

is a principle that says a property's value is determined by what it would cost to purchase a similar substitute property. This principle is in operation when collecting information on comparable property sales. If two properties in a particular area are very similar to each other, they're also going to share a similar value.

discretionary trust

is one that may be altered or discontinued by any of the parties to the trust.

Contribution

is related to how a change in a property impacts the value as a whole. This isn't the same as the dollar value of the change. For example, adding a restaurant-quality kitchen to an otherwise modest house won't increase the home's value by the amount spent to renovate, but updating the countertops and cabinets might.

Equilibrium

is the period of stable use.

trustee

is the person who carries out the trustor's wishes, manages the trust, and holds the legal title

trustor

is the person who creates the trust.

Integration

is the time period when the property is being developed.

Disintegration

is the time when the property is deteriorating and needs constant upkeep to maintain its viability.

sales price

is what a buyer actually pays for a property. It may be higher or lower than the market value as determined by an appraiser.

Rejuvenation

is when the property is redeveloped with new improvements and often with a different use. This is also known as revitalization.

How does a living trust differ from a living will?

living trust is established to convey property, assets, avoid probate living will created to dictate terms of care in the event the trust maker becomes incapacitated.

grantor retained income trust (GRIT)

method of conveying or granting title to an income-producing property to another, generally a family member usually established for a specified number of years before it becomes the grantee's (the trust beneficiary's). allows for the grantors to retain the flow of income from the property up until the end date of the trust.

Progression

opposite of regression and is also related to conformity. Progression is the bump in value that a lower-value property gets by being near a higher-value property.

Equity REITs

purchase properties. make money primarily from properties' rents. tend to specialize in owning certain building types (such as apartments, regional malls, self-storage, office buildings or hotels).

two major investment choices for REITs

real estate mortgage trusts (REMTs) equity REITs

two kinds of property may exist between a married couple:

separate property (solely and separately owned by one spouse) community property (owned in common and in equal shares by both spouses).

One of the most important reasons to establish a trust is...

that assets within trusts avoid probate, so trusts are used often in estate planning.

beneficiary

the one who benefits from the trust

When sole proprietors want to conduct business, they can use

their own name, or their own name in combination with a trade name. For example, if your name is Jane Smith, you can call your business "Jane Smith, doing business as (DBA) Wonder Woman." You could not do business or hold title to property as "Wonder Woman," or any business name other than your own without also using your name.

A real estate investment trust (REIT)

trust that meets the IRS requirements to avoid the double tax burden imposed on corporate earnings.