QuadReal Investment Group, Inc.- real estate, investing, education

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Some Frequently Asked Questions:

Question 1: What makes real estate such a good form of investment, as opposed to the stock market?

Answer: The great American Industrialist, Andrew Carnegie, is quoted as saying, “ More money has been made in real estate than in all industrial investments combined.” There are five major reasons that investing in real estate is a preferred method of generating wealth. They are:

It is a great inflation fighter.
As a general rule real estate appreciates well.
Real Estate can provide a quick and sustained positive cash flow.
Real Estate provides exceptional tax benefits.
Real Estate can be purchased utilizing other people’s money.

Real estate is both a powerful as well as a relatively liquid form of investment. Our entire seminar is based upon these facts.

Question 2: I am considering buying a single family home in a marginal quality neighborhood. My seller is becoming very pushy and has given me an appraisal he has on his property. The appraisal is 5 months old and in the name of a lender I have never heard of. First off, I don’t know why he has the appraisal, and secondly, would it be a wise decision for me to use the appraisal to determine the value of the property I am considering buying?

Answer: Your seller has the appraisal because he was obviously trying to re-finance his property. For whatever reason, the financing did not take place, and now he is trying to sell it. This can give insight into the motivation level of your seller. The appraised value is the value established by an independent appraiser and was ordered by the lender to substantiate the amount of money that was trying to be borrowed by your seller. As an investor, you should not trust any appraisal offered to you by the seller as justification for his asking price. While such an appraisal may be accurate, you need to investigate other information as well.

Question 3: I keep hearing the term, “loan-to-value ratio”. Can you explain that to me?

Answer: This is a term used by lenders that shows the ratio of the debt to the actual value of the property. If the home is worth $150,000.00 and there is a total projected loan that will have a principal value of $75,000.00, the LTV ratio is 50%. This means that should you purchase this property for $75,000.00, you will automatically have $75,000.00 in equity. Lenders are usually looking for a minimum 80% LTV to feel comfortable making a loan.

Question 4: Is Title Insurance a must when buying an investment property?

Answer: Absolutely! I would never recommend buying any property, either for personal use or investment without buying title insurance. As a matter of protocol, we even order a preliminary title search before we make an offer on a property that we want to buy. Title Insurance is a form of insurance that is designed to protect you, the buyer, against title problems following the acquisition of a property. If you are considering buying distressed properties, by all means spend the money for title insurance.

Question 5: I am buying a single family home subject to an existing mortgage. I am not sure if the mortgage is assumable, but the seller is allowing me to wrap it. I have read the underlying mortgage documents and see that it has a due on sale clause. Is this something I should be concerned with?

Answer: Of course you should be concerned about it. There is a school of thought that you should get your seller to sign an applicable waiver, stipulating that you as the buyer will not be held responsible for paying off the mortgage should the lender opt to enforce the due on sale clause when they learn that the property has been sold. While this may make you and the seller feel good, the lender is not bound by the waiver. If at all possible, I would get the property refinanced as soon as possible or perhaps contact the lender and attempt to assume the loan. Doing business this way is done all the time, but can be quite risky.

Question 6: Real Estate prices in my town have skyrocketed and I can’t quite figure out why. What is making the prices go so high?

Answer: Real Estate goes up in value for any of six basic reasons or combinations thereof. They are:

1. Inflation
2. Improved infrastructure
3. Economic conversion
4. Increased bottom line
5. Capital Improvements
6. Supply and demand

Each of these six factors can cause a rise in the value of some real estate in an area independently of other circumstances that may also have an effect on the value of that same property. Remember, real estate is local in nature and most of the factors that govern its value are often contained within that community, area and sometimes even state.

Question 7: Real estate prices are going up just about everywhere. I have been trying to sell my property for over a year. We have had a lot of lookers but no takers. Everyone has said we are asking too much. Some offers have been downright insulting. Why is our property not as valuable as others in our county?

Answer: Of course without seeing your property, I can not accurately answer your question. However, there are seven reasons or combinations of reasons why some property in one area is not as valuable as others in another area. Each of the reasons can cause a decline in property value, and in concert they can be very destructive. They are:

1. Decline of the neighborhood
2. Adverse effects of the change in the infrastructure
3. Government controls or regulatory changes
4. Supply and demand
5. Lack of proper maintenance
6. Sellers urgency to sell or motivation

Question 8: My wife and I are considering buying our first Junker but the previous owners kept dozens of cats in the home. The smell is unbelievable. How can we eliminate the odors?

Answer: You didn’t state whether you were going to rehab the property or flip it, however my answer would be the same. First off, you MUST get rid of the materials that are holding the smell. You may have to remove the carpet, drapery, paneling, sub-flooring, drywall, etc. Wherever those animals chose to sleep, eat or relieve themselves will present a problem. Get in touch with your local janitorial supply store, explain to them your problem and get them to suggest cleansers, deodorizers, and disinfectants that will properly address the issues. I would do this whether you are keeping the property to rehab or looking to flip it.

Question 9: What is a Section 1031 Exchange? Will it help me avoid Capital gains?

Answer: In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or a business, or for investment. This Section is NOT applicable to personal use homes or property. A tax deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”, while deferring the payment of Federal income taxes and some state taxes on the transaction.

The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer’s investment is still the same, only the form has changed (i.e. vacant land exchanged for an apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a “paper” gain.

Keep in mind, the exchange is not tax free, just tax deferred. When the replacement property is ultimately sold (not as part of another exchange) the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

Question 10: I am a landlord here in Florida. I have a problem tenant. She is a single mother with two young children. She is continually late paying her rent and has accumulated late fees that she does not pay. She has not even paid the rent for last month and this the third week of the next month. There are bags of garbage all around the outside of the house and I know she has two other people living there that are not on the lease. This has been going on for five months. I have had my fill and I want to evict her. Do I have grounds to terminate the lease and evict?

Answer: From what you say, I would think that you have good grounds to evict. But be advised, there is a strict procedure that you must follow in Florida, to assure that you can regain possession of your rental property. Chapter 83, Part II of the Florida Statutes is known as the Florida Residential Landlord and Tenant Act. You can file your own complaint and do so competently if you cannot afford an attorney to do it for you.

You are required to serve your tenant with the proper notices; in this case it will be a 3 Day Notice for Non-Payment of Rent wherein you make a demand for your tenant to bring current her lease agreement, inclusive of all late fees. After 3 business days, excluding weekends and holidays, if your tenant has not responded by either paying the arrearage or properly contesting your demand, you can file your complaint with the applicable county court. If you just want your property back, you will file a simple eviction, wherein your tenant has 5 days, excluding weekends and holidays, to comply or vacate. If you want your property back and the money owed, you will file a hybrid eviction comprised of two counts.
Count I will address the money owed and Count II will address your demand for possession. In this case, your tenant has 5 days to respond to Count I and 20 days to respond to Count II.

Your tenant always has the right to cure the breach, up until the time the court grants you a final judgment. Evictions can be time consuming and you really need to know the statutes and a certain amount of civil procedure. The statutes can be found on the internet by going to www.leg.state.fl.us.

Visit our resource center and order our CD: LANDLORD/TENANT. You will find everything you need to know to initiate your eviction complaint, complete with forms and sample letters required to be sent to the court.