If you are an investor, you know what capital gains are, so they need very little explanation to most. But considering that some may be investing, or planning to invest/or sell an investment property for the first time, I will provide a simple explanation and crunch some numbers.
When you buy a property and sell it for a profit, or more than you paid for it , then you had a capital gain. If you held it longer than a year, then it is considered a Long Term Capital Gain, and thus subject to a more favorable tax rate.
Number crunching example: Property purchased for $100,000 in January 2008 and sold after January 2009 for $160,000, is treated as a long term capital gain. The $60,000 you made will be subject to a 15% tax, or $9,000.
I am going to ignor ACR ( accellerated cost recovery) and it's effects, to make this a single focus of the Capital Gain Rate. Ask your accountant to help you if you have an investment, and are making plans to sell.
Most of you have heard in the news that President Obama has a tax plan which will effect the Capital Gains rate. When Ronald Regan was President, the rate was 28%, during the Bush administration it was cut to 15% and is still in effect until the end of 2010. President Obama's is planning to raise it to approximately 23%. This may not be the same rate for all tax brackets, so see your tax advisor for your specific set of circumstances.
I have read about some experts suggesting that there will be a huge sell off of investment properties before the rate expires. It sounds logical......maybe. If this is the case, then that may mean taking a lower price/profit, to get it sold, to avoid paying 8% more in tax on the profit.
Let's crunch some of those numbers so you can see the opportunity, or insanity of such a move.
If you sold your property, for $150,000 at the end of 2010, to take advantage of the 15% capital gains rate, then the tax would be $7,500. (ignoring ACR) If you waited until after the tax change, and sold later at the new tax rate, then it would cost you $11,500 or $4,000 more in taxes. But consider that many others may be selling at that time, and you only got $150,000 when it was actually worth $160,000. If you waited, your gain may have been $60,000 and your tax under the new rate would be $13,800. Look at the net cash to you. Selling quickly made you $50,000 - $11,500 = $38,500 net. Selling later, (possibly) $60,000 - 13,800 = $46,200 net. You might have made more, when less people were selling, if you ignored the tax increase. I don't have a crystal ball, and cannot predict the effect.
I don't think anyone can predict the real effect of a tax rate increase on your situation. Bigger or smaller numbers may change the results. Just consider that you should sell properties based on a plan, or the market, or your needs, or the value of your property, and not to chase a tax rate.
Thursday, July 29, 2010
Friday, July 16, 2010
New Location - Lease versus Own
Okay, we have done all our homework, considered all the associated costs to move your business. Together we have found the ideal location. Now we need to decide if you are leasing or buying the building.
Maybe you are not sure if you have the ability to buy the building. There is a substantial down payment to consider. But remember, there is also a first and last lease payment and damage deposit due the landlord. Think about the lost cost of leasehold improvements, which become the improved value of the landlords property. Think about all the upfront out of pocket. They may be more similar than you first thought.
There are two different methods when calculating lease versus own. They are, Present Value and Internal Rate of Return. We will compare the after tax cost of leasing versus owning using Present Value. If I were helping you, I would calculate both, but for illustration here, I am only providing PV. I have spreadsheets to assist with these calculations, using both methods, and would provide them to your accountant for their verification. There are a lot of assumptions in any calculations like this, so you need the independence of your accountant or attorney to look closely at all the numbers I provide to see if they fit your specific situation.
With the Present Value method, we add all the related income and expenses for each line item in leasing or owning and come to a bottom line, cash flow after tax. Using those numbers, we then select a PV calculation rate, (which equals what you would receive in an after tax investment, or perhaps the after tax cost of capital) We then reduce the after tax cash flow from leasing and owning to its present value. Remember, the cost of ownership, also comes with selling the property at the end. This includes some of those assumptions I was speaking of earlier. We have to assume that we would sell at some point, and include the estimated cost and estimated appreciation associated with the sale.
Whichever method gives us the lowest present value ( leasing or owning ) will be the one that we should select. If you are confused, let me do it for you. Call me.
Maybe you are not sure if you have the ability to buy the building. There is a substantial down payment to consider. But remember, there is also a first and last lease payment and damage deposit due the landlord. Think about the lost cost of leasehold improvements, which become the improved value of the landlords property. Think about all the upfront out of pocket. They may be more similar than you first thought.
There are two different methods when calculating lease versus own. They are, Present Value and Internal Rate of Return. We will compare the after tax cost of leasing versus owning using Present Value. If I were helping you, I would calculate both, but for illustration here, I am only providing PV. I have spreadsheets to assist with these calculations, using both methods, and would provide them to your accountant for their verification. There are a lot of assumptions in any calculations like this, so you need the independence of your accountant or attorney to look closely at all the numbers I provide to see if they fit your specific situation.
With the Present Value method, we add all the related income and expenses for each line item in leasing or owning and come to a bottom line, cash flow after tax. Using those numbers, we then select a PV calculation rate, (which equals what you would receive in an after tax investment, or perhaps the after tax cost of capital) We then reduce the after tax cash flow from leasing and owning to its present value. Remember, the cost of ownership, also comes with selling the property at the end. This includes some of those assumptions I was speaking of earlier. We have to assume that we would sell at some point, and include the estimated cost and estimated appreciation associated with the sale.
Whichever method gives us the lowest present value ( leasing or owning ) will be the one that we should select. If you are confused, let me do it for you. Call me.
Tuesday, July 13, 2010
Moving your business - More cost or profit?
It is one of my underlying commercial real estate philosophies that business owners, do not give one of the most important decisions in their business life the importance it deserves. I mean, the choice of where we locate the business. We have a general idea of where to locate, but have you really thought about all the numbers. Sometimes, overlooking a few can be very costly. I have met business owners whose business location or building is actually hurting their business. If they looked at the whole financial picture, they would be gone already.
If you are considering a new location, here's just one item to consider for example: Will your service or delivery vehicles be closer or further away from their customers? Six additional miles may not seem like much until you crunch the numbers. Six times eight trucks times 600 trips per year adds up quickly. At a reasonable seventy-five cents a mile, that's over $20,000. Also consider an additional twelve minutes per employee per trip. Even at minimum wages, that's about $10,000. Now consider that you moved six miles closer. These become savings or additional profit.
You know your business better than I do, so think about your customers, your employees, your vendors. Can you save money, or improve your service by moving. If so, then it is the right decision.
There are many more factors to consider when we start to look for a new location for you. Not the least among those are lease versus buy. But we can crunch those numbers once we find a place to move and calculate its value to you.
Sunday, July 4, 2010
Would Realtors buy now - July 2010?
I went to a real estate seminar recently and the speaker asked the realtors present, to raise their hands, if they would buy some real estate today, if they had cash to buy. The entire room of realtors, raised their hand.
That should tell you something about this market. Realtors are immersed in it, they live it every day, and despite the media and the problems, every realtor in that room knew there are good properties out there. If you are a buyer with cash you should be looking to make an investment that will make your money work for you.
I hope you are not one of those waiting for prices to go down further before you buy. Instead you should be looking for investment properties that fit your investment profile that are fairly priced now. Waiting for a five percent decrease might lose you ten percent return. We are in a unique market in SW Florida. There are many owner/investor groups who own properties which may only be a very small percentage of their portfolio. Oh yes, we have very wealthy people in our market. They can afford to wait for the market. You have to forget about those owners and find the ones who cannot afford to wait.
Serious sellers are motivated. Interest rates are at an all time low. Properties that are priced right, sell in any market. Buyers with cash should raise their hands, and say you understand the market just like the realtors.
That should tell you something about this market. Realtors are immersed in it, they live it every day, and despite the media and the problems, every realtor in that room knew there are good properties out there. If you are a buyer with cash you should be looking to make an investment that will make your money work for you.
I hope you are not one of those waiting for prices to go down further before you buy. Instead you should be looking for investment properties that fit your investment profile that are fairly priced now. Waiting for a five percent decrease might lose you ten percent return. We are in a unique market in SW Florida. There are many owner/investor groups who own properties which may only be a very small percentage of their portfolio. Oh yes, we have very wealthy people in our market. They can afford to wait for the market. You have to forget about those owners and find the ones who cannot afford to wait.
Serious sellers are motivated. Interest rates are at an all time low. Properties that are priced right, sell in any market. Buyers with cash should raise their hands, and say you understand the market just like the realtors.
Wednesday, June 23, 2010
Reaching a Target Yield
How many times have you looked at an investment in Commercial Real Estate, and liked it, but it was only showing a 6% CAP. I am going to show you how to go after the property you want at a price that will get the yield you need for the risk.
Face it, in 2005, all of us were willing to take a 6% return on a commercial properties, because, we perceived there was very little risk, and we knew that the potential for appreciation would make it worth the wait and risk. In 2010 we are not wasting our time on 6%, 7% or even 8%. If it is not returning 9% or better, investors will not touch it. I have seen some really good TRIPLE NET Leases recently at 9% or better, on large publicly traded company properties. These are held by groups who have to sell them to raise quick cash so they can keep other properties, or acquire even juicier properties. So it is a good time to be looking, if you have cash.
Let's crunch some numbers to see how it works. If an owner lists a property for $1,000,000 promising a 6% cap, then they are telling you that you will 'net' $60,000 per year on this investment. The current owner calculated the property's expected net income, then backed into the value, dividing the net, by the cap. $60,000 divided by 6% = $1,000,000. Some owners can afford to sit on properties until the 6% market returns, but those that can't will be willing to give you your yield.
To calculate the price to pay, to get your yield, just back into it. Net Operating income, divided by desired yield equals the initial investment price, or stated another way, the Net Present Value of this property to YOU.
Divide NOI $60,000 by Desired yield 9% = $666,666.67. So instead of paying one million, you offer what it takes to get the yield to 9%, which is $666,666.67. Whenever I write an offer for a buyer for a substantial price reduction under what the owner is offering, I accompany the offer with my calculation and explanation, so the current owner knows where we got the number and what yield we need to make this investment. It keeps the owner from trying to counter back closer to their listing price, because they see quickly what we want, why and that we know what we are doing.
Try it yourself. It works. Or call me and let me crunch the numbers for you.
Face it, in 2005, all of us were willing to take a 6% return on a commercial properties, because, we perceived there was very little risk, and we knew that the potential for appreciation would make it worth the wait and risk. In 2010 we are not wasting our time on 6%, 7% or even 8%. If it is not returning 9% or better, investors will not touch it. I have seen some really good TRIPLE NET Leases recently at 9% or better, on large publicly traded company properties. These are held by groups who have to sell them to raise quick cash so they can keep other properties, or acquire even juicier properties. So it is a good time to be looking, if you have cash.
Let's crunch some numbers to see how it works. If an owner lists a property for $1,000,000 promising a 6% cap, then they are telling you that you will 'net' $60,000 per year on this investment. The current owner calculated the property's expected net income, then backed into the value, dividing the net, by the cap. $60,000 divided by 6% = $1,000,000. Some owners can afford to sit on properties until the 6% market returns, but those that can't will be willing to give you your yield.
To calculate the price to pay, to get your yield, just back into it. Net Operating income, divided by desired yield equals the initial investment price, or stated another way, the Net Present Value of this property to YOU.
Divide NOI $60,000 by Desired yield 9% = $666,666.67. So instead of paying one million, you offer what it takes to get the yield to 9%, which is $666,666.67. Whenever I write an offer for a buyer for a substantial price reduction under what the owner is offering, I accompany the offer with my calculation and explanation, so the current owner knows where we got the number and what yield we need to make this investment. It keeps the owner from trying to counter back closer to their listing price, because they see quickly what we want, why and that we know what we are doing.
Try it yourself. It works. Or call me and let me crunch the numbers for you.
Wednesday, June 16, 2010
Commercial Real Estate Owners, It's time to sell
The market in Naples has adjusted itself for the desirability factor of our subtropical upscale location. The buyers are not who made our prices shoot through, and past the ceiling of reasonableness. It was everyone who took advantage of the increased interest by over extending and overbuilding as if there were no end to the increases.
If you have a commercial property for sale, it's time to cut the price and let it sell. Allow someone else to make a profit too. Take your profit and run. No need to be greedy, or hold out for an even bigger profit. It is not a bad thing to double your money. If you have done that, leave some future growth and profit for the next investor. Even if you only made thirty percent. Try getting that in the stock market.
The problem with most commercial properties that are still sitting on the market for these past twelve months is that owners are worried that they are leaving profit on the table. Trust me, you will never know when the right time has arrived. When the market hits bottom, it will not notify you. Drop your price so you can sell what you have now and move on.
The commercial market has plenty of buyers. Lots of them now are searching for 'steals.' But there are legitimate owner/users out there who may need your property for their business. Allow them some profit growth room.
Take your small profit, all the way to the bank, or let me help you find another. It's a great time to be a cash buyer, and even better to be a seller.
If you have a commercial property for sale, it's time to cut the price and let it sell. Allow someone else to make a profit too. Take your profit and run. No need to be greedy, or hold out for an even bigger profit. It is not a bad thing to double your money. If you have done that, leave some future growth and profit for the next investor. Even if you only made thirty percent. Try getting that in the stock market.
The problem with most commercial properties that are still sitting on the market for these past twelve months is that owners are worried that they are leaving profit on the table. Trust me, you will never know when the right time has arrived. When the market hits bottom, it will not notify you. Drop your price so you can sell what you have now and move on.
The commercial market has plenty of buyers. Lots of them now are searching for 'steals.' But there are legitimate owner/users out there who may need your property for their business. Allow them some profit growth room.
Take your small profit, all the way to the bank, or let me help you find another. It's a great time to be a cash buyer, and even better to be a seller.
Sunday, June 13, 2010
The Perfect Storm
NOW IS THE TIME TO FINANCE COMMERCIAL REAL ESTATE! June 8th, 2010. The SBA lowered their interest rate to 5.29% and will accept as low as 10% down on commercial real estate.
This is the lowest it has ever been and probably the lowest it will ever be! If you are on the fence about purchasing business assets, commercial real estate OR purchasing businesses that include commercial real estate, PLEASE, consider the SBA. Call me and I will introduce you to a lender. This is truly unbelievable.
Banks and other lending institutions offer a number of SBA guaranteed loan programs to assist small business owners. While the SBA itself does not make loans, it does guarantee loans made to small businesses by private and other institutions.
The SBA (Small Business Administration) offers guarantees on loans for small businesses or entrepreneurs who have cash flow but do not have the necessary principal to obtain a loan for expansion or for a startup. The SBA has many different types of guarantees that they will give to private lenders, each has its own interest rate.
7(a) Loan Program:
This is SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It is designed for start-up and existing small businesses, and is delivered through commercial lending institutions.
CDC/504 Loan Program:
This program provides long-term, fixed-rate financing to acquire assets (such as real estate or equipment) for expansion or upgrade to your business. It is designed for small businesses needing financing against their assets. and is delivered by CDCs (Certified Development Companies) which are private, non-profit corporations set up to contribute to the economic development of their communities.
Business owners in search of small business loans have a government agency working on their behalf and that is the SBA. They encourages local banks to lend money to local businesses.
If you apply for a small business loan at a bank, the bank will check your application and supporting documentation to see if you qualify for a small business loan. If you do not qualify for a regular small business loan, the bank can check your application against the SBA guidelines. If your application meets the guidelines set by the SBA, the bank can offer you a loan that is guaranteed by the SBA. This means that in the event the business owner defaults on the small business loan, the SBA will pay the bank some money to help offset some of the loss it could experience.
One thing to know, the SBA will require you to commit to unlimited personal liability for the loan, but if it helps you grow and or succeed, then it may be worth giving that promise to the SBA.
It is truly the perfect storm in Commercial Real estate. Prices are coming down, and there are cash stressed owners willing to offer a deal to get some cash. Combine that with this news and you have all the notice you need that it's time to get serious about a business purchase or commercial real estate.
Let me crunch some numbers for you. I can run a discounted cash flow analysis, with financing , against your investment to show you if it will cash flow with the reported earnings and SBA loan. Everything is coming together for you, and the wind is starting to blow. Don't wait this storm out.
This is the lowest it has ever been and probably the lowest it will ever be! If you are on the fence about purchasing business assets, commercial real estate OR purchasing businesses that include commercial real estate, PLEASE, consider the SBA. Call me and I will introduce you to a lender. This is truly unbelievable.
Banks and other lending institutions offer a number of SBA guaranteed loan programs to assist small business owners. While the SBA itself does not make loans, it does guarantee loans made to small businesses by private and other institutions.
The SBA (Small Business Administration) offers guarantees on loans for small businesses or entrepreneurs who have cash flow but do not have the necessary principal to obtain a loan for expansion or for a startup. The SBA has many different types of guarantees that they will give to private lenders, each has its own interest rate.
7(a) Loan Program:
This is SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It is designed for start-up and existing small businesses, and is delivered through commercial lending institutions.
CDC/504 Loan Program:
This program provides long-term, fixed-rate financing to acquire assets (such as real estate or equipment) for expansion or upgrade to your business. It is designed for small businesses needing financing against their assets. and is delivered by CDCs (Certified Development Companies) which are private, non-profit corporations set up to contribute to the economic development of their communities.
Business owners in search of small business loans have a government agency working on their behalf and that is the SBA. They encourages local banks to lend money to local businesses.
If you apply for a small business loan at a bank, the bank will check your application and supporting documentation to see if you qualify for a small business loan. If you do not qualify for a regular small business loan, the bank can check your application against the SBA guidelines. If your application meets the guidelines set by the SBA, the bank can offer you a loan that is guaranteed by the SBA. This means that in the event the business owner defaults on the small business loan, the SBA will pay the bank some money to help offset some of the loss it could experience.
One thing to know, the SBA will require you to commit to unlimited personal liability for the loan, but if it helps you grow and or succeed, then it may be worth giving that promise to the SBA.
It is truly the perfect storm in Commercial Real estate. Prices are coming down, and there are cash stressed owners willing to offer a deal to get some cash. Combine that with this news and you have all the notice you need that it's time to get serious about a business purchase or commercial real estate.
Let me crunch some numbers for you. I can run a discounted cash flow analysis, with financing , against your investment to show you if it will cash flow with the reported earnings and SBA loan. Everything is coming together for you, and the wind is starting to blow. Don't wait this storm out.
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