Chapter 3 Understanding Financial Statements And Cash Flows Test Bank The Absolute Beauty of Real Estate Investing

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The Absolute Beauty of Real Estate Investing

There are many investment options these days. From cash to treasuries, stocks, bonds, gold, emerging markets, art, start-ups, own business, outstanding debt, etc. The options are virtually limitless and for every type of investment there is a salesperson or two who will share why their chosen investment is the best type of investment. It makes sense that you should be fairly savvy and informed wherever you put your investment dollars. You’ve been saving hard for something, haven’t you? It would be nice to know that you had some sort of control over the outcome of the money spent over the years after your daily efforts.

The sad truth is that most people work hard for their money for years, but are too tired to really put the time and effort into understanding their investment options and strategies and simply pawn it off with a portfolio advisor who could sell their business on a plan or the first decent the person who walks through the door with an investment strategy. Some people actually go out of their way to get a referral from a friend or colleague. The real litmus test is whether someone has ever gone out of their way to tell you about an advisor who really blew them away, and I mean someone who is not related to that person or has a financial incentive to get you involved. There is a subtle but very important difference between someone who is happy with their advisor and someone who will spend half an hour at lunch talking about how great their advisor is. The vast majority fall into the first category, and probably the vast majority of the first category probably tell themselves that they’re happy simply because they don’t want to feel stupid for putting so much trust and trust in their financial future to someone they’re not exactly thrilled with. .

Let’s talk real estate. Some of the outstanding advantages of real estate over other investment options are as follows.

1) It is a tangible substance that can be touched, felt, smelled and is suitable for living,

2) is insured,

3) Is leverage,

4) is amortized,

5) Value can be increased in several ways,

6) Return on investment can be achieved with increased capital and cash flow,

7) The right to buy or sell using inside information is not illegal,

Here’s an example of how you can use all these benefits on one property.

I got a tip the other day about a man who inherited a property through probate but had personal money problems. Well, the real estate was of no use to the man because it was illiquid at the time. He needs money in a few days, and no matter how beautiful this inherited house was, it was actually a burden for the man, simply because one didn’t solve his problem, the other was something else he had to take care of. This is a bit of what we would call inside information. The general public does not know about this man’s situation, nor will it be published in any newspaper, nor do I intend to share this information with anyone, and this is great news for me and completely legal. As Martha Stewart might argue, that’s not how the stock market works.

I did a little research and found out that the house is worth about $175,000. I called this man and explained that I was a real estate investor and had heard that he had recently inherited a property that he might not have any use for and I wanted to see if he would discuss possibly selling the property to me. He said he did and explained the details of the property to me. I simply asked a few more questions about why he would sell such a nice house and he came out and told me about his financial struggles and how the property was like a huge weight on his shoulders. I sympathized with the man and got him to tell me that we buy real estate with cash only, we can close very quickly if needed at a discount. I went on to explain that we need to be able to sell the house quickly and make a profit on our own in order for the business to succeed. He stated that he needed about $75,000 to solve his financial problems and give him some breathing room, and he hoped to sell the house to simply give him a fresh start. I told him that based on what he told me about the property, we could offer him $100,000 cash and that we could close as soon as the title was clear and he jumped on everything. Now, to be fair, I probably could have said $75,000, which was his number, and he would have jumped on that too, but we’re not in the business of taking advantage of people. No matter what the situation was, this would be my offer because it is a fair disposition of the property for our company.

So we GENERATE $75,000 in equity the first day with just good inside information. Also, his property was an older house and had three bedrooms and one bathroom. Updated homes in the area with three beds, two baths, preferably one in the master bedroom, sell for $225,000. So for about $15,000 in paint, carpeting, relatively minor kitchen and bathroom updates (mostly just re-glazing the tiles to a more modern white) and redecorating some odd space on the first floor, I was able to turn this property into a fresh and clean three bed two bath that was in demand in the area. With a little vision and $15,000, I was able to generate an additional $50,000 in equity or $35,000 in net positive impact on my bottom line in less than a month. So far we have $110,000 of equity in the property and financially we are all in about $115,000 plus taxes and insurance costs of a few thousand dollars.

I’m not nearly done with it. I have a handful of investors who understand the power of real estate and want in on the action, but don’t want to get their hands dirty. They will lend me up to 70% of the property’s after-repair value (“ARV”), $157,500 ($225,000 x 70%), using liquid assets they have available or money from their IRA, see the investment section of IRA. As a practical matter, we will only take up to 70% of the value of the property after the repair, because that gives everyone a 30% relief, if there is a shake-up in the market or if something unforeseen happens, there is still a lot of equity to get out of the deal and make a profit. In addition, I insure the property for the full ARV in the event that a force of God completely destroys the property so that everyone gets their money and profits back as promised. Our investors also get a first mortgage position on record with the county.

In addition to the privilege of having access to my investors’ funds at short notice and to entice them to remain satisfied as a passive investor, we pay a good rate of return of 12% ordinary interest, assuming the investor accepts full repayment of his outstanding amount. the balance when the property is sold or refinanced, usually no more than a few years, or 10% if they want monthly payments. I pay the 2% benefit because I don’t have to pull out a big old checkbook every month and mail the check and save it in my ledger and quickbooks, etc. Are my investors happy? He’s earned 12% in tangible assets, leveraged at no more than 70% loan-to-value (“LTV”), his investment and returns are disaster-insured, he’s the first lien on the property, and the term is relatively short, no more like a few years, plus he knows that’s all I do, so as soon as we’re done with that investment, he can jump into the next one. Just kidding, the worst/best case scenario is that I don’t pay him back. Instead of 12%, he takes all 30% of the equity capital.

But we’re still not done. I just happen to know that there are people in this market who have had their credit cards cut, the scattered economy has caused a late payment or two and a potential move, and whose credit has gone down ever so slightly. These are people who, if they had been born a year earlier, would have been first-time home buyers, but would have simply been caught in the financial meltdown and simply couldn’t qualify in the traditional way. The good news is that I’m happy to help. These people are very eager to get into their own home and are scouring the daily papers and online classifieds looking for three things, 1) a decent 3 bedroom 2 bath home, 2) in a good area with 3) an owner who will finance. I happen to have exactly that. My ad says: Attractive 3 bed 2 bath home, great neighborhood, $235,000, owner will finance with reasonable down payment. They call me, come see the house, which I have partially decorated with at least some nice towels in the kitchens and bathrooms, some fresh cut flowers placed around the home, a pot of fresh coffee brewing when they walk in and a little radio playing some kind of soothing music . It’s everything they wanted.

We took it out as a lease to buy, they put 3% down, which was the 3% they were saving to qualify for the FHA loan already, and I leased them for two years (time to fix my credit, so they can directly buy the property from me with conventional financing) and their lease payment is exactly the same as the monthly payment on a 6.5% 97% loan of $235,000 amortized over 30 years, plus taxes and insurance, or $1,774. Furthermore, the terms of my agreement with them are as follows, they will take care of any repairs and maintenance on the property under $1000, and upon exercising the option to purchase the property from me in two years, I will credit them with their down payment as well as what would be a reduction in their principal, if you actually had a loan versus a lease. They are home owners in basically every way but title. They will have equity in the property on day one. For me, if they decide not to buy the property, I have their down payment and the 6.5% interest that I actually charged them over a two year period. Just for comparison, I borrowed $120,000 at 12% interest, which is $14,400 a year. The tenants who provide me with the lease pay me $14,817 per year in effective interest. All property costs are covered, I can put $400 in the bank every year and by the way, did you notice because I was offering equity financing that I was able to raise the price by $10,000?

I still haven’t finished. Being a real estate professional, I can deduct all of my expenses related to this property for tax purposes, newspaper ads, vehicle expenses, and best of all, depreciation. Since I still own the property, I can also depreciate the property for further tax savings. Plus, as long as I wait a year, the profit will be taxed at the capital gains rate compared to ordinary income, which is an extra $20,000 or more going into my pocket.

Since I didn’t exceed the 70% ARV threshold on this investment, my return is infinite because I didn’t invest a single dollar in this property. Unlike the banks, my investor would probably feel cheated if I didn’t take full advantage of his investment to make him as much money as possible. I could have sold the property outright for $225,000 and put $110,000 in the bank tax-free, but I chose to go the other way and put a few deserving people in the house for an extra $10,000 with no extra effort and take advantage of the tax benefits of holding onto the property for the short term. It’s hard not to like the benefits of real estate. When you find and work with the right people, the sky’s the limit.

I won a lot of time, but it takes a little work. My private investors earn huge, generate significant returns with protection you can’t get with any other type of investment. With one property, we were able to take advantage of many of the benefits of real estate investing. This doesn’t even take into account the advantages of multi-family housing or commercial properties, which are just as plentiful as those listed above.

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