Purchasing Real Estate for Dummies and Seth Bond.
Ideally, your mortgage should not be more than 28% of your Gross Monthly Income, i.e if you make $3000/month, your mortgage should not be over $1000.
Understand the hidden costs of Real Estate.
i.e.: $150,000 home with 10% down.
Base monthly mortgage: $855
Property Tax (1-3% of home), monthly: $156
Monthly Homeowners Insurance: $38
Monthly PMI: $65
Home repairs: $125
Principal: Amount Borrowed from the lender
Interest: Amount Paid to the lender for allowing the money to be borrowed
Taxes: Amount due to the government for the privilege of private ownership of Real Estate.
Insurance: Amount paid to the insurance company in case of damage to the property.
Private Mortgage Insurance (PMI).
Determine the following:
Type of House
COOP owns property, member owns home as a longterm lease.
Individuals make monthly rental payments, taxes, insurance, management, etc.
Individual owns the entire unit (known as FEE Simple).
Individual makes all patyments.
Common elements are owned as tenants in common and individuals each pay Homeowners Association (HOA) fees for common areas.
Bedrooms (BR)/Bathrooms (BA)
Amenities (Patio, Pool, Fireplace, View, etc)
Size (measured in SqFt)
Start researching online.
Contact a Real Estate Agent.
In most cases, the Realtor is paid by the seller. They will help you research, conduct walk-throughs, and deal with the seller on your behalf.
Do not be timid to reach out to them for assistance. Again- they are there to help you and they are paid, in general, by the seller, not the buyer.
Provide them with your cost, home type, location, size, amenities, BR/BA, etc.
Make sure you ask them for “COMPS;” a comparative list of prices that show the average cost of similar homes in your area.
Request a mortgage quote to obtain home loan from multiple lenders including your banks.
Pay careful attention to your interest rate.
Ensure you have a small percentage of the home cost for a down payment.
Down Payment: what you put down on the house (3-20%)
If down payment <20%, you owe private mortgage insurance (PMI)
When you receive your home loan, it is guaranteed by the FHA. Home loans are generally sold to Fannie Mae on the secondary market (banks lose the interest payments but keep the loan processing fees).-Man v. Markets by Paddy Hirsch.
Conventional mortgages are generally backed through Fannie Mae, or the Federal National Mortgage Association (FNMA).-Complete Guide to Money by Dave Ramsey.
FHA loans are insured by the Department of Housing and Urban Development (HUD).-Complete Guide to Money by Dave Ramsey.
Order and attend a home inspection (your realtor can assist you with this).
Ask the inspector for a written assessment of all issues.
Order a Home Appraisal (your realtor can assist you with this).
Consider purchasing title insurance.
Obtain a detailed list of closing costs from your Realtor.
Closing costs: 2-3% of mortgage to get deal done.
Conduct a final walk-through
Test all circuits, outlets.
Flush all toilets, turn on all water sources.
Check all appliances.
Test the heating and AC.
Sign the contract.
Take the Title to your home.
Title: Right to ownership of the land.
Title insurance covers you against an unclean title.
Selling your Home
The median home price for sellers who use an agent is 16 percent higher than homes sold directly by an owner.-Complete Guide to Money by Dave Ramsey.
Real Estate Tax
Although rent is not deductible from income taxes, the two major expenses associated with homeownership- interest payments on your mortgage and property taxes- are deductible.-A Random Walk Down Wall Street by Burton g. Malkiel.
According to current tax law, you can have a gain of $250,000 if you’re single or $500,000 if you’re married and pay zero taxes on the sale of your personal residence if you’ve lived there at least two years.-Complete Guide to Money by Dave Ramsey.
The IRS considers your rental property as a business and gives you several deductions. One is the payment you make on the interest of your debt service. In addition, there are the phantom deductions- the passive loss from component depreciation and from building depreciation, which are computed at an annual rate.-Real Estate Advantages by Rich Dad, Poor Dad.
Personal Property items: those that can be removed without damage or disablement to the structure or its operation and maintenance. In general, personal property in residential rental properties falls into either 5 year of 7 year schedules for depreciation.-Real Estate Advantages by Rich Dad, Poor Dad.
Building items: include the structure and the components such as those that relate to the operation and maintenance of a building, such as ceilings and roofs, walls and windows, electrical and plumbing, central AC and heating systems, chimneys and bathtubs, sinks and lighting fixtures, fire escapes and stairs, floors and doors, landscaping and paving. Without a cost segregation, the value of these items is depreciated over 27.5 years in a residential rental property, and over 39 years in a nonresidential, or commercial real property.-Real Estate Advantages by Rich Dad, Poor Dad.
Real Estate Investing
A good house on good land keeps its value no matter what happens to money. As long as the world's population continues to grow, the demand for real estate will be among the most dependable inflation hedges available.-A Random Walk Down Wall Street by Burton g. Malkiel.
Securitization: Investors pool money in a trust. The trust money is given to a bank to loan to home buyers as mortgages. The Mortgages are packed together and the trust receives a monthly payment.-Complete Guide to Money by Dave Ramsey.
I make an offer with language that details “subject-to” contingencies, such as the approval of a business partner. Never specify who the business partner is. Most people don’t know that my partner is my cat.-Rich Dad, Poor Dad by Robert Kyosaki.
In the US, overall appreciation over the past 4 decades has been above 6% annualized.-Real Estate Advantages by Rich Dad, Poor Dad.
As long as you keep trading up in value, you will not be taxed on the gains until you liquidate.-Rich Dad, Poor Dad by Robert Kyosaki.
The best question to ask the agent is: What questions should I have asked about this place that I have not? You should ask that same question of brokers, lenders, appraisers, and others. That's how you learn.-Real Estate Advantages by Rich Dad, Poor Dad.
As soon as you buy an investment property, it's wise to set up a separate bank checking account to handle the income and the expenses.-Real Estate Advantages by Rich Dad, Poor Dad.
Before you buy a property, you will determine your expectations for it, including what your positive cash flow must be to make it a viable investment.-Real Estate Advantages by Rich Dad, Poor Dad.
The Pro Forma contains the property's sale price and operating costs, such as utilities and taxes, insurance, repairs, and business expenses; and it projects the property value and income based on such market factors as a full occupancy rate.-Real Estate Advantages by Rich Dad, Poor Dad.
In a RE investment, there are 4 types of property: land, land improvements, personal property, and the structure of buildings.-Real Estate Advantages by Rich Dad, Poor Dad.
Team of Advisors: RE Broker, RE Lender, Escrow Officer, Appraiser, Home Inspector, RE Attorney, RE Accountant, Insurance Agent, Prop Manager, Handyman, Cleaning Service, Landscaper, Roofer, Plumber.
Vacation Homes-Real Estate Advantages by Rich Dad, Poor Dad.
Income from Rent: $20,000
Expenses: $17,100 (Advertising: $200, Property Tax: $5500, Mortgage Interest: $9500, Insurance: $400, Maintenance & Repairs: $1500).
Cash Profit: $2900
Expenses + Depreciation= $23,300- $20k profit= $3300 tax loss.
Homestead Exemptions-Real Estate Advantages by Rich Dad, Poor Dad.
Florida has an unlimited homestead exemption. As long as the house sits on an acre or less, creditors cannot touch your house. Whether it is fully encumbered or completely paid off, creditors cannot force a sale of your house in FL.
A person can possess but one valid homestead at a time. And their homestead must be their principal residence.
Homestead protects against seizure, forced sale, creditor claims, credit card balances, accidents, etc.
Land Ownership and Notice Requirements-Real Estate Advantages by Rich Dad, Poor Dad.
4 types of Ownership
Fee Estate (aka Fee Simple Absolute): Absolute ownership for an indefinite period of time.
Life Estate: When the title holder grants the tenant possession of the property, lasting the tenants lifetime. The lifetime tenant is responsible for taxes and repairs until his or her death, at which time the possession of the house reverts back to the title holder.
Estates at Will: This occurs when a fee owner allows a tenant to use the property for free. Estates at will terminate at the will of the fee owner once he or she has given the tenant proper notice.
Leasehold Estates: Occurs when a fee owner grants a tenant the right to possess the property for a predetermined amount of time. This is the typical landlord-tenant agreement in which the fee owner retains the title while the tenant possesses and uses the property for the term of the lease.
Fixed Term Tenancy (a Lease)
•Periodic Tenancy (a Rental)
•Tenancy at Will
•Landlord Liability-Real Estate Advantages by Rich Dad, Poor Dad.
•Best strategy for a landlord: understand meet the requirements for duty of care, carry enough insurance to cover unforeseen claims, have further protection with the proper legal entity.
•Duty to Inspect
•A reasonable inspection is required every time the landlord renews, extends, or first enters into a rental agreement. Negligence in inspecting the premises at such times leaves the landlord vulnerable later on to being charged with foreknowledge of an unsafe condition that the landlord should have found during the inspection.
•Duty to Disclose a Dangerous Condition
•MUST warn tenants of current problems.
•Implied Covenant of Quiet Enjoyment
•How Not to Hold RE-Real Estate Advantages by Rich Dad, Poor Dad.
•Joint Tenancy: Form of shared property ownership, used most commonly by married couples. Allow for undivided ownership, meaning each tenant owns the entire property and is granted all rights to use and occupy the property.
•Tenancies in Common: Most common form of shared property ownership. Each partner owns a separate fractional interest in the property.
•How to hold RE-Real Estate Advantages by Rich Dad, Poor Dad.
•A properly formed and maintained entity can discourage an attack. Holding RE in your own name invites attack. How should you protect yourself: LLC and LP's.
•Organize your LLCs and LPs in the two states that have excellent asset protection laws- NV and WY.
•Let's assume you own three apt buildings in CA. You form ABC MGMT, INC, and LMN, LP, in NV. RST, LP, and XYZ, LP, are formed in WY. All four entities are then properly qualified to do business in CA, a process that involves presenting the out of state documentation to the CA secretary of State's office and paying the annual fee.
•How to protect your primary residence-Real Estate Advantages by Rich Dad, Poor Dad.
•Single Member LLC is the best way to hold RE.
•Qualifying as a disregarded entity for income tax purposes is easy to do once you have a single member LLC in place. You simply do not apply for an EIN and instruct your CPA to flow all the LLC tax items onto your personal tax return. The single member LLC is considered disregarded for tax purposes because there is only one member . And with only one member, the tax flows from the LLC directly to the member.
•Legal Due Diligence.-Real Estate Advantages by Rich Dad, Poor Dad.
•Federal Law recognizes 4 classes of parties responsible for cleanup of hazardous waste:
•The current owner and operator of the property.
•The owner and operator of the property at the time the waste was deposited.
•Those who generated the waste and sent it to the site.
•Those who transported the waste to the site.
•Make RE Your Business-Real Estate Advantages by Rich Dad, Poor Dad.
•If you as a RE investor can qualify as a RE professional under section 2064 of the US Tax Code, the savings can be significant.
•An RE Professional can write off 100% of the couples RE losses against ordinary income.
•Qualifying as a RE professional
•Must perform at least half of all worked hours in the tax year in RE property trades or businesses.
•Must perform at least 750 hours of work during the tax year in RE property trade or businesses (~14.5hours per week).
•IRS Section 162(a) says: "There shall be allowed as a deduction, all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."
•Computer Software, Internet Service, Cell Phone, Automobile, Meals Out, Dry Cleaning, Tuition, Seminars, Furniture, Home Costs, etc.
•Section 179 of the US Tax Code: Depreciation- up to a certain amount of expenses per year for depreciable business assets is allowed to be deducted as business expenses.
Selling Your Home
A living person has no heirs. Only prospective heirs; or heirs apparent.
Important terms for property transfer:
Alienable: Property is Transferrable
Devisable: Property is capable of passing by will
Descendible: Property is capable of passing without a will
Waste: Anything that is destructive to property and/or hurts future interest holders. 3 Types:
Voluntary (Affirmative): due to overt conduct that causes a drop in value.
Only allowed if PURGE
P: Prior Use: Prior to grant, land was used for exploitation
R: Repairs and maintenance
G: Life tenant can use resources if granted that right
E: Exploitation- land is suitable only to exploit
Permissive Waste (Neglect): Land falls into disrepair
Life Tenant must, at the least, maintain the premises.
Ameliorative Waste: Life Tenant must not engage in acts that will enhance the properties value unless all future interest holders accept.
There are four different types of property transfer:
Fee Simple Absolute: Absolute Ownership of infinite duration: 3 types:
Fee Simple Determinable (D, D, A): “For X years to A”
Automatic forfeiture following an elapsed duration of time (verbiage includes “so long as”)
Must have possibility of Reversion to owner.
Fee Simple Subject to Conditions Subsequent
“To A but if X event occurs”
Grantor has power of termination (reserved right to re-enter and retake if subsequent condition is met) at the prerogative of the grantor (right of reacquisition) aka Right of Entry.
Fee Simple subject to Executory Interest (shifting executory interest)
“To A, but if X happens, then to C.”
The Estate is automatically forfeited in favor of someone other than the grantor.
Absolute restraints on alienation (transfer are void)
Example: “To A so long as she never attempts to sell”= alienable= void.
Example: “To A so long as she does not attempt to sell until 2017”= reasonable time period and therefore not void. Transfer contains legally enforceable and clear durational language.
An Estate that must be measured in explicit life terms (never in years). A Life Time Plan.
“Eric conveys to Mandy for life.” Mandy is the holder of a life estate and is known as the life tenant. Estate reverts to Eric if Mandy dies.
Grantor has possibility of Reversion
The life estate is measured by a life other than the grantees.
“To A for the life of B.”
It is permissible for a life tenant to sell their interest.
Life tenant gets all ordinary uses and profits from the land.
Life Tenant must not commit waste.
Joint Tenancy: 2+ own with the right of survivorship
When one joint tenant dies, their share goes automatically to the surviving joint tenants.
A Joint Tenants interest is alienable
Not devisable or descendible
Mandy and Emily are joint tenants in Cornell. Emily passes away, and her share goes to Mandy. Mandy now owns the house in its entirety.
Joint Tenants must take their interest at the same time and on the same title (same instrument) and with identical shares and with the right to possess the whole.
Grantor must also clearly express the right of survivorship.
Joint Tenancy is disfavored because joint tenants get to bypass probate!!! YAY!
JTWROS: Joint Tenants without the Right of Survivorship
May pass shares without consent.
Buyer is a tenant in common and joint tenancy remains intact.
Severance: Break up plan/dissolution plan
Voluntary Agreement: Peaceful resolution
Lien theory of mortgages: Joint Tenants mortgage on their share does not sever the joint tenancy.
Title Theory of Mortgages: any encumbrance of one's share severs the joint tenancy.
Partition: Break up of the relationship.
Partition in Kind: Court Action for physical division of property if in best interest of all (usually property)
Court Action if in the best interests of all to sell property. Sale proceeds are split evenly. (usually single building)
Tenancy by Entirety
Marital Interest between married partners who share the right of survivorship
One spouse may mortgage their interest.
Unilateral Transfer to a third party: Eric and Mandy own house. Eric secretly transfers share to Emily. Emily has nothing.
Tenancy in Common: 2+ own with no right of survivorship
Each co-tenant owns an individual part and each has a right to possess the whole.
Each interest is devisable, descendible, and alienable.
No Survivorship rights between tenants in common.
Favored: because each tenant in common’s interest must go through probate.
Right and Duties of Co-Owners (all rules apply to all types of joint tenancy)
Each co-tenant is entitled to possess and use the whole regardless of what percentage they own.
Wrongful Ouster: not allowing a joint tenant use of the whole.
A co-tenant who leases part of a premise to a third party must account to their co-tenants: An Action for an Accounting: providing their fair share of the rent income. The rent income would be equal to each individual share percentage.
Adverse Possession: a single owner cannot acquire title to the exclusion of the others.
Each joint tenancy is responsible for shared carrying contests based upon undivided share: tax, mortgage, etc.
Right to Contribution for reasonable necessary repairs provided that the co-tenant has told the other of the need…once again done by undivided share percentage.
Improvements: During life of co-tenancy there is no right to contribution for “improvements.”
Improvements are inherently subjective.
At partition, the improving co-tenant is entitled to a credit equal to any increase in value caused.
The improver bears full liability for any drop in value caused.
4 Leasehold interests: Renting
Term of Years: Lease for ANY fixed period of time (1 day or 50 years)
Must know termination date from the start
No notice is needed to terminate
A term of years greater than 1 year must be in writing to be enforceable (bc of statute of frauds)
Periodic Tenancy: until Mandy gives proper notice to terminate
L conveys to T from week to week or month to month or year to year. Continuous successive nature of leasehold.
Land is leased with no mention of duration but provision is made for payment of rent at set intervals.
Mandy moves in June 1 and pays month to month. Mandy is implied month-to-month periodic tenancy.
How to terminate periodic tenancy: usually written notice must be given (at least = to the length of the period itself) unless otherwise agreed.
Month-Month periodic tenancy= 1 month notice
Only 6 months for year to year.
Must end at the conclusion of a natural lease period
L leased house to T on Jan 1 for month to month. On may 15 T sends written of termination. T must stay until end of June (end of natural month)
Tenancy at Will: Tenancy for no fixed duration
To T for as long as L or T desires. It is terminable at the will of either party. However, a reasonable demand to vacate is usually needed.
Unless parties expressly agree to Tenancy at Will. Courts will treat this as implied periodic tenancy.
Tenancy at Sufferance: Created when tenant has wrongfully held over.
Permits landlord to recover rent.
Lasts until L evicts T or elects to hold T to a new tenancy.
T’s liability to third parties: this is a matter of tort law
T is responsible for keeping premises in reasonably good repair. In Tort, T is liable to third parties T invited even where L promised to make the repairs.
T’s duty to repair:
Maintenance: T must maintain premises and make routine repairs other than those due to ordinary wear and tear.
Clogged Toilet: T must de-clog however…as tiles yellow because of time: T is not responsible.
Tenant must not commit waste
Voluntary Waste: overt destruction
Permissive Waste: neglect
Ameliorative Waste: changes that increase value.
Law of Fixtures (tested with waste doctrine): when a tenant removes a fixture, she commits voluntary waste.
Fixture: once moveable chattel. Objectively shows the intent to permanently improve the property.
Furnace, Custom Storm Windows, heating systems, certain lighting installations.
T MUST NOT remove a fixture…even if she installed it.
Fixtures pass with ownership of the land.
How to determine if given installation is a fixture
Express Agreement Controls: Any agreement between L and T is binding (Freedom of Contract).
Absence of an Agreement: On absence of agreement, T may remove so long as removal does not cause substantial harm to the premises.
Objective Judgment: T has shown the intent to install a fixture. If removal creates harm.
Today: T may end the lease if the premises are destroyed without T’s fault.
T’s duty to pay rent
T breaches the duty but is still in possession of the property: landlords only option is to evict through courts or continue relationship and sue for rent due.
If L moves to evict, t is a tenant and sufferance, and must pay rent due.
L must not engage in self-help: changing locks, removing T’s possessions, forcibly removing T.
Self Help is flatly outlawed: punishable civil and criminally
T breaches duty but is out of possession: T wrongly vacates with time left. L has 3 options
Treat T’s abandonment as implicit offer of surrender which L accepts.
T shows that she wants to give up the lease via words, actions.
If time is >1yr, then surrender must be in writing to T.
Ignore abandonment and hold T responsible for rent. This option is only available in a minority of states.
Hold them liable for any deficiency
Majority Rule: L must at least try to re-let. An opportunity for L to cut his losses.
Duty to give possession
Implicit Covenant of Quiet Enjoyment: Applies to commercial and residential leases.
T has right to quiet use and enjoyment of premises without interference from L. Occurs when L wrongfully evicts T or excludes T from the premises.
L has committed constructive eviction. 3 elements must be met.
Substantial interference due to L’s actions or failures.
Permanent or chronic problem.
Apt floods every time it rains. T must notify L of problem. And L must fail to act meaningfully.
T must vacate within a reasonable time after L fails to fix the problem.
L must not permit a nuisance on site.
L must control common areas.
Implied Warranty of Habitability: applies only to residential leases.
Premises must be fit for basic human dwelling. Standard may be applied from housing code and/or case law. What are T’s entitlements in this case:
Move out and end lease but she doesn’t have to.
T may make repairs themselves and deduct rent.
L must reduce rent.
Remain in possession: pay rent and affirmatively seek money damages.
Retaliatory Conviction: if T lawfully reports L for housing code violations, L cannot end lease, raise rent, harass T, or take other reprisals.
Landlord’s Tort Liability
If T has been personally injured: Caveat Lessee- let T beware.
L has no duty to make the premises safe in tort law.
5 Exceptions to caveat Lessee:
Common Areas- L must maintain all common areas- hallways or stairwells.
Latent Defects: L must warn T of hidden defects that L knows about or should know about- merely a duty to warn, not to repair.
Public Use Rule: A L who leases public space (convention hall, museum) and who should know, because of the length of the lease and the nature of the defect, that T will not repair.
The short term lease of a furnished dwelling: L is liable for any defects on site.