Real Estate Considerations & Strategic Issues

There are a multitude of considerations & strategic issues that need to be regularly reviewed, analyzed and proactively acted upon to optimize the performance (return and growth of equity-capital) of any real estate investment.

Proper planning will result in proper investing. The net benefit (return and growth of equity-capital) of proper investing over a period of time is much greater than most private investors believe.

The use and amount of financial leverage (mortgage debt) used in real estate investments will significantly impact:

1. Cash flow (both before and after income taxes)
2. Income taxes due on ordinary income received from property (s)
3. Additional yield from principal pay down on a mortgage loan
4. Appreciation benefit from proper use of financial leverage

The net benefit of optimizing the four (4) items above can easily have a double-digit effect on the return and growth of equity-capital. Depending upon the amount of equity-capital involved this could be "tens" or even "hundreds" of thousand of dollars over a period of time! It is imperative that financial leverage (mortgage debt) be carefully considered in all strategic real estate investment wealth building programs.

The Considerations List

Economic influences

1. Regional issues (employment, new construction, land use, etc.)
2. Supply and demand of investment property type (s)
3. Location decisions
4. Inflation

Factors influencing rate of return on equity-capital

1. Role of financing and leverage at current market capitalization and borrowing rates (including type of loan(s), loan term, balloon, prepayment penalties, etc.)
2. Sensitivity & stability of current and future cash flow
3. Tax implications (taxes paid on the ordinary income earned from property (s))
   • Mortgage interest expense deduction
   • Depreciation expense deduction
   • Marginal ordinary income tax rate of investor
   • Proper income classification according to current tax laws
4. Appreciation projections
5. Methods of depreciation
6. Holding period optimization (how long to hold a property?)
7. Capital improvements and additions (rate of return on these items?)

Other

1. Capital gains issues & irs code 1031 exchanges
2. Estate planning & exit strategies
3. Other types of real estate investments (pooled fund vehicles, notes/contracts, etc.)
4. Identifying sources of risk
   • Financial
   • Liquidity
   • Inflation
   • Management
   • Interest rate
   • Legislative
   • Environmental