REAL ESTATE INVESTMENTS AND BUSINESS OPPORTUNITY BROKERAGE<\/p>\n\n\n\n
OVERVIEW In this , the following topics are discussed: various types of investment real estate, types of risk associated with the purchase and ownership of real estate, methods of analyzing such investments, the tax consequences of both owner-occupied and investment real estate, and the distinction between most real estate transactions and the sale of a business.<\/p>\n\n\n\n
OBJECTIVES After completing this , you should be able to do all of the following:<\/p>\n\n\n\n
Distinguish among the different types of real estate investments<\/p>\n\n\n\n
Identify the advantages and disadvantages of investing in real estate<\/p>\n\n\n\n
Calculate the percent of profit or loss, given the original cost of the investment, the sale price, and the dollar amount of profit or loss<\/p>\n\n\n\n
Distinguish among the various types of risk<\/p>\n\n\n\n
Explain the importance of investment analysis<\/p>\n\n\n\n
Describe the similarities and differences between real estate brokerage and business brokerage<\/p>\n\n\n\n
Describe the types of expertise required in business brokerage<\/p>\n\n\n\n
Distinguish among the methods of appraising businesses<\/p>\n\n\n\n
Explain how to determine taxable income of investment real estate<\/p>\n\n\n\n
Distinguish between installment sales and like-kind exchange<\/p>\n\n\n\n
Describe the steps in the sale of a business<\/p>\n\n\n\n
KEY TERMS Appreciation Asset<\/p>\n\n\n\n
Basis<\/p>\n\n\n\n
Capital gain\/loss Cash flow<\/p>\n\n\n\n
Debt service Equity<\/p>\n\n\n\n
Going concern value Goodwill<\/p>\n\n\n\n
Installment sale Leverage<\/p>\n\n\n\n
Like-kind exchange Liquidation value approach Liquidity<\/p>\n\n\n\n
Profit Risk<\/p>\n\n\n\n
Tax shelter Taxable income<\/p>\n\n\n\n
REAL ESTATE INVESTMENT ANALYSIS<\/p>\n\n\n\n
The purchase of real estate as an investment has been popular for both high- and<\/p>\n\n\n\n
moderate-income investors. Most investment decisions depend on the rate of return or<\/p>\n\n\n\n
profit, which the investor expects to earn by assuming a risk in real estate or other type<\/p>\n\n\n\n
of investment. A real estate sales associate can be a major resource to a potential<\/p>\n\n\n\n
investor if he or she is familiar with investment real estate, which includes both<\/p>\n\n\n\n
terminology and analysis.<\/p>\n\n\n\n
A thorough analysis is critical when evaluating the potential of a real estate<\/p>\n\n\n\n
investment. Investment analysis must take into consideration land use controls, such as<\/p>\n\n\n\n
zoning, deed restrictions, and permitting requirements that affect the value of a property.<\/p>\n\n\n\n
Investment analysis considers economic forces, such as population growth,<\/p>\n\n\n\n
investment of foreign capital, and the impact of taxation on real estate investments. The<\/p>\n\n\n\n
most important factor underlying every investment decision is economic soundness.<\/p>\n\n\n\n
Real estate licensees should be capable of evaluating the advantages and<\/p>\n\n\n\n
disadvantages of a potential real estate investment compared to alternative investments.<\/p>\n\n\n\n
The process of investment analysis begins with the search for and location of<\/p>\n\n\n\n
potentially desirable real estate investments that are based upon the investor\u2019s personal<\/p>\n\n\n\n
objectives.<\/p>\n\n\n\n
Real estate investors can receive potentially significant rewards from real estate<\/p>\n\n\n\n
investments that include income generated by the property, a build-up of equity,<\/p>\n\n\n\n
appreciation in value, tax benefits, positive leverage, and prestige. Investment in real<\/p>\n\n\n\n
estate can also serve as a hedge against inflation when the property has level-payment<\/p>\n\n\n\n
mortgage where the payments remain the same, but the rental income increases with<\/p>\n\n\n\n
inflation.<\/p>\n\n\n\n
Disadvantages of investing in real estate include the illiquidity of property (it cannot<\/p>\n\n\n\n
be bought or sold as quickly as other assets), the local (immobile) nature of the real<\/p>\n\n\n\n
estate market compared to other types of investments that can be bought and sold in a<\/p>\n\n\n\n
variety of markets, the expense or overhead required to manage the property or hire a<\/p>\n\n\n\n
property manager, and the need for additional investment assistance from experts such<\/p>\n\n\n\n
as brokers, tax accountants, and other professionals.<\/p>\n\n\n\n
TYPES OF INVESTMENT PROPERTIES<\/p>\n\n\n\n
The following discussion provides information about some of the different types of<\/p>\n\n\n\n
real estate available for investment.<\/p>\n\n\n\n
Agricultural. Agricultural property investors have many different motivations for<\/p>\n\n\n\n
investing in agricultural land. Some investors wish to personally engage in<\/p>\n\n\n\n
agricultural endeavors, while others may own the land and lease it to others for<\/p>\n\n\n\n
agricultural activities. Investors may also purchase agricultural land in the path of<\/p>\n\n\n\n
growth, allowing for lower taxes through agricultural exemptions, before<\/p>\n\n\n\n
ultimately selling or developing the property.<\/p>\n\n\n\n
Business opportunities. Business opportunities are typically smaller local<\/p>\n\n\n\n
businesses, such as barbershops, hair salons, print shops, corner stores, and<\/p>\n\n\n\n
boat rental businesses. Often an investor may be looking for a small business<\/p>\n\n\n\n
that he or she could own and manage, creating an income for him or herself.<\/p>\n\n\n\n
Business opportunities are normally valued based upon applying a multiplier to<\/p>\n\n\n\n
the net income being produced by the business. Value may also be applied to<\/p>\n\n\n\n
intangible assets such as a business\u2019s name or reputation in the community.<\/p>\n\n\n\n
Commercial. Commercial investment properties include retail centers, such as<\/p>\n\n\n\n
regional shopping centers usually located near major transportation routes. Major<\/p>\n\n\n\n
retail centers attract anchor tenants that draw people to the center. Typically,<\/p>\n\n\n\n
these are the name-brand department stores in which people plan to shop. They<\/p>\n\n\n\n
are called generative functions, since they generate customer traffic to the<\/p>\n\n\n\n
center. Suscipient functions are businesses that attract passersby, such as card<\/p>\n\n\n\n
and gift shops, ice cream and novelty stores, and so on.<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
Industrial. Industrial investment properties involve manufacturing, assembly, and<\/p>\n\n\n\n
distribution. These properties are located most often near major transportation<\/p>\n\n\n\n
arteries. Weight-reducing operations, such as mining operations, prefer locations<\/p>\n\n\n\n
near the source of their raw materials. Weight-gaining operations, such as<\/p>\n\n\n\n
assembly plants, prefer locations close to their market areas in order to reduce<\/p>\n\n\n\n
transportation costs.<\/p>\n\n\n\n
Office. Office investment properties are usually located in central business<\/p>\n\n\n\n
districts or professional office parks in suburban areas near their tenant base.<\/p>\n\n\n\n
Offices are usually good long-term investments since office tenants generally<\/p>\n\n\n\n
lease for extended periods.<\/p>\n\n\n\n
Residential. Residential investment property is available in a wide range of<\/p>\n\n\n\n
prices. Important factors to be considered when selecting residential properties<\/p>\n\n\n\n
are location, availability of transportation, schools, and shopping. Typical<\/p>\n\n\n\n
residential investments include condominiums, villas, single-family homes, and<\/p>\n\n\n\n
apartment complexes.<\/p>\n\n\n\n
Real Estate Investment Trust (REIT)<\/p>\n\n\n\n
A real estate investment trust (REIT), a type of business trust, allows groups of<\/p>\n\n\n\n
investors to invest in income-producing property. A REIT provides a method for<\/p>\n\n\n\n
individuals to pool financial resources to invest in larger, professionally managed<\/p>\n\n\n\n
properties. Investment trusts invest in office buildings, large apartment complexes, and<\/p>\n\n\n\n
retail centers. Purchasing shares in a REIT is similar to purchasing shares in a mutual<\/p>\n\n\n\n
fund. (Please refer to , Joint Business Relationship section for more<\/p>\n\n\n\n
information on a business trust relationship.)<\/p>\n\n\n\n
REAL ESTATE INVESTMENT TERMINOLOGY<\/p>\n\n\n\n
Amount Realized<\/p>\n\n\n\n
The amount realized, also referred to as net proceeds from sale, is expressed by the<\/p>\n\n\n\n
following formula:<\/p>\n\n\n\n
Amount Realized = Sale Price \u2013 Costs of Sale<\/p>\n\n\n\n
Sale price is the total amount the seller receives for the sale, including money, notes,<\/p>\n\n\n\n
mortgages, or other debts the buyer assumes as part of the sale. The costs of sale<\/p>\n\n\n\n
include brokerage commissions, relevant advertising, legal fees, seller-paid points, and<\/p>\n\n\n\n
other closing costs paid by the seller.<\/p>\n\n\n\n
Basis<\/p>\n\n\n\n
Basis, or cost basis, is the original value of an asset for tax purposes. When<\/p>\n\n\n\n
purchasing a home, the basis includes the purchase price and any associated<\/p>\n\n\n\n
acquisition costs. Basis is used to determine the gain or loss on the sale, exchange, or<\/p>\n\n\n\n
other disposition of a property.<\/p>\n\n\n\n
Adjusted basis is a measurement of how much is invested in a property for tax<\/p>\n\n\n\n
purposes, including any IRS-allowed improvements, referred to as capital improvements.<\/p>\n\n\n\n
Examples of capital improvements include a new addition to the home, paving the<\/p>\n\n\n\n
driveway, replacing the roof, installing central air conditioning, and rewiring the home. By<\/p>\n\n\n\n
adding the cost of improvements to the basis, the amount of gain is reduced, thereby<\/p>\n\n\n\n
decreasing the amount of capital gains tax otherwise owed. Refer to \u201cTax Benefits of<\/p>\n\n\n\n
Homeownership\u201d in for tax benefits associated with the sale of a principal<\/p>\n\n\n\n
residence.<\/p>\n\n\n\n
The adjusted basis may also include certain IRS-allowed reductions including such<\/p>\n\n\n\n
items as depreciation of investment property, casualty losses, and residential energy<\/p>\n\n\n\n
credits.<\/p>\n\n\n\n
The basic formula for adjusted basis is:<\/p>\n\n\n\n
Adjusted Basis = Cost Basis + Increases \u2013 Decreases<\/p>\n\n\n\n
Capital Gain\/Loss<\/p>\n\n\n\n
A capital gain is an increase in the value of an asset, such as personal or investment<\/p>\n\n\n\n
property, that gives it a higher value than the cost of purchasing the asset. If a property<\/p>\n\n\n\n
sells for more than the purchase costs, there is a capital gain. A capital loss is incurred<\/p>\n\n\n\n
when there is a decrease in the value of an asset that gives it a lower value than the cost<\/p>\n\n\n\n
of purchasing the asset.<\/p>\n\n\n\n
A capital gain or loss is not realized until the property is sold. A capital gain may be<\/p>\n\n\n\n
short term (one year or less) or long term (more than one year) and must be claimed on<\/p>\n\n\n\n
the investor\u2019s tax return.<\/p>\n\n\n\n
The capital gain is represented by the basic formula:<\/p>\n\n\n\n
Gain = Amount Realized \u2013 Adjusted Basis<\/p>\n\n\n\n
Cash Flow<\/p>\n\n\n\n
Cash flow is the movement of money into or out of a business or investment,<\/p>\n\n\n\n
measured over a period-of-time. Generally speaking, cash flow is the money that<\/p>\n\n\n\n
remains after all the income, such as rents, is collected and all the day-to-day expenses<\/p>\n\n\n\n
associated with owning the property are paid.<\/p>\n\n\n\n
Cash flow can be ongoing or one-time. Ongoing cash flows are received by the<\/p>\n\n\n\n
investor throughout the investment-holding period, as in rental income. One-time cash<\/p>\n\n\n\n
flows are sales proceeds received as a result of the sale of an investment property.<\/p>\n\n\n\n
Cash flows may be positive or negative. Positive cash flow occurs when there is<\/p>\n\n\n\n
more money coming in than going out, resulting in money remaining. Negative cash flow<\/p>\n\n\n\n
occurs when there is more money going out than coming in, resulting in a deficiency that<\/p>\n\n\n\n
the investor or business owner must pay out of pocket. Most investors and business<\/p>\n\n\n\n
owners desire a positive cash flow in order to achieve a profit and a high rate of return<\/p>\n\n\n\n
on their investment. However, there are tax benefits to negative cash flows.<\/p>\n\n\n\n
Appreciation<\/p>\n\n\n\n
Appreciation is an increase in the value of an investment over time. Investment<\/p>\n\n\n\n
property can appreciate in value for many reasons, such as inflation, supply and<\/p>\n\n\n\n
demand, and capital improvements. Most real estate investors purchase income<\/p>\n\n\n\n
property with the goal of realizing a positive cash flow and appreciation.<\/p>\n\n\n\n
Tax Depreciation<\/p>\n\n\n\n
Tax Depreciation, also referred to as cost recovery, is an income tax deduction that<\/p>\n\n\n\n
allows a taxpayer to recover the cost of investment property over a number of years.<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
Equity<\/p>\n\n\n\n
Equity is the difference between the current market value of a property and the<\/p>\n\n\n\n
amount the owner still owes on the mortgage. The initial down payment creates equity.<\/p>\n\n\n\n
Additional equity is created through principal reduction and appreciation.<\/p>\n\n\n\n
One advantage of investing in real estate is the equity build-up that can occur on<\/p>\n\n\n\n
mortgaged rental property. An investor who collects rent from a tenant can use the rental<\/p>\n\n\n\n
income to pay expenses and reduce the principal amount of the loan, which can<\/p>\n\n\n\n
increase the equity in the property. Over time, the tenant essentially pays for the<\/p>\n\n\n\n
property to the benefit of the investor. Some investors consider equity build-up as a good<\/p>\n\n\n\n
use of cash flows when the interest rates on savings accounts and certificates of<\/p>\n\n\n\n
deposits are lower than the rate of return on the investment property.<\/p>\n\n\n\n
Liquidity<\/p>\n\n\n\n
Liquidity refers to an asset’s ability to be easily converted through an act of buying or<\/p>\n\n\n\n
selling without causing a significant movement in the price and with minimum loss of<\/p>\n\n\n\n
value. Cash is the most liquid asset. A liquid asset can be sold rapidly with minimal loss<\/p>\n\n\n\n
of value. The essential characteristic of a liquid market is that there are ready and willing<\/p>\n\n\n\n
buyers and sellers at all times.<\/p>\n\n\n\n
An illiquid asset is one which is not readily saleable due to uncertainty about its value<\/p>\n\n\n\n
or a lull in the market in which it is regularly traded. One disadvantage of investing in real<\/p>\n\n\n\n
property is that property is considered an illiquid asset, which cannot be transferred as<\/p>\n\n\n\n
easily as other assets, such as stocks or bonds.<\/p>\n\n\n\n
Tax Shelter<\/p>\n\n\n\n
A tax shelter is a legal method of minimizing or decreasing an investor\u2019s taxable<\/p>\n\n\n\n
income, and therefore, his or her tax liability. Depreciation of a real estate investment<\/p>\n\n\n\n
can reduce an investor\u2019s taxable income and is, therefore, a form of tax shelter.<\/p>\n\n\n\n
Risk<\/p>\n\n\n\n
Risk is the possibility of losing all or part of the investment. Every investment<\/p>\n\n\n\n
involves a certain degree of risk. There are two primary types of risk: dynamic and static.<\/p>\n\n\n\n
Dynamic risk. Dynamic risk is risk associated with changes in general market<\/p>\n\n\n\n
conditions. The different types of dynamic risk are outlined below.<\/p>\n\n\n\n
o Business risk. Business risk is the possibility that an investment will yield<\/p>\n\n\n\n
lower than anticipated profits, or that it will experience loss rather than a<\/p>\n\n\n\n
profit. Business risk is measured by comparing actual income and expenses<\/p>\n\n\n\n
to budgeted income and expenses. If expenses are higher than projected,<\/p>\n\n\n\n
and\/or income is lower than projected, the investment could be in jeopardy.<\/p>\n\n\n\n
o Financial risk. Financial risk is associated with extremely high expenses<\/p>\n\n\n\n
and\/or extremely low income. The investor may be faced with adding to the<\/p>\n\n\n\n
original investment to keep it in operation. In the alternative, the investor may<\/p>\n\n\n\n
have to borrow more money or sell other assets to raise capital to prevent<\/p>\n\n\n\n
losing the investment. If an investor is unable to make the required payments<\/p>\n\n\n\n
on their debt obligations, they risk defaulting on the loan.<\/p>\n\n\n\n
o Inflationary risk. Inflationary risk, or purchasing-power risk, is the risk that future inflation will cause a decrease in purchasing power of the currency, resulting in a rise in the cost of goods and services. Inflation causes the investor\u2019s expenses to increase. Potential buyers may also lack the purchasing power to buy the property.<\/p>\n\n\n\n
o Interest rate risk. Interest rate risk is the effect of the economy on the investment. If the value of a dollar increases or decreases because of inflation or deflation, interest rates could increase or decrease, which may affect the value of the investment or reduce the likelihood of selling it.<\/p>\n\n\n\n
o Liquidity risk. Liquidity risk is the risk that an investment property cannot be bought or sold quickly enough to prevent or minimize loss.<\/p>\n\n\n\n
o Market risk. Market risk is the possibility for an investor to experience losses due the effect of the national or local real estate market. There are many sources of market risk that can affect the real estate market, including recessions, unemployment rates, availability of financing, changes in the economy, and other local conditions affecting specific markets.<\/p>\n\n\n\n
Static risk. Static risk is risk that can be offset with insurance, such as fire, flood, robbery, and so on.<\/p>\n\n\n\n
Investors attempt to evaluate and minimize risk. A feasibility study is used as a basis<\/p>\n\n\n\n
for making a real estate investment decision. The feasibility study assesses financial,<\/p>\n\n\n\n
governmental, legal, social, physical, and locational factors that may influence the<\/p>\n\n\n\n
investor\u2019s decisions, based on anticipated risk and potential reward.<\/p>\n\n\n\n
Leverage<\/p>\n\n\n\n
Leverage is the use of borrowed funds to purchase assets. Most investors make real<\/p>\n\n\n\n
estate investments with borrowed money. Positive leverage allows an investor to earn a<\/p>\n\n\n\n
higher rate of return on funds invested by borrowing than they could earn by paying cash<\/p>\n\n\n\n
for the investment. Financial leverage can be either positive or negative.<\/p>\n\n\n\n
Positive leverage. Positive leverage occurs if the investment returns more to the<\/p>\n\n\n\n
investor than the cost of borrowing the money necessary to purchase the<\/p>\n\n\n\n
investment.<\/p>\n\n\n\n
Negative leverage. Negative leverage occurs if the investment returns less to<\/p>\n\n\n\n
the investor than the cost of borrowing the money necessary to purchase the<\/p>\n\n\n\n
investment.<\/p>\n\n\n\n
In most instances, an investor will use leverage to purchase real estate because of<\/p>\n\n\n\n
the expectation of positive leverage. However, highly leveraged investments require<\/p>\n\n\n\n
cash flows from the property to make the mortgage payments; debt service that is too<\/p>\n\n\n\n
high may make that impossible.<\/p>\n\n\n\n
EVALUATING INVESTMENT PROPERTIES<\/p>\n\n\n\n
Evaluating an investment property begins with the preparation of a reconstructed<\/p>\n\n\n\n
operating statement that shows annual forecasts of income and expenses over a period-<\/p>\n\n\n\n
of-time. Required rates of return based on forecasted income, expenses, risk, and length<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
of the ownership period are applied to estimate the value of the property. The rate used<\/p>\n\n\n\n
to estimate value is dictated by the individual investor\u2019s requirements, but tempered by a<\/p>\n\n\n\n
competitive market.<\/p>\n\n\n\n
An analysis of the past income and expenses of an income-producing property can<\/p>\n\n\n\n
help to evaluate the future income of the property. However, it should be noted that new<\/p>\n\n\n\n
ownership and new management often result in a change in the operating characteristics<\/p>\n\n\n\n
of a property. Historical information is obtained from current owners to serve as a basis<\/p>\n\n\n\n
for making projections, but cannot always be relied upon. Consequently, figures<\/p>\n\n\n\n
obtained from the current owner must be evaluated based on the individual investor\u2019s<\/p>\n\n\n\n
requirements and allowances made for any changes that are anticipated in income and<\/p>\n\n\n\n
expenses.<\/p>\n\n\n\n
As a result, the analysis must be based on revised historical operating data. In this<\/p>\n\n\n\n
case, the reconstructed operating statement includes items that are not included by the<\/p>\n\n\n\n
current owner and deletes items that are not expected to recur. Other figures may be<\/p>\n\n\n\n
increased or decreased based on the investor\u2019s operating philosophy and management.<\/p>\n\n\n\n
The forecast of income and expenses (shown below) is performed in the same<\/p>\n\n\n\n
manner as was discussed in the Appraisal of this book. However, investment<\/p>\n\n\n\n
analysis goes beyond the calculation of the net operating income and considers the<\/p>\n\n\n\n
effect of financing and taxation on the investment.<\/p>\n\n\n\n
PGI = Potential gross income (contract rent plus market rent)<\/p>\n\n\n\n
\u2013 V&C = Vacancy and collection losses<\/p>\n\n\n\n
+ OI = Other income (from sources other than rent)<\/p>\n\n\n\n
EGI = Effective gross income<\/p>\n\n\n\n
\u2013 OE = Operating expenses<\/p>\n\n\n\n
= NOI = Net operating income<\/p>\n\n\n\n
\u2013 ADS = Annual debt service (one year\u2019s mortgage payments)<\/p>\n\n\n\n
= CTO = Cash throw-off (BTCF, before-tax cash flow)<\/p>\n\n\n\n
Operating expenses include fixed expenses, variable expenses, and a reserve for<\/p>\n\n\n\n
replacements. Each is outlined below.<\/p>\n\n\n\n
Fixed expenses. Fixed expenses include costs that do not change with the level<\/p>\n\n\n\n
of occupancy, such as real estate taxes and hazard insurance.<\/p>\n\n\n\n
Variable expenses. Variable expenses change with the level of occupancy and<\/p>\n\n\n\n
include costs, such as management fees, maintenance, utilities, yard care,<\/p>\n\n\n\n
janitorial, and so on.<\/p>\n\n\n\n
Reserve for replacements. Reserve for replacements is a noncash expense.<\/p>\n\n\n\n
This money is for future use to replace worn-out components, called short-lived<\/p>\n\n\n\n
items, such as carpeting, appliances, central heat and air systems, roof<\/p>\n\n\n\n
coverings, and so on.<\/p>\n\n\n\n
Mortgage payments, called debt service, are not considered an operating expense.<\/p>\n\n\n\n
Real estate does not borrow money, people do. The type and amount of financing is<\/p>\n\n\n\n
dictated by the needs of the investor, not the property. It would be inappropriate to<\/p>\n\n\n\n
charge the property for something unrelated to its operation.<\/p>\n\n\n\n
After the net operating income is estimated, debt service is subtracted to obtain the<\/p>\n\n\n\n
cash throw-off (CTO). This is also called the before-tax cash flow (BTCF). Investors will<\/p>\n\n\n\n
be concerned with an additional computation to determine the after-tax cash flow<\/p>\n\n\n\n
(ATCF), which is beyond the scope of the pre-license course.<\/p>\n\n\n\n
The objective of real estate investment analysis is to assist an investor in choosing<\/p>\n\n\n\n
the best property available among available alternatives and to base a price decision on<\/p>\n\n\n\n
the analysis performed. Applying ratios to the forecasted income and expenses can<\/p>\n\n\n\n
facilitate analysis. Ratios commonly used in the evaluation of income properties include<\/p>\n\n\n\n
the operating expense ratio and the loan-to-value ratio.<\/p>\n\n\n\n
Operating Expense Ratio<\/p>\n\n\n\n
The operating expense ratio expresses the relationship between the expenses<\/p>\n\n\n\n
incurred in operating the property (the operating expenses) with the amount the investor<\/p>\n\n\n\n
actually receives (the effective gross income). This relationship is expressed as a<\/p>\n\n\n\n
percentage, or ratio. The formula is as follows:<\/p>\n\n\n\n
Loan-to-Value Ratio<\/p>\n\n\n\n
The loan-to-value (LTV) ratio measures financial risk in an investment by comparing<\/p>\n\n\n\n
the mortgage loan amount to the price, or value, of the property. This ratio indicates the<\/p>\n\n\n\n
percentage of the property value that is represented by debt. A higher LTV ratio<\/p>\n\n\n\n
increases the risk of the borrower\u2019s default. The formula is as follows:<\/p>\n\n\n\n
Calculating Profit on Investment<\/p>\n\n\n\n
Profits from investments are calculated on the amount that is originally invested, not<\/p>\n\n\n\n
on the amount received when the investment is sold or liquidated. The following formula<\/p>\n\n\n\n
is used to determine the profit based on the original investment amount paid:<\/p>\n\n\n\n
Example: Assume that an investor paid $, for a parcel of land, divided it into<\/p>\n\n\n\n
three separate lots, and sold each lot for $,. What is the profit on this<\/p>\n\n\n\n
investment?<\/p>\n\n\n\n
Solution: The profit on this investment is %. Profits from investments are<\/p>\n\n\n\n
calculated on the amount that is originally invested, not on the amount received<\/p>\n\n\n\n
when the investment is sold or liquidated.<\/p>\n\n\n\n
$ , Sale price of each separate lot<\/p>\n\n\n\n
x Number of lots sold<\/p>\n\n\n\n
$, Gross sales price<\/p>\n\n\n\n
– $, Amount paid<\/p>\n\n\n\n
$ , Amount made<\/p>\n\n\n\n
To determine the percentage of profit, divide the amount made by the amount paid.<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
Rate of Return (ROR)<\/p>\n\n\n\n
The money made in an investment is referred to as the return. The investment<\/p>\n\n\n\n
amount made with the original purchase is referred to as the capital, or capital<\/p>\n\n\n\n
investment. The return from an investment is calculated based upon the capital<\/p>\n\n\n\n
investment. Investors want to achieve a high rate of return.<\/p>\n\n\n\n
The IRV formula discussed in to derive capitalization rates can also be<\/p>\n\n\n\n
used to calculate the rate of return (ROR). When evaluating investments, the ROR<\/p>\n\n\n\n
replaces the cap rate that was used in . Dividing the net operating income<\/p>\n\n\n\n
(NOI) by the investment value will provide the investor with the ROR.<\/p>\n\n\n\n
If the investor wishes to determine the rate that is being received based upon the<\/p>\n\n\n\n
actual equity invested (vs. the rate on the overall investment), then an equity dividend<\/p>\n\n\n\n
ratio would be used. The formula for equity dividend ratio (EDR) is:<\/p>\n\n\n\n
The equity dividend ratio provides the investor with a more accurate picture as to the<\/p>\n\n\n\n
return on the money actually invested.<\/p>\n\n\n\n
Loan Constant<\/p>\n\n\n\n
A loan constant is an interest and principal factor used to calculate a level monthly<\/p>\n\n\n\n
payment necessary to pay off both principal and interest over the term of the loan.<\/p>\n\n\n\n
Today, financial calculators and computers are typically used to calculate payments and<\/p>\n\n\n\n
amortization schedules. In the past, booklets were published where the interest rate and<\/p>\n\n\n\n
term of the loan were matched to arrive at a constant. The constant was then applied to<\/p>\n\n\n\n
the original loan amount to determine the monthly payment.<\/p>\n\n\n\n
Example: Calculate the monthly payment on a new loan of $, at % for<\/p>\n\n\n\n
years, using a monthly loan constant of ..<\/p>\n\n\n\n
Solution:<\/p>\n\n\n\n
Loan Balance x Loan Constant = Monthly Payment<\/p>\n\n\n\n
$, Loan balance<\/p>\n\n\n\n
x . Loan constant<\/p>\n\n\n\n
$. Monthly payment<\/p>\n\n\n\n
IMPACT OF FEDERAL TAXATION<\/p>\n\n\n\n
Real estate investment strategies and long-term planning of investment portfolios are<\/p>\n\n\n\n
impacted by federal taxation. Since taxation is an important consideration in all real<\/p>\n\n\n\n
estate transactions, real estate licensees must be knowledgeable concerning tax<\/p>\n\n\n\n
matters. However, they must also exercise extreme caution to avoid giving advice<\/p>\n\n\n\n
regarding tax matters. Investors should be advised to seek the advice of qualified<\/p>\n\n\n\n
experts in the field of taxation.<\/p>\n\n\n\n
The Tax Reform Act of , the Tax Act of , the Taxpayer Relief Act of ,<\/p>\n\n\n\n
and revisions to the tax code made in have made significant changes in tax<\/p>\n\n\n\n
treatment associated with real estate. The following discussion presents some of the<\/p>\n\n\n\n
changes related to these laws.<\/p>\n\n\n\n
Depreciation<\/p>\n\n\n\n
One benefit that is not available to homeowners but is available to investors and the<\/p>\n\n\n\n
owners of businesses is the ability to deduct a portion of the money that they have<\/p>\n\n\n\n
invested in their property each year from their gross income. This deduction is referred<\/p>\n\n\n\n
to as cost recovery, or tax depreciation.<\/p>\n\n\n\n
A system called the Modified Accelerated Cost Recovery System (MACRS) was<\/p>\n\n\n\n
adopted in , thereby replacing the Accelerated Cost Recovery System that was<\/p>\n\n\n\n
implemented in . Cost recovery, in the language of the tax code, refers to tax<\/p>\n\n\n\n
depreciation. The MACRS stipulates the time periods over which investment real estate<\/p>\n\n\n\n
can be depreciated for tax purposes. The time period begins when the property is placed<\/p>\n\n\n\n
in service, which, essentially, means the time in which title is taken.<\/p>\n\n\n\n
Tax law currently allows the owners of residential and low-income investment<\/p>\n\n\n\n
properties to depreciate a portion of their investment over . years on a straight-line<\/p>\n\n\n\n
basis. The residential category includes single-family rentals, all apartment rentals, and<\/p>\n\n\n\n
mobile homes. The owners of nonresidential investment properties may depreciate a<\/p>\n\n\n\n
portion of their investment over years, also on a straight-line basis. Hotels and motels<\/p>\n\n\n\n
are classified as nonresidential.<\/p>\n\n\n\n
To calculate the amount of the allowable deduction, the total cost of acquisition,<\/p>\n\n\n\n
including the total cost of the property plus closing costs, is allocated on a percentage<\/p>\n\n\n\n
basis to the land and improvements. The basis for depreciation is that portion of the total<\/p>\n\n\n\n
cost, including closing costs, which applies to the improvements. Land cannot be<\/p>\n\n\n\n
depreciated. This amount is evenly divided by the number of years allowed, either .<\/p>\n\n\n\n
or , depending on the type of property. That is what is meant by straight-line; the same<\/p>\n\n\n\n
dollar amount is deducted each year. This percentage can be calculated by having an<\/p>\n\n\n\n
appraisal made or using the percentages of land and improvements utilized by the<\/p>\n\n\n\n
property appraiser\u2019s office. The basis is reduced each year by the amount allowed until<\/p>\n\n\n\n
the total depreciable basis equals zero or the property is sold.<\/p>\n\n\n\n
Example: An apartment complex was purchased for $,; closing costs were<\/p>\n\n\n\n
$,. An appraisal indicated the improvements represented % of the value of<\/p>\n\n\n\n
the property. What amount may the investor deduct each year for tax purposes?<\/p>\n\n\n\n
Solution:<\/p>\n\n\n\n
$, Purchase price<\/p>\n\n\n\n
+ $ , Closing costs<\/p>\n\n\n\n
$, Total acquisition cost<\/p>\n\n\n\n
x . Improvements percentage<\/p>\n\n\n\n
$ , Basis for depreciation<\/p>\n\n\n\n
In the example above, the investor can claim $, each year as an expense on<\/p>\n\n\n\n
his or her personal tax return until the entire $, has been claimed.<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
Capital Gains Tax<\/p>\n\n\n\n
Capital gain is profit made when an income property is sold.<\/p>\n\n\n\n
Under the American Taxpayer Relief Act of , the top capital gain tax rate has<\/p>\n\n\n\n
been permanently increased to % (up from %) for single filers who have incomes<\/p>\n\n\n\n
above $, and married couples filing jointly who have incomes exceeding<\/p>\n\n\n\n
$,. The Act also changed the depreciation recapture rate to % for all<\/p>\n\n\n\n
taxpayers, independent of tax bracket.<\/p>\n\n\n\n
A summary of the current capital gain tax rates for taxable income ranges follows:<\/p>\n\n\n\n
If tax depreciation has been deducted during the ownership period, the proceeds of a<\/p>\n\n\n\n
sale will be taxed at two different rates. The capital gains tax rate shown above is for<\/p>\n\n\n\n
capital assets held over months. A portion of depreciation claimed during the<\/p>\n\n\n\n
ownership must be recaptured at the time of sale, and is taxed at a depreciation<\/p>\n\n\n\n
recapture rate of %. Profit made on the sale of property owned for a period of<\/p>\n\n\n\n
months or less is taxed at the investor\u2019s ordinary tax rate.<\/p>\n\n\n\n
Example: Capital gains tax calculation.<\/p>\n\n\n\n
An apartment building was purchased for $, by an investor with a taxable<\/p>\n\n\n\n
income of $,. Closing costs were $,. An appraisal indicated the value of<\/p>\n\n\n\n
the improvements represent % of the value of the property.<\/p>\n\n\n\n
Only that portion of the purchase price allocated to the improvements can be<\/p>\n\n\n\n
depreciated. The basis for depreciation is reduced each year to arrive at the adjusted<\/p>\n\n\n\n
basis. When the adjusted basis reaches zero, no further depreciation may be<\/p>\n\n\n\n
claimed.<\/p>\n\n\n\n
After five years of ownership, the adjusted basis is calculated as shown:<\/p>\n\n\n\n
$, Purchase price<\/p>\n\n\n\n
+ $, Closing costs<\/p>\n\n\n\n
$, Acquisition cost<\/p>\n\n\n\n
x . Improvement percentage<\/p>\n\n\n\n
$, Basis for depreciation<\/p>\n\n\n\n
, Annual depreciation allowance<\/p>\n\n\n\n
x Years of ownership<\/p>\n\n\n\n
$, Total depreciation<\/p>\n\n\n\n
$, Basis for depreciation<\/p>\n\n\n\n
– $, Depreciation claimed<\/p>\n\n\n\n
$, Adjusted basis<\/p>\n\n\n\n
If the property was held longer than months and sold for $,, the capital<\/p>\n\n\n\n
gains tax due on sale would be calculated in two steps:<\/p>\n\n\n\n
Step $ , Sales price $, Capital gain<\/p>\n\n\n\n
\u2013 , Acquisition cost x . Capital gains tax rate<\/p>\n\n\n\n
$ , Capital gain $ , Tax on gain<\/p>\n\n\n\n
Step $, Depreciation recaptured $ , Capital gains tax<\/p>\n\n\n\n
x . Tax rate on recapture + , Tax on recapture<\/p>\n\n\n\n
$ , Tax on recapture $ , Total tax due<\/p>\n\n\n\n
Income Classification<\/p>\n\n\n\n
Under the Tax Reform Act of , income must be separated into three categories:<\/p>\n\n\n\n
active, passive, and portfolio.<\/p>\n\n\n\n
Active income. Active income is income from salaries and wages.<\/p>\n\n\n\n
Passive income. Passive income includes income from rental activity and any<\/p>\n\n\n\n
investments in which the investor does not materially participate.<\/p>\n\n\n\n
Portfolio income. Portfolio income is income from dividends.<\/p>\n\n\n\n
The significance of the separation of income into separate categories is that a loss<\/p>\n\n\n\n
cannot be offset against income from another classification; it can be offset only by<\/p>\n\n\n\n
income in the same classification. This is in order to eliminate many forms of tax<\/p>\n\n\n\n
shelters, and to expose more income to federal income tax. Losses that cannot be offset<\/p>\n\n\n\n
by gains in any given year must be carried forward to subsequent years; they may not<\/p>\n\n\n\n
be deducted against income from other sources such as salary, interest, dividends, or<\/p>\n\n\n\n
other active business income. If a property is sold at a gain, any losses from previous<\/p>\n\n\n\n
years may be used to offset losses carried forward.<\/p>\n\n\n\n
Exceptions are as follows:<\/p>\n\n\n\n
Limited exception. A limited exception is when a small investor has an<\/p>\n\n\n\n
opportunity to retain a tax shelter advantage. An investor with an adjusted gross<\/p>\n\n\n\n
income of $, or less may offset up to $, of passive losses against<\/p>\n\n\n\n
active portfolio income as long as,<\/p>\n\n\n\n
o Management decisions are made by the taxpayer<\/p>\n\n\n\n
o The taxpayer owns at least % of the investment<\/p>\n\n\n\n
o The adjusted gross income of the taxpayer is below $,<\/p>\n\n\n\n
This benefit is phased out on a percentage basis when the investor\u2019s income<\/p>\n\n\n\n
rises above $,, and is eliminated when the investor\u2019s income is above $,.<\/p>\n\n\n\n
This exception exists even if a rental agent or property management firm<\/p>\n\n\n\n
handles the property. Management decisions include approving new tenants,<\/p>\n\n\n\n
deciding on rental terms, approving expenditures, and other similar decisions.<\/p>\n\n\n\n
Exception for real estate licensees. The exception for real estate licensees is<\/p>\n\n\n\n
found in the Tax Law of that provides additional relief for real estate<\/p>\n\n\n\n
licensees who spend a minimum of hours per year in the real estate<\/p>\n\n\n\n
business and incur passive loss from rental activities. Real estate licensees who<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
own investment real estate should contact their tax accountants for clarification of<\/p>\n\n\n\n
this provision.<\/p>\n\n\n\n
Capital Gains and Losses<\/p>\n\n\n\n
A capital gain or loss occurs when an investment or business property is sold for an<\/p>\n\n\n\n
amount greater or lesser than the amount paid. Income from properties held for sale to<\/p>\n\n\n\n
customers, such as model homes offered for sale by builders, is considered to be an<\/p>\n\n\n\n
active income since these are not considered to be investment properties.<\/p>\n\n\n\n
As discussed above, passive losses must be carried forward and offset against<\/p>\n\n\n\n
future gains from passive activity. Capital gains, on the other hand, are realized income.<\/p>\n\n\n\n
Generally speaking, realized income is subject to income tax in the year in which it is<\/p>\n\n\n\n
earned.<\/p>\n\n\n\n
There are two methods an investor can use when a property is sold to reduce or<\/p>\n\n\n\n
defer the amount of tax due on the transaction: a tax-deferred exchange or an<\/p>\n\n\n\n
installment sale.<\/p>\n\n\n\n
Tax-deferred exchanges. Tax-deferred exchanges allow any capital gain<\/p>\n\n\n\n
realized from the sale of investment property to be transferred into another<\/p>\n\n\n\n
property by exchanging properties. An investment real estate that is exchanged<\/p>\n\n\n\n
for other investment real estate is called a like-kind exchange. The problem with<\/p>\n\n\n\n
this type of transaction is that most properties do not have the same value.<\/p>\n\n\n\n
Therefore, in order to conclude the exchange, investors often include cash, or<\/p>\n\n\n\n
other forms of unlike property, to equalize the transaction. Unlike property<\/p>\n\n\n\n
received in a tax-deferred exchange is called boot and is taxable to the recipient.<\/p>\n\n\n\n
To the extent that the equities are equal, the capital gain is deferred, or<\/p>\n\n\n\n
postponed, until the property is sold.<\/p>\n\n\n\n
Note that this does not eliminate the tax; it is allowed to be recognized in a<\/p>\n\n\n\n
later tax year. This can be an advantage in tax planning, particularly when an<\/p>\n\n\n\n
investor expects to be in a lower income tax bracket in future years.<\/p>\n\n\n\n
Installment sale. Installment sale is a form of seller financing. No down payment<\/p>\n\n\n\n
is required to qualify as an installment sale. It qualifies as long as at least one<\/p>\n\n\n\n
payment is received in a tax year subsequent to the year of sale. Under<\/p>\n\n\n\n
installment sale treatment, only the percentage of gain received in any given year<\/p>\n\n\n\n
is taxable. Therefore, the gain can be spread over several years, thereby<\/p>\n\n\n\n
reducing the amount of tax due in any tax year.<\/p>\n\n\n\n
Investment Interest Limitation<\/p>\n\n\n\n
Deduction of investment interest is limited to the amount of net investment income<\/p>\n\n\n\n
within the tax year. The investment interest limitation applies to all interest paid for tax<\/p>\n\n\n\n
years beginning after December , , regardless of when the debt was incurred.<\/p>\n\n\n\n
Investment interest. Investment interest is all interest charged on debt that is<\/p>\n\n\n\n
not incurred in connection with the taxpayer\u2019s primary trade or business.<\/p>\n\n\n\n
Investment income. Investment income is gross income from interest,<\/p>\n\n\n\n
dividends, rents, royalties, and income not derived from a trade or business.<\/p>\n\n\n\n
Net investment income. Net investment income is the excess of investment<\/p>\n\n\n\n
income over investment expense.<\/p>\n\n\n\n
At-Risk Rules<\/p>\n\n\n\n
A taxpayer may deduct losses from an activity only to the extent of the amount of<\/p>\n\n\n\n
investment capital that is at risk.<\/p>\n\n\n\n
Retained provisions of the Tax Reform Act of include credits for a taxpayer who<\/p>\n\n\n\n
restores a historical building. The Act also provides credits for qualified low-income<\/p>\n\n\n\n
housing projects.<\/p>\n\n\n\n
BUSINESS ENTERPRISE AND OPPORTUNITY BROKERAGE<\/p>\n\n\n\n
Business Brokerage<\/p>\n\n\n\n
A business brokerage offers real estate services that are connected with the sale or<\/p>\n\n\n\n
lease of businesses. The sale of a business may or may not include the sale of real<\/p>\n\n\n\n
property.<\/p>\n\n\n\n
Business brokerage consists primarily of analyzing financial statements. Those<\/p>\n\n\n\n
engaged in this aspect of real estate are required to have knowledge concerning<\/p>\n\n\n\n
business formations, and be able to read and understand operating statements and<\/p>\n\n\n\n
financial balance sheets. An income statement is a history of income and expenses over<\/p>\n\n\n\n
a stated period, such as a month or a year. A balance sheet reflects the financial<\/p>\n\n\n\n
condition of a business as of a particular time.<\/p>\n\n\n\n
The sale of a business may involve the transfer of ownership of shares of stock,<\/p>\n\n\n\n
limited partnership interests, or other forms of securities. Persons who deal in securities<\/p>\n\n\n\n
are required to have a separate license. Real estate licensees must be certain that<\/p>\n\n\n\n
securities laws are not violated when listing or selling a business.<\/p>\n\n\n\n
The sale or lease of a business is a real estate transaction. Persons and firms that<\/p>\n\n\n\n
offer brokerage services connected with the sale or lease of a business are regulated by<\/p>\n\n\n\n
F.S. , and are required to hold a real estate license. Regulation of business<\/p>\n\n\n\n
brokerage became effective in . The legislature believed a real estate license<\/p>\n\n\n\n
should be required in the brokerage of a business since the transaction almost always<\/p>\n\n\n\n
involves either the sale of real estate or negotiation of a lease.<\/p>\n\n\n\n
A real estate licensee may also need to hold a securities license if the transaction<\/p>\n\n\n\n
includes the transfer of corporate stock or limited partnership interests. Legal counsel is<\/p>\n\n\n\n
strongly advised before proceeding with the sale of a business.<\/p>\n\n\n\n
Business Enterprise Defined<\/p>\n\n\n\n
A business enterprise involves transactions that are in excess of $,. The<\/p>\n\n\n\n
brokerage of larger businesses usually involves the transfer of stock shares or other<\/p>\n\n\n\n
types of security. The transaction may or may not involve the sale of real estate. If not,<\/p>\n\n\n\n
negotiation of a lease may be required.<\/p>\n\n\n\n
Markets for business enterprises are typically wider in geographic scope than<\/p>\n\n\n\n
markets for individual parcels of real estate.<\/p>\n\n\n\n
Business Opportunity Defined<\/p>\n\n\n\n
Business opportunities involve smaller businesses with sales prices of $, or<\/p>\n\n\n\n
less. These businesses typically have a limited amount of assets. The ownership of such<\/p>\n\n\n\n
businesses may also involve securities, but many are sole proprietorships or<\/p>\n\n\n\n
partnerships that do not.<\/p>\n\n\n\n
The sale of many of these businesses involves only the sale of inventory and<\/p>\n\n\n\n
fixtures, and an assignment of a lease.<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
Expertise Required of Business Brokers<\/p>\n\n\n\n
Generally, business brokers work in conjunction with certified public accountants and<\/p>\n\n\n\n
attorneys. Business brokers must have an understanding of corporate finance and<\/p>\n\n\n\n
knowledge regarding the classes and characteristics of corporate stock, securities<\/p>\n\n\n\n
analysis and valuation, capital management, and budgeting.<\/p>\n\n\n\n
A business broker must have knowledge regarding business accounting, including<\/p>\n\n\n\n
classes of assets and liabilities, income statement analysis, balance sheet analysis,<\/p>\n\n\n\n
cash-flow analysis, asset depreciation methods, and taxation.<\/p>\n\n\n\n
Appraisal Using the Liquidation Value Approach<\/p>\n\n\n\n
The comparable sales approach, cost-depreciation approach, and income approach<\/p>\n\n\n\n
(discussed in ) can all be used to appraise a business. A fourth method, the<\/p>\n\n\n\n
liquidation value approach, may also be used. This approach is unique to the valuation<\/p>\n\n\n\n
of a business.<\/p>\n\n\n\n
Liquidation value is the value that remains after liquidating all the assets of the<\/p>\n\n\n\n
business and satisfying all the liabilities. This approach is used to value a failing<\/p>\n\n\n\n
business that is not expected to continue to do business. It can also be used to establish<\/p>\n\n\n\n
the minimum value of a profitable business.<\/p>\n\n\n\n
The appraisal of a profitable business presents a unique challenge. The value of the<\/p>\n\n\n\n
business is not just the value of any real estate owned, but rather, a composite of the<\/p>\n\n\n\n
values of the real estate, personal property, and intangible assets, such as licenses,<\/p>\n\n\n\n
franchises, noncompetition contracts, and so on. When the value of all assets is<\/p>\n\n\n\n
combined, it creates what is known as going concern value.<\/p>\n\n\n\n
Reasons for a Business Appraisal<\/p>\n\n\n\n
Business owners or potential purchasers may request an appraisal in order to<\/p>\n\n\n\n
establish a sales or purchase price, obtain a loan, or for insurance purposes. Other<\/p>\n\n\n\n
reasons include condemnation, buy-sell agreements, property settlements, estate<\/p>\n\n\n\n
settlements, or to be used in connection with employee stock option plans.<\/p>\n\n\n\n
Uniform Commercial Code<\/p>\n\n\n\n
The Uniform Commercial Code (UCC) is a body of standardized rules that regulate<\/p>\n\n\n\n
commercial transactions throughout the nation by focusing on the sale and financing of<\/p>\n\n\n\n
personal property. Florida has adopted a version of the UCC as law.<\/p>\n\n\n\n
When personal property is sold in a commercial transaction, a Bill of Sale is used to<\/p>\n\n\n\n
identify the property conveyed. This document is similar to a deed. If financing is<\/p>\n\n\n\n
involved, a standard Security Agreement is used to identify the property that is security<\/p>\n\n\n\n
for the debt. The Security Agreement is similar to a mortgage and is usually recorded to<\/p>\n\n\n\n
protect the lender\u2019s interest in the property.<\/p>\n\n\n\n
An attorney must be retained to prepare documents used in compliance with the<\/p>\n\n\n\n
UCC; real estate licensees may not prepare these on behalf of customers or principals.<\/p>\n\n\n\n
Accounting Terms<\/p>\n\n\n\n
Agents involved in the selling of businesses should be familiar with the following<\/p>\n\n\n\n
terms and the accounting formula:<\/p>\n\n\n\n
Assets. Assets are items of value that are owned by a business. Assets include accounts and promissory notes receivable, cash, inventory, production machinery, real estate, personal property, patents, trademarks, and goodwill (the value of the name of the business in the marketplace).<\/p>\n\n\n\n
Liabilities. Liabilities are debts that are owed by a business. Liabilities include accounts and notes payable, and long and short-term debt. Short-term liabilities are debts that must be recognized within one year or less. Long-term liabilities are debts that will not come due for more than a year, such as mortgage balances.<\/p>\n\n\n\n
Owner\u2019s equity. Owner\u2019s equity is the difference between assets and liabilities.<\/p>\n\n\n\n
Basic accounting formula. The basic accounting formula is<\/p>\n\n\n\n
Assets – Liabilities = Owner equity<\/p>\n\n\n\n
Capital. Capital is the total amount that is invested. Capital includes the funds that were used to start the enterprise, money that is invested during operation, and retained capital.<\/p>\n\n\n\n
Tangible assets. Tangible assets are assets that have physical existence such as buildings, furniture, office equipment, and so on.<\/p>\n\n\n\n
Intangible assets. Intangible assets have no physical existence, but have monetary value. Intangible assets include stock shares, trademarks, copyrights, research and development expenses, noncompetition contracts, franchises, and goodwill.<\/p>\n\n\n\n
Steps in the Sale of a Business<\/p>\n\n\n\n
The steps taken to list and sell a business are not unlike the steps that are taken to<\/p>\n\n\n\n
list and sell any other real estate. The exception, of course, is the knowledge and<\/p>\n\n\n\n
experience necessary to properly value and market the business.<\/p>\n\n\n\n
Step Acquire the listing. The listing process is virtually the same as listing<\/p>\n\n\n\n
other property for sale.<\/p>\n\n\n\n
Step List the assets. A detailed list of all tangible and intangible assets is<\/p>\n\n\n\n
required.<\/p>\n\n\n\n
Step Valuation. Estimate the value of the business by using the appropriate<\/p>\n\n\n\n
appraisal methods.<\/p>\n\n\n\n
Step Deduct liabilities. The value established in Step must be reduced by<\/p>\n\n\n\n
the amount of liabilities, long- and short-term. This includes the value of<\/p>\n\n\n\n
any preferred, outstanding stock.<\/p>\n\n\n\n
Step Valuation of stock. If a corporation is being sold by transferring shares<\/p>\n\n\n\n
of stock, the share value must be determined. Divide the net value of the<\/p>\n\n\n\n
business by the number of shares to determine the per-share value.<\/p>\n\n\n\n
Real Estate Investments and Business Opportunity Brokerage <\/p>\n\n\n\n
Step Legal compliance. Review the transaction carefully before proceeding in<\/p>\n\n\n\n
order to be certain that all laws have been complied with. This includes<\/p>\n\n\n\n
real estate, securities, mortgage brokerage licensing laws, and UCC<\/p>\n\n\n\n
requirements.<\/p>\n\n\n\n
Step Close the transaction. Locate a buyer who is interested in the business<\/p>\n\n\n\n
and conclude the sale.<\/p>\n","protected":false},"excerpt":{"rendered":"