July 10th, 2016
HECM Servicing Frequently Asked Questions (FAQs)
With more and more HUD, Fannie May and other Government held foreclosures on the market it is becoming much more common to see homes listed with the phrase...
"PROPERTY IS BEING SOLD SUBJECT TO 24CFR 206.125" So I have attached here the Frequently asked questions document from HUD to help explain this convoluted mess.
Thanks for visiting Turn-Key Properties LLC
Real Estate Asset Protection
Asset protection is a legitimate right of any individual to avoid or mitigate the effects of taxation, divorce and bankruptcy. Asset protection is a concept that has arisen out of the estate planning industry. It is an attempt to hinder a creditor's attack to seize and sell assets to recover debt owed. It changes the character of assets that cannot be legally seized and sold by the creditor.
There are various legal techniques to protect your assets. They vary depending on the type and location of property with limitations. The most essential factors of an asset protection plan are the degree of financial risk, type of assets own total net worth. The kind of asset protection you need depends on your risk factor. It is a standard part of business and estate planning. Traditional forms of asset protection techniques are gift of property, retirement plans, spendthrift provisions in life insurance, turning the business into a limited company, etc. You can also transfer a risk to an insurance company that will protect your asset.
In domestic asset protection strategy you have to legally protect your assets within the country of that you residence in. While offshore asset protection allows you to transfer your assets and form a trust in a foreign land that has anti-creditor law. It is an expensive technique that requires a lot of legal consultation and maintenance.
Properly crafted asset protection strategy could reduce the damage caused by a plaintiff's attorney. Asset protection has been practiced for ages because it is legal, effective and trusted. It is the best way to protect your savings, investments and other accumulated assets.
If you own rental property you would do well to talk to an attorney who specializes in aset protection.
What does the IRS have to say about eschanging your property or a 1031 exchange? What is a 1031? Like-Kind Exchanges - Real Estate Tax Tips Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
Cash on Cash Return
In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. The formula to compute cash-on-cash return is:
PurposeThe cash-on-cash return is often used to evaluate the cash flow from income-producing assets.
ExampleSuppose an investor purchases a $1,200,000 apartment complex with a $300,000 down payment. Each month, the cash flow from rentals, less expenses, is $5,000. Over the course of a year, the before-tax income would be $5,000 × 12 = $60,000, so the cash-on-cash return would be
LimitationsBecause the calculation is based solely on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor's tax situation, the particulars of which may influence the desirability of the investment. Furthermore, the formula does not take into account any appreciation, depreciation, or other risks associated with the underlying property.
Cash-on-cash return is essentially a simple interest calculation, and therefore is not subject to the compounding of interest. The implication for investors is that an investment with a lower nominal rate of compound interest may be superior, in the long run, to an investment with a higher cash-on-cash return.
Retrieved from "http://en.wikipedia.org/wiki/Cash_on_cash_return"
Internal Rate of Return (IRR)
Occasionally someone will want to calculate the Internal Rate of Return on an investment property. This article explains how that formula works. (IRR) The internal rate of return (IRR) is a capital budgeting method used by firms to decide whether they should make long term investments. The IRR is defined as any discount rate that results in a net present value of zero, and is usually interpreted as the expected return generated by the investment. In general, if the IRR is greater than the project's cost of capital or hurdle rate, the project will add value for the company.
To find the internal rate of return, find the IRR that satisfies the following equation
Year Cash flow
Calculation of NPV:
i = interest rate in percent
NPV = -100 +120/[(1+i/100)^1]
(This calculation is condensed.)
Calculation of IRR:
NPV = 0
-100 +120/[(1+IRR/100)^1] = 0
IRR = 20%
Problems with using IRRAs an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in. In cases where one project has a higher initial investment than a second mutually exclusive project, the first project may have a lower IRR (expected return), but a higher NPV (increase in shareholders' wealth) and should thus be accepted over the second project. A method called marginal IRR can be used to adapt the IRR methodology to this case.
The IRR method should not be used in the usual manner for projects that start with an initial positive cash inflow, for example where a customer makes a deposit before a specific machine is built, resulting in a single positive cash flow followed by a series of negative cash flows (+ - - - -). In this case the usual IRR decision rule needs to be reversed.
If there are multiple sign changes in the series of cash flows, e.g. (- + - + -), there may be multiple IRRs for a single project, so that the IRR decision rule may be impossible to implement. Examples of this type of project are strip mines and nuclear power plants, where there is usually a large cash outflow at the end of the project.
In general, the IRR can be calculated by solving a polynomial. Sturm's Theorem can be used to determine if that polynomial has a unique real solution. Importantly, the IRR equation cannot be solved analytically (i.e. in its general form) but only via iterations.
A critical shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. However, this is not the case because intermediate cash flows are almost never reinvested at the project's IRR; and, therefore, the actual rate of return (akin to the one that would have been yielded by stocks or bank deposits) is almost certainly going to be lower. Accordingly, a measure called Modified Internal Rate of Return (MIRR) is used, which has an assumed reinvestment rate, usually equal to the project's cost of capital.
Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over NPV. Apparently, managers find it intuitively more appealing to evaluate investments in terms of percentage rates of return than dollars of NPV.
Modified Internal Rate of Return (MIRR) is a financial measure used to determine the attractiveness of an investment. It is generally used as part of a capital budgeting process to rank various alternative choices. As the name implies, MIRR is a modification of the financial measure Internal Rate of Return (IRR).
There a few misconceptions about the IRR calculation. The major one is that IRR automatically assumes that all cash outflows from an investment are reinvested at the IRR rate. IRR is the "internal rate of return" with "internal" meaning each dollar in an investment. It makes no assumptions about what an investor does with money coming out of an investment. Whether the investor gives it away or puts it in a coffee can, the IRR stays the same.
It does however have a few drawbacks. First, IRR is not made to calculate negative cash flows after the initial investment. If an investment has an outflow of $1,000 in year three and an IRR of 30%, the $1,000 is discounted at 30% per year back to a present value. You would have to put this PV amount in an investment earning 30% per year for the IRR to reflect the true yield. Also, IRR ignores the reinvestment potential of positive cash flows. Since most capital investments will have intermediate positive cash flows, the firm will need to reinvest these cash flows, and the firm's cost of capital is a reasonable proxy for the return to be expected. Investments with large or early positive cash flows will tend to look far better with IRR than with MIRR for this reason.
To illustrate: a firm has investment options with returns that are generally moderate. An unusually attractive investment opportunity comes up with much higher return. The cash spun off from this latter investment will probably be reinvested at the moderate rate of return rather than in another unusually high-return investment. In this case, IRR will overstate the value of the investment, while MIRR will not.
Formula MIRR is calculated as follows:
where n = i + j
What is a Cap Rate
Just what is a CAP Rate and how do I figure it?
According to the Appraisal Institute, a cap rate is the method used to convert an estimate of a single year's income expectancy into an indication of value, by dividing the income estimate by an appropriate rate. Expressed as a formula, it looks like this:
Cap Rate = NOI / Value
Where NOI = Net Operating Income. This also leads to the derivative formulae:
Value = NOI / Cap Rate, and
NOI = Value x Cap Rate
An investor is looking at a property listed at $100,000 She knows that the annual expenses will be $10,000 annually. and the income will be $20,000. The NOI is then $10,000 annually. Thus the cap rate is 10%.
A positive cash flow is hard to recognize if the cap rate falls below 10-15%. And lets face it, this is all about cash flow.
Appreciation is a great plan but most people don't have the pockets to purchase a property that will not cash flow, waiting and hoping that it will appreciate. You need income. I need income without it you call me and yell at me. Not good!
You must have the prior operating expenses for the property. More importantly they must be correct. Let us go over the numbers with you and evaluate them.
You must understand the actual operating expenses of an income producing property. Those expenses have a direct effect on the NOI, which has a direct effect on the Cap Rate. Before proceeding, let's review some terms:
For illustration, let's choose a duplex that has two 2-bedroom apartments. Let's also say that you know the current fair market rent for a 2-BR apartment in your area to be $650/month. If this property is listed at $98,000, what would be the cap rate?
You cannot answer this question unless you know the operating expenses for this property. You can figure out that the annual Income should be $15,600, but that's as far as you can go. Let's say that you are told that the owner listed operating expenses as $4,300 last year on their tax return. Now, you have something to work with (even though owners tend to inflate the actual operating expenses on tax returns, in order to reduce taxes owed.)
Using these numbers, the NOI would be $11,300, and the cap rate would be 11.53%. But, let's say that the same tax return only shows $13,700 in rental income. How does this change things? Using that figure, the cap rate would only be 9.59%.
Your investment guidelines might require a 10% or better cap rate for rental properties. How could you get the cap rate up, knowing that the owner's tax return last year shows a NOI of only $9400? If you remember the cap rate formula, you can increase the cap rate by:
- Increasing the rent (it's $1,900 a year under fair market)
- Decreasing the operating expenses ($4,300 might be too high)
- Negotiating a lower purchase price ($94,000 would be a 10% cap rate)
Don't forget to factor in your closing costs and of course my management fees.
Now, did the previous owner do all of his own maintenance? Will this make your costs higher? What about taxes and insurace? They never decrease! Did he have a high vacancy rate prior to listing the property for sale. Very common to fill a property with warm bodies that may not pay rent, just to say it's full. If so will this make your utility and trash collection higher? Don't forget eviction costs. If he filled it up with deadbeats I will have to evict them. In this area that may take 90 days.
Don't go into these things alone. Please call me. I may save you a fortune.
What does Turn-key mean?
_ What does Turnkey mean? What is a turnkey investment or what is a turnkey property?
Turn-Key is defined by Wiki as
"Turnkey refers to something that is ready for immediate use, generally used in the sale or supply of goods or services. The term is common in the construction industry, for instance, in which it refers to the bundling of materials and labor by sub-contractors. A "turnkey" job by a plumber would include the parts (toilets, tub, faucets, pipes, etc.) as well as the plumber's labor, without any contribution by the general contractors.
This is commonly used in motorsports to describe a car being sold with drivetrain (engine, transmission, etc.). A vehicle for sale without these pieces is sold "rolling". A racer may prefer to keep the drivetrain pieces to use in another vehicle to preserve a combination. Similarly, this term may be used to advertise the sale of an established business, including all the equipment necessary to run it, or by a B2B supplier providing complete packages for business start-up.
Specific usageThe term turnkey is also often used in the technology industry, most commonly to describe pre-built computer "packages" in which everything needed to perform a certain type of task (e.g. audio editing) is put together by the supplier and sold as a bundle. This often includes a computer with pre-installed software, various types of hardware, and accessories.
In The Wizard of Id, Spook's jailer is named Turnkey."
In real estate the term has two meanings; for rental property the term means to be ready to rent-ready or move-in ready. In investment real estate the term means a property that is already tenanted and fully functional as an investment property.
A turn-key property is one that is fully occupied with little or no maintenance required, generally with management in place. Often, local investors do not require the services of a property management company.
There is no dollar figure attached to the term turnkey only the fact that the property is leased, occupied and cash-flowing.
Cap Rates are often used to decide the income potential or value of a property. Please visit our Cap Rate description page understand the value of a cap rate.
We offer Turn-Key Property, Many of our current investors are interested in selling their investment portfolio. We can offer sales, leasing and property management for your turnkey investment.
Another use of the term turnkey is to say that a company offers turnkey services. Many contractors offer total turnkey services for rental property. Taking a vacant unit from vacant to cleaned, painted, and ready for occupancy.
Buy a House, Get a Gun!
_ Buy or sell real estate in KS and we will buy you a new gun!* *Conditions apply! Buy Real Estate in KS and Get a Gun Too!
Turn-Key Properties LLC is offering an inducement as approved by the KREC. That inducement is defined herein. This offer is extended to buyers and sellers of real estate valued at over $100,000 in the state of KS. The buyers must either be purchasing property that is listed with Turn-Key Properties LLC or using Turn-Key Properties LLC as their buyers or sellers agent.
Unfortunately; like anything else in this world we have to have disclaimers. This offer is subject to change without notice at any time. If at any time this offer is considered to violate any laws or ethics, this offer is null and void!
After many weeks of waiting for clarification from the KREC, on the offering of inducements I finally received approval for such in writing on June 9, 2009.
While such inducements are legal in Kansas, they are not in Missouri so this offer only applies to specific properties in Kansas. Not all listings by Turn-Key Properties LLC in Kansas will offer this inducement; only ones selected by the Brokers and staff of Turn-Key Properties LLC. Those properties will be clearly labeled with information about the inducement.
GUN: No actual guns, firearms or ammunition will be purchased or transferred by Turn-Key Properties LLC, its agents or staff. Instead a VOUCHER will be issued to the buyer or seller for a value of $250.00. That voucher will be for the purchase of any items or services from any local firearms dealer who is willing to participate.
VALUE: The VOUCHER shall have no actual cash value, and cannot be traded for cash. It can only be used at a participating firearms dealer in exchange for products or services.
SUBSTITUTIONS: The Free Gun/Voucher is offered mostly as a marketing gimmick; if the buyer declines to accept the Gun/Voucher, no substitutions will be offered. As the Gun/Voucher has no declared value. Should the buyer request it, a BB gun, squirt gun or a cap pistol will be made available as a substitution. See also: http://en.wikipedia.org/wiki/Gimmick .
* If you do not want a Gun/Voucher, or you are not legally allowed to own a firearm you do not have to accept a Gun/Voucher! *
LIMITATION OF LIABILITY: Turn-Key Properties, our agents, clients, buyers, sellers, principles, partners, employees, friends, family, pets and even our horses claim no representations or warranties regarding anything or any gun or voucher. Further by accepting the voucher you agree that we are not liable for anything you do with it or after using it. Guns are not toys, and if you are not experienced in the use of a firearm you should seek training. Firearms can be used as lethal weapons and as such have certain risks involved.
In other words it is a voucher, a piece of paper and we are not responsible for what you do with it!
I agree to the terms and conditions defined herein, if you do not understand this document please seek legal advice.
_______________________ Accept the Voucher Decline the Voucher
Turn-Key Properties LLC
22 years of real estate and property management experience serving Missouri and Kansas.