Archive for Business Topics
Tax Savings: Cost Segregation – Why isn’t my CPA already doing this?
Most commercial property owners, even those who use professional accountants, fail to take advantage of cost segregation, a tax mechanism that could generate substantial savings in federal income taxes.
While most accountants are familiar with the approach, many are hesitant to recommend it without a documented analysis of correct depreciation amounts. The numerous intricacies of IRS designated building components make it difficult for some accounting professionals to be cognizant of all applicable items on a specific property. CPAs recognize that in order for the client to fully benefit, it is usually necessary to seek a real estate specialist to provide an independent report supporting the owner’s depreciation schedule.
Although it is vastly under-utilized, cost segregation is no wildly speculative accounting tool. In fact, the American Institute of Certified Public Accountants’ National Journal of Accountancy has published numerous articles in support of cost segregation.
Cost segregation identifies applicable components and establishes the value and correct time line for depreciation. Under typical circumstances, depreciation is spread out over as long as 39 years. However, cost segregation applies depreciation to parts of the property in 5-,7- and 15-year increments. This acceleration in depreciation time reduces the income subject to federal taxes. This method does not dictate alternative minimum tax issues.
Professionals Prepare Detailed Reports
To perform a cost segregation analysis, initially the building’s cost basis for construction, renovation and repairs is reviewed. A technician goes on site to take detailed measurements and observe the quality and condition of the property. After the site visit, he or she calculates the value of the property using widely accepted pricing resources and local economic conditions.
A cost segregation study produces a professional document that is backed by careful research. The results are summarized in a detailed report, documenting the amount of 5-,7- and 15-year property that qualifies for short-life depreciation.
Real estate appraisers or engineering firms typically have the knowledge to perform the detailed cost segregation studies, frequently at the recommendation of the owner’s tax preparer. Preparing the study requires expertise in evaluating real estate and complete command of the regulations that detail these depreciation options. Internal Revenue Code regulations outline approximately 130 categories of property, which qualify for shorter lives.
Cost segregation regulations contain a lot of variables that are not necessarily intuitive. The 5-year property includes items such as carpet and vinyl flooring. Seven-year property may reflect signs and parking lot striping. Fifteen-year property encompasses paving and landscaping.
Many CPAs Do Recommend Cost Segregation
Most property owners instinctively believe their CPAs are performing cost segregation for them, but research has suggested that this tool is used only 5 to 10 percent of the time. CPAs and other tax preparers may not routinely perform the study because it involves real estate appraisal methodology and specialized knowledge outside the scope of a typical tax practice. Even though cost segregation may be unfamiliar territory to some accounting professionals, it is highly praised by many accountants. Recent changes in tax regulations make cost segregation more attractive and allow it to be implemented years after the completion of a real estate purchase.
How Does It Work?
Historically, most depreciation schedules are split between land and long-life property. Long-life property depreciates over 27.5 years for apartments and 39 years for most commercial properties. A cost segregation study can typically allocate 20 percent to 40 percent of the improvement basis to short-life categories, and sometimes more.
High-income owners typically pay a 35 percent federal tax rate on ordinary income and a 15 percent rate on capital gains. The mechanics of reporting the gain on a sale usually allocate most of the gain to capital gains, which is taxed at 15 percent.
A cost segregation study actually reduces the amount of long-life property, which is recaptured at 25 percent by allocating more of the basis to the 5-,7- and 15-year property. If cost segregation is utilized from inception until a gain on the property is recognized, it can reduce the federal tax rate from 35 percent to 15 percent for most investors. The exceptions are C corporations, which pay the same tax rate for either ordinary income or capital gains.
How Much Can It Save?
A recent client of the firm realized a payback ratio for the first year savings at 4:1 and the payback ratio for the first five years at 20:1.
Who Prepares Cost Segregation Studies Today?
Appraisal and engineering firms, Big Four firms and spin-offs of Big Four firms are the primary providers of cost segregation studies. Some accounting firms offer the service but frequently outsource the actual report preparation to an appraisal or engineering firm. With the introduction of new providers, the price gap has widened between very low cost analytical studies and much higher large firm rates.
Do All Properties Benefit From Cost Segregation?
Cost segregation is typically effective and financially feasible for properties that have an improvement basis of $500,000 or higher.
Properties with a great deal of site-improvement, including landscaping and parking, generate great results.
Cost segregation can be performed for properties anywhere in the United States. It is effective for apartments, office, retail, industrial, self-storage and many special use properties.
When Should You Obtain A Cost Segregation Report?
It typically makes sense to obtain a cost segregation report the year a property is purchased or built. Property owners who purchased or constructed property after 1986 can often benefit substantially by re-couping previously under-reported depreciation without filing amended tax returns.
Commercial Real Estate Savings
For small companies, an office is an overhead that many feel they can do without, at least when starting up, but as a business grows and takes on staff, an office becomes an essential.
Even before that, there are many arguments in favour of a physical presence; an office can add credibility, and suggests permanence, that the company is going to be around in the future, perhaps particularly important for new companies.
But how much space should you rent or buy? Obviously this will depend on the employees that you expect to be working there, but you will need to factor in growth plans, whether you require an open plan working environment (allow 75-100 sq ft for each person) or individual offices (about 175 sq.ft) and meeting areas (215 sq.ft will accommodate a table and chairs for about six to eight people).
An alternative, particularly if your growth is uncertain is a serviced office, where you rent space by the number of workstations you require and by the month. This may not only help with cash flow, but also allows a company to grow or contract in a fairly flexible manner. There are no capital outlay costs for furniture or telephone equipment, all of which are provided and if you need meeting space, you pay for it by the hour.
Additional services, such as secretarial assistance are also available as required and the telephone is answered by a dedicated receptionist and in your company’s name.
On a price per sq. ft basis, serviced offices are more expensive, but this additional cost is often outweighed by the fact you are paying for just the space your business needs.
Real Estate Investing Business: Learn To Expand Your Business Network
People just getting started in real estate investing notice at the very outset that having a network of fellow investors and a network of buyers can make their investment business flourish. Having a network of people to rely on can help you locate better properties and also to find out which investors will usually want to buy real estate from you. In fact, it is not all that hard to build up your own business network provided you know how to go about it.
As far as real estate investing goes, it is common knowledge that you won’t buy every property that comes your way. But when you check out different properties you will come into contact with others who have similar interests — giving you the basis for your business network. After you have made a few real estate investing deals you will also have come into contact with REO agents who may be holding bank properties that are in post-foreclosure — another source of contacts for your business network.
One last source we’d like to recommend for business networking is to attend seminars and go to classes that deal with real estate investing
If you follow these simple tips, you will find that your business network will expand considerably.
Assembling Your Real Estate Investing Dream Team
There are several important things you need to be successful in real estate investing, one of which is a great team. I’m going to talk briefly about who should be on the winning team:
1. Your Mentor – every successful entrepreneur needs a good mentor. A guide. By training under the watchful eye of one smarter then us, we can only get smarter. Start at your local investment club
2. Mortgage Broker – you want someone who has the experience of working with other investors. They need to be creative and smart!
3. Real Estate Attorney – it is really important to have someone on the team who can go through contracts, and who knows the legalities of all your moves.
4. Escrow Officer or Title Rep – having a good one on the team helps to close deals that much quicker. You always want people looking out for YOUR interests.
5. Accountant – Preferably a CPA (Certified Public Accountant). Your numbers guy should also be well aware of the ins and outs of real estate. Come tax time, this is the man to help you through the write-offs!
6. Insurance Agent – It is always better having an insurance rep that is looking out for you when things hit the fan.
7. Contractor – The good contractor seems like the hardest one to find, but can often make or break your profit margin. You want someone who gets things done on time and under budget!
8. Supportive Family & Friends – Having the support and backing of loved ones is important in any endeavor.
Other Optional Team Members:
9. Realtor – someone keeping an eye out on your behalf
10. Property Manager – someone to watch over your investments
11. Great Handyman – Someone to take care of the little things that come up on a daily basis.
Assembling the team will not happen overnight, but once together, they will give you the backing and help you’ll need to make your real estate investing dreams come true.
Real Estate Investing Business: Getting The Most Out Of SEO
Being in the real estate business used to mean advertising properties over the radio, on the TV, and even in newspapers. With the Internet properties can be listed online, allowing clients to view houses and land before contacting you. But what if they’re using a search engine to find the real estate for them and your site doesn’t show up? That’s where real estate SEO (Search Engine Optimization) services come in, offering the ability to boost your real estate site to a higher position in the search results.
Keyword placement is one of the important factors in getting a search engine to find and return your site as one of their top listings. Linking in from other sites is another great way to get people to see your real estate site. The more people on outside sites who click links that lead to your site, the higher your site will go up in the search results. The content on your site is also very important as once people arrive at your site, your content will be what gets them stay.
There are wrong ways to use keywords and link building. More importantly, if done improperly, it can actually get your real estate site banned from search engines such as Google. Overuse of keywords (keyword spamming) can clutter the content of your site and even defeat the purpose of your site by creating a search engine friendly text that has nothing to do with your business. Linking to your site from others can also be useless if the site your link is on isn’t related to the real estate in some way.
As with any business transaction, if you’re going to pay money you should be sure to see references or examples of SEO service company’s work. If this can’t be provided to you, move on. Since you’re hiring the company to help increase your site’s popularity, they should be able to tell you some of the proper keywords and phrases you’ll need. If they’re asking you what you want to use, they’re not fulfilling the duties of their job.
A good SEO service company will want to know about your company so they know what route would be best for you and your real estate business. They’ll also have a writer to assist with the search engine optimization, since keyword placement works best when the text is written with keywords rather than throwing keywords into text later on. When you’re satisfied that the real estate SEO services you’re looking into are legit, the sooner you hire them the sooner you’ll see more traffic at your business site.
Asset Protection for Real Estate Investors
Many real estate investors started out running their investing business as a sole proprietor because they really didn’t know any better. Most survived with only minimal damages, but quickly realized they needed to take the time to assess the best legal structure to use for real estate investing.
If you ask 10 experts you are likely to get 10 different opinions. With that in mind, here’s our opinion. Please don’t let our advice interfere with common sense and sensible business practice — ie, consult with your attorney or accountant (or the website of your state’s secretary of state) when choosing a business structure.
Many say that if you are a beginning investor, it’s probably best to not worry about asset protection until you actually have a few assets to protect. On this point we disagree. Our opinion is that you carefully consider the method(s) you will be acquiring and disposing of your real estate assets. Then huddle with your team/advisors and set up a business structure that will provide the best asset protection for the way you plan to run YOUR business. Why do we suggest getting the asset protection part done up front? Because you can turn around an investment deal faster than you can set up a business. Better to have your asset protection plan in place when you do the deal, than to try to go back and get everything re-done in the name of the business. Our recommendation is to never take title to investment property in your own name.
So, now that you’re going to structure that business, what structure should you take?
Assuming you want to set up an entity for handling your investment properties, the most popular are an LLC (Limited Liability Corporation) or a C Corporation. There is a lot of debate about which one is better. Many investors prefer the C Corporation because a certain amount off the top is taxed at 15percent and you can have a kick-butt employee (you) benefit plan to write off expenses. Others prefer the LLC, even though the income is passed through like a sole proprietor. The LLC is easy and inexpensive to establish, and just as easy to dissolve. In fact, we know investors who set up an LLC for each property they hold.
There are other ways to structure your business and shield your assets, but don’t even get us started on S Corps, or on the more complicated structures whereby you establish one entity which owns the others. Just trust us that you’ll want to talk it all over with a trained professional or a mentor.
Why is the tax issue such a big deal?
Here’s a simplified example using the C Corp. If you make $100K as a sole proprietor you are taxed on the full amount (35 percent) and have $65,000 left. Anything you buy for yourself comes from after-tax dollars. However, with a C Corporation if you could make the same $100K on paper, but have $50K in allowable expenses that you can write off. So you get taxed on that $50K at 15 percent and only have to pay $7,500 in taxes compared to $35,000 if it was your personal income being taxed. You still can buy the same stuff, but you are taxed less if you structure things correctly.
A very wealthy man once said It’s very hard for a C Corporation to make any money! What he meant was that C Corporations can expense almost everything until there is little or no profit.
Think about it… and then call a professional.
Real Estate Specialists: The Buyer’s Agent
Never before has the role of specialists in real estate been more important. With buyers and sellers requiring more services, the industry has seen an explosion of agents who specialize in either the representation of sellers or buyers. These specialist agents can provide a wealth of services and maintain a complete impartiality during the sales process as there is only one client to concern them.
Historically the sales transaction and the concerns of the buyer were the purview of a single realtor. However as the industry has progressed, so have the needs of each party and so the specialist arose. Buyers have some very particular needs, and specifically the need to feel that their best interests are seen to. Listing agents are representatives of the home’s owner and in that role they have a primary responsibility to that owner.
So what is it that a buyer’s agent does?
Primarily the buyer’s agent will begin with the location of suitable properties for their clients. This is usually based on a list of requirements and desires that the client has communicated to the agent. They will then arrange viewings and recap their findings with their clients and assist in deciding upon a good candidate for an offer. This will be based on the wealth of community information that a buyer’s agent commands
As specialists, buyer’s agents are experts on their given area. Once a property is selected, the buyer’s agent role evolves into an overseer-negotiator role. They will typically coordinate the inspections and conduct the negotiations with the listing agent. This includes the execution of and closing of the actual contract.
There is an art to representing a buyer. It is a role that has become ever more crucial in an industry where customer service is the single most important thing that an agent can offer. If you are in the market for a home then the buyer’s agent is the friend that you need in order to make sure that you are given the service that you deserve.
The Key to Real Estate Investing Success: Goal Setting
Goal setting is a primary attribute of successful entrepreneurs, while lack of proper planning is the number one reason for failure.
Proper goal setting involves setting a business plan in place for your life. To many, this doesn’t sound easy or it sounds tedious. In practice though, goal setters have more free time, more money, and more success in all areas of their lives than those who don’t set goals, and it’s no different with real estate investors.
Real Estate Investing must be treated as a business. It requires planning that anyone can do. Much like an airplane pilot who goes through a pre-flight checklist, the real estate investor must go through many steps for every real estate deal. You must find the deal, do your research on the property to establish a value, prepare your contracts, present your offer, schedule the closing, get the title work done, prepare the financing, get property insurance, etc.
Set your plan up into baby steps that you can review and knock out every single day. Your daily plan must include marketing to get motivated sellers to contact you. Regardless of the deals you have in the works, if your marketing stops, you will go through long dry spells. Even with consistent marketing you will have periods with few leads and periods where you are swamped with sellers offering you great deals.
Constant daily review of your goals is critical. This is why so many suggest taping your goals to your bathroom mirror so you see it them when you wake up and again before you go to bed. You can even buy giant poster sized post it notes to write your goals on and stick them to your wall. Reviewing your goals before going to sleep at night causes your brain to program your goals into your subconscious. So put those goals down on paper and start putting your real estate investing success plan into action!
Real Estate Investing Business: Your ‘Go-To’ Team
If you tend to be a “lone wolf,” trying to do too much yourself, listen up! In real estate investing, you need a team of people you can trust and rely on. Here are some possible team members, and what they should bring to the team.
1. A mortgage broker or banker. A broker can offer many options, but a banker can make the loan decision. They each have their advantages, and you could use both on your team. In either case it’s important they understand what you want (fast closings, lower interest, corporate loans, etc)
2. An accountant or bookkeeper. Keeping proper books for real estate investments is getting more complicated with all the tax-law changes. Find someone who understands the law, and understands what you want.
3. A real estate attorney. Find someone familiar with the laws and legal customs of your area, and who has experience with the type of deals you intend to do (If you are buying rentals, they should be familiar with doing evictions, for example.)
4. A good real estate agent. An agent with experience in the area of town you invest in and access to the MLS (Multiple Listing Service), can be a great help. If this is a seller’s agent, they can still ethically bring the best deals to you once they know you’re a serious buyer.
5. An appraiser. A good appraiser can give you an accurate valuation of a property, but they can also suggest ways in which you can most efficiently raise the value of a property. Find someone that will talk to you.
6. An inspector. Some states make it too easy to become an inspector with little experience. You may want to find one that is or used to be a contractor or an engineer, so he can find the problems AND give you some idea of the cost of repairs.
7. An insurance agent. Good ones will understand what you want, and find ways to save you money. As far as possible, insure all your properties with one agent, and you’re likely to have discounts available, as well as better service.
8. An escrow officer. They’ll usually be with a closing company. Find someone that’s efficient, and can explain things clearly to both sides. If this person is confused by a creative real estate contract, they should be easy to educate or easy to replace.
9. A cleaning person or crew. When you have a trusted person or crew ready, it means a fast turn-around when you buy a rental or rehab project.
10. Rental property manager. Be certain that the company you hire has experience, is responsive, and will have time when you call. Good property managers can tell you what you should get for rent in a given area BEFORE you buy.
Start building that team. Investing in real estate is less stressful and more profitable with a strong team.