Chapter V

REAL ESTATE

People come and go but the land is always there

Definition:

Real Estate refers to land and all permanent improvements thereon including buildings. It may be Agricultural, Industrial, Commercial, Residential or in the form of rental units.

Advantages:

It is a hedge against inflation. The price of land in the Philippines in general increases steadily. It is one of the few finite investments. Land available for development is limited. It is one of the basic necessities of man. It is a tangible asset and can be directly controlled by the owner. It can be used in financing.

 Real estate is an investment that can give you income for the rest of your life. You can use a lot of leverage to acquire them. There are many ways you can buy properties without using your own money. One way of doing this is seller financing. Seller financing is when you agree to pay the seller over time the down payment and the rest you get from the bank.

 Real estate is real estate has intrinsic value to it. Real estate values tend to rise with inflation. In fact, much real estate often rises faster than inflation

 Tax Advantages: The first is interest costs. Interest costs can be fully tax deductible for your personal residence (up to a limit) or for any commercial real estate investment. This means the cost of funds is reduced by your marginal tax rate. The second important tax advantage to owning real estate is the ability to depreciate any property being rented. Depreciation is a legitimate (non cash) deduction used to offset revenue that would otherwise be subject to taxes. This means you can show a loss on your real estate investment, use that loss to reduce your personal income, and thus lower your taxes.

 Many individuals want to gain more "control" over their lives. It is not uncommon for such individuals to want to "start their own business" to gain more control over their lives. Commercial real estate is an activity you control entirely. You find the opportunities, arrange the financing, bring all the elements together, and create something where there was nothing before.

Example:
Real property costing P500,000 is sold for P1,250,000 or 250% after eight(8) years. The gain must be P750,000 or P93,750 per annum arrived at as follow: Annual gain = (P1,250.000-500,000)/8yrs= P93,750 Rate gain = P93,750/P500,000= 18.76% With an annual earnings rate of 18.75%, the investment may be considered as very attractive considering the prevailing interest rates on time deposits.

Disadvantages:
It requires a number of years to realize profit on the investment. It is immovable so that it is not easily transferred from one party to another party. Mortgaging real property requires certain procedures adopted by lending institution such as credit investigation, property appraisal and maintenance of required deposits ( in the case of banks)

 Upon death of the investor, real property automatically forms part of his estate which is subject to inheritance tax. It involves big amount so that it is impractical to dispose of it in case the investors is in need of small amount of additional capital. Its price is adversely affected in times of crisis. In case of chaos or war, it cannot easily be disposed of.

 Real Estate is a non- liquid investment that requires maintenance and taxes to be paid. An optimal investment portfolio would have some liquid assets that can be quickly converted to cash in order to sustain real estate. Investment when their returns are not sufficient enough to pay recurring costs. High transactions costs, such as brokerage and commissions and closing expenses. These costs eat up short term profits. Limited marketability. Lack of central market or exchange to real estate investment more liquid.

 Management headache, such as unreliable tenants, or otherwise high professional management fees. The balloon payment is the unpaid balance of a mortgage loan that is paid off in a lump sum of the end of the loan term. Is if you buy a property and can't make the mortgage payments you can lose the property and damage your credit.

Factors Considered in Real Estate Acquisition

Location Frontage and shape of the land Drainage and sewerage system Width of streets Elevation Possible expropriation Clean title Encumbrances Improvements Financing Prospects

Market Condition for Real Property

The market conditions for real property vary depending on the demand and supply. It may either be a buyers market or a sellers market depending on who has the greater advantage.

 Buyers Market This exists when buyers are at an advantage. Demand is low so that buyers are able to avail of discounts and deferred payment plans for extended periods. Sellers Market This exists when sellers are at an advantages. Demand exceeds supply so that sellers can charge high prices often on cash basis or for shorter terms.

 Buyers or Seller Markets In determining market conditions, an investors may considered the trend in construction, occupancy rates, loan availments for real property acquisitions and interest rates. It is always advisable to invest in real property in a buyers and sell during times of prosperity.

Thank you for Listening!!! God bless,.

GROUP: 5