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What are FHA loans?
These are loans provided by FHA approved lender and insured by Federal Housing Administration (FHA). The loans are attractive to first time homebuyers as they allow for low 3.5% down payment and for down payment contribution from a relative. Loan limits for single family homes in Miami-Dade and Broward Counties are $345,000 for 2018.
What is the difference between homeowners and condominium association?
Homeowners Association is created by recording of Declaration of Covenants, Conditions, and Restrictions (CC&R). Contrary to condo association, HOA does not record its bylaws. HOA are typically set up for single family and some townhome communities in which homeowners own their home and land. Common areas typically including sidewalks, parking lots, pools, playgrounds, and green areas outside of individual owners’ lots, are all owned by HOA through common area deed.
Condominium Association on the other hand is a form of joint ownership of a property in which individual unit owners own their units (condominiums) and hold a shared ownership of common areas. Common areas are further broken down as General Common Elements (GCE) and Limited Common Elements (LCE) where GCE’s are for enjoyment of all unit owners and tenants and can include for example lobby, playground, pool, party room, fitness gym, etc. On the other LCE’s are for exclusive use of certain units owners and can include balconies, parking spaces, storage units, boat slips, etc.
Condominium is created by Declaration of Covenants and Restrictions, Bylaws, and a Condo Plat in the municipal land records or local county.
What is homestead exemption?
Most homeowners understand homestead exemption as a way of reducing their property tax bill on primary residence but homestead exemption serves four primary reasons:
- Preventing forced sale of a home to satisfy demands of creditors (typically mortgages, mechanics liens, or sales to pay property taxes are exempt)
- Providing a surviving spouse with shelter
- Providing an exemption from property taxes on primary residence
- Allowing a tax-exempt homeowner to vote on property tax increases to homeowners over the threshold, by bond or millage requests
What is a lien?
A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.
Types of liens:
- Mortgage Liens
- IRS Liens
- Property Tax Liens
- Mechanic’s Liens
- Judgement Liens
- Child Support Liens
- Unrecorded Municipal Liens
Should I purchase a property in my name or company name?
More and more people elect to purchase properties under company names especially LLC’s because they are very easy to set up and can provide a level of privacy as well as more protection in case of a lawsuit which is especially true for investment properties. We recommend you consult with your legal counsel.
What is FIRPTA Withholding?
FIRPTA stands for Foreign Investment in Real Estate Property Tax Act. It is a tax law which requires a buyer/ closing agent to withhold 15% of the sales amount in real estate transactions involving foreign sellers.
For additional information and forms visit IRS website here.
Is there a risk in buying pre-construction condos?
All investments carry a level of risk and when it comes to real estate some investments are riskier than others. Your deposits are held in escrow only up 10% of the purchase price with the balance being allowed to use for construction related expenses. Hence it is of utmost importance to do your due diligence on the developer before you fork over up to 80% of the purchase price before your unit is completed. Buying pre-construction can be a very profitable investment strategy but cycle timing is just as important if not more as the developer building the project.
Contact us for the latest pre-construction offerings in South Florida.
What is a title insurance?
Title insurance provides a form of protection for buyers and lenders against title defects arising from previous chain of title (ownership) to a property. The most common type of title insurance is lender’s title insurance, in which the borrower purchases coverage only to protect the lender. Owner’s title insurance is often paid for by the seller to protect the buyer’s equity in the property, and is available separately.
What happens at closing?
Many things need to happen first in order for a closing to take place but at closing ownership interest in property is simply transferred from seller(s) and buyer(s). Closing agent coordinates this transfer by having all involved parties review and sign necessary documents to effectuate the closing and disbursing funds. All cash closings (without mortgages) tend to be much quicker with fewer documents to sign but a majority of closings involve lenders providing funds to the borrowers (buyers).
What is capital gains exemption?
If you sell your primary residence where you lived at least 2 out of the last 5 years, you can claim capital gains exemption of up to $250,000 if you are single and up to $500,000 if you are married filing jointly. Capital gain is calculated as a difference between net sale price (gross sale price less seller’s share of closing costs) less adjusted purchase price (purchase price plus buyer’s closing costs) less any capital improvements made during your ownership (new roof, kitchen, etc.). We suggest you consult a Certified Public Accountant or tax professional.
What is a cap rate?
Cap or capitalization rate is a ratio between property’s net operating income and its sale price. It represents a rate of return if an investor were to purchase a property all cash. Some investors will use cap rate when comparing various properties to invest in; property owners and brokers might use cap rate to determine likely sale price based on in-place net operating income and prevailing cap rate of sold properties in the area of similar vintage, size, and use. Note that cap rate does not consider any debt in its calculation. Also, when evaluating acquisition of investment property make sure that none of the operating expenses are omitted. Often when properties are owner managed, line items such as salaries, management fees, etc. are not included artificially increasing cap rate making it more appealing in eyes of potential investors. The same happens when property has been owned by the same individual or entity for extended period of time where you as a prospective purchaser might need to make adjustment to property taxes to estimate property NOI after closing.
How are commercial real estate brokers compensated?
Mostly the same as in residential real estate transactions meaning by landlords in leasing deals and by sellers in sales deals but there are always exceptions to this rule. Many investment transactions do not cover fees of cooperating brokers hence real estate professionals representing buyers have to secure compensation from their clients.
What is the difference between gross, full service and net leases?
In commercial real estate unless you are a credit tenant, i.e. a tenant which receives investment grade rating based on their financial strength and size, you will be dealing with leases which tends to favor landlords.
Gross Leases tend to be fully inclusive of rent payments, insurance, property taxes, and standard utilities, maintenance, and janitorial services. Modified Gross Leases shift responsibility for certain items over to a tenant, typically the ones that are associated with tenant’s unit such as maintenance & repairs, utilities, and janitorial services.
Full Service Leases are also all inclusive leases but tenants have to cover any increases in operating expenses after base year (year 1). Your landlord might have a standard increase provision in the lease agreement where your rent increases by CPI or certain % amount and at the end of the year they calculate so called true-up or reconciliation of actual expenses for the year providing each tenant either with rent credit or bill for the balance if actual operating expenses exceeded the anticipated increases.
Then there are absolute triple net leases, full service plus leases,industrial leases percentage leases, modified net leases, etc. which are beyond the scope of this article.
What is IRR?
Internal Rate of Return or annualized effective compounded return rate is calculated by setting net present value of all future cash flows (negative and positive) to zero.
What falls under the definition of commercial real estate?
The following are general categories of commercial real estate:
- Multifamily – over 4 units in size, garden, midrise, and highrise communities
- Offices – A,B,and C classes depending on vintage, amenities, and location.
- Industrial – heavy or light manufacturing, storage, and flex warehouses with office component
- Retail – strip centers, community retail centers, power centers, regional malls, and out parcel spaces
- Hotels – full service or limited service hotels and extended stay hotels
- Land – agricultural, infill, or brownfield land
- Special Purpose – self storage, sport arenas, funeral homes, marinas, churches, trailer parks, car washes, etc.
What is TI?
TI (also TI’s or TIA) stand for Tenant Improvement Allowance or amount of money a landlord is willing to contribute towards a commercial space build out or renovation. Amount offered typically depends on many different factors such as general market conditions, type of space (retail, office, industrial), length of lease, rental rate, etc.
Should I buy or rent an office?
It entirely depends on your business objective. There is a significantly larger number of offices for lease than there are for sale so if you like having options then leasing is for you. Further on, if you are starting a new business or might need to expand or relocate entirely then again go with leasing. On the other hand there are times when purchasing makes complete financial sense in terms of cash flow plus it might prove to be a great investment down the line. Contact us if you like us to evaluate lease versus buy options for specific property scenario.
What is the difference between full recourse and non-recourse loan?
Under a full recourse loan agreement, the lender has the ability to go after borrower’s other assets if sale proceeds of property serving as loan collateral did not fully satisfy the outstanding loan amount. Non-recourse loan is limited to collateral pledged by the borrower.
What property type is the most and least management intensive?
Hospitality followed by multifamily properties are most management intensive. On the opposite spectrum are absolute triple net investments in which tenants are responsible for all expenses associated with the property such as property taxes, insurance, maintenance, landscaping, etc.
What is 1031 Exchange?
1031 Exchange is a tax strategy (section 1031 of IRS code) which allows an investor to defer capital gains taxes otherwise due from a relinquished property as long as the proceeds from the sale are used to acquire “like-kind property” within 180 days of the sale. Investor has 45 days from the sale to identify prospective acquisition properties. There are other requirements and an investor should seek advice from a legal counsel or qualified 1031 exchange intermediary.