3. A. Objectives
Some investors may be seeking additional income
through well-chosen properties while others use it as
a tax shelter to help reduce the bite on otherwise
taxable income
The number one objective for investing in real estate
is to make money
4. B. Capacity
The investor in real estate should have the
financial ability to handle the carrying costs
of the investment
The costs of operating expenses continue
to escalate
5. C. Soundness
The investment should be sound from an economic
point of view, that is, investors ought to look beyond
projected figures
Projected figures should reflect financial reality
7. A. Tax Shelter
Investors in high income tax brackets may benefit from
“sheltering” or conserving part of their ordinary income
through wise planning, selection, and operation of an
income producing property
8. B. Other Tax Benefits
Capital gains can be largely deferred through one
of several devices:
A tax-free exchange
A deferred sale
An installment sale
9. C. Appreciation Potential
Growth through appreciation is a function of supply
and demand, economic conditions, influx of
population, inflation, and scarcity
10. D. Hedge Against Inflation
California’s real estate usually rebounds eventually
and continues to appreciate in value over the long
run
Real estate tends to keep abreast with the
fluctuations of the purchasing power of the U.S.
Dollar
During inflationary periods, the cost of everything
rises, including real estate and during recessionary
times, prices may dip
11. E. Income
“Cash flow” is the difference between the income
generated from a property and the expenses
associated with it, including taxes, mortgage
payments, and operating expenses
Many investors purchase property with the objective
of providing an annuity for themselves
12. F. Interim Use
Real property ownership offers the purchaser of a
ranch, farm, or other investment the opportunity to
use the property to make some income while
waiting for appreciation of value to take place
13. G. Stability
Many types of real estate, especially commercial and
industrial, enjoy long-term leases with top
corporations, producing a dependable, stable
investment for as long as twenty years or more
14. H. Control and Use
As a real estate professional, you can assist your
investors by helping them:
Thoroughly study the environment and economic background
By analyzing the investments for tax benefits
Hedge against inflation
Explore financing opportunities
Analyze cash flow, income and stability
15. I. Refinancing
Some clients who have investment properties with
large equities may choose to refinance their property
to take out more cash to buy another property
16. J. Amenities
Other benefits to the investor included pride of
ownership, security, status, achievement, estate
building, and the opportunity to improve profits
18. A. Sources of Financing
Miscellaneous sources of funds for
investment properties include:
Savings Banks –specialize in housing
Commercial Banks – active in the urban
mortgage market
Life Insurance Companies – invest in large
commercial projects like shopping malls, etc
20. A. Apartment Prospecting
and Marketing
• Sources of prospects for listing and buying investment
properties include many of the same as those for
residential properties
• Don’t overlook the current tenants as potential buyers
21. 1. Getting the Listing
Listing an apartment complex is like listing a house
You meet the owner, ask searching questions, come
prepared with valuation data, and create
opportunities for the sellers by showing them how
the proceeds can be reinvested, and so on
When gathering info, you’ll also need to get detailed
facts about the property, such as:
Needed repairs
Condition of units
Quality of tenants
Rent schedules
Lease terms
Vacancy factors
Evaluation of income and expenses
22. B. Investment Planning and
Counseling
To earn the respect and confidence of your clients,
you will need a thorough understanding of your
client’s total financial and family picture
A confidential file should be maintained for each of
your clients
Conferring with your client’s attorney, accountant, or
business advisor may be advisable somewhere along
the way
24. A. Property Analysis
To understand the
analysis of an income
producing property, an
Income Property
Residential Statement
can be utilized
Potential Gross Income
Vacancy Factor
Effective Gross Income
Net Operating Income
Operating Expenses
Fixed Expenses
Variable Expenses
Reserves
25. Times Gross
TIMES GROSS is simply the proposed selling price
divided by the scheduled gross income, with the
multiple used as a ballpark figure to weigh the
prospective value of the investment
26. Capitalization of Net Income
The net operating income is divided by the
selling price to determine the appropriate
capitalization rate
or
27. B. Characteristics of
the Rental Market
Income characteristics
Rent-to-Income Relationships
Current Rental Ranges
Current Vacancy Rates
Rent Control
Desirable Distribution of Units by Type and Price Class
29. Purchase Group
Syndications are based on complex legal concepts, so
advise your clients to seek advice from an attorney
A SYNDICATION is an association of two or more
people who combine their financial resources for the
purpose of achieving one or more investment
objectives
30. B. Brokerage Opportunities
Creating a real estate syndication can be
creative, challenging, and profitable for the
enterprising broker
Benefits include:
Commissions earned from selling properties
Management fees
Percentage of ownership
Resale commissions
Option to acquire one or more interests
31. C. Forms of Legal
Organization
Limited Partnership
General Partnership
Corporation
REIT
33. Small Business Opportunities
As a broker, you may wish to engage in a variety of
activities that complement your basic real estate
brokerage operation
Each activity can supplement your income as well as
provide you with additional sources of prospects
You should be aware of the value of informing all your
clients about other services offered by your company,
such as property management
36. Selling a Business
Section 10030 of the Real Estate Law defines a
BUSINESS OPPORTUNITY as a “sale or lease
of the business and goodwill of an existing
business enterprise or opportunity”
GOODWILL is defined as the expectation of
continued public patronage
37. A. Listing Agreement
In this first step, an agency relationship is
created by securing a listing on the business
38. B. Uniform Commercial Code
The UNIFORM COMMERCIAL CODE (UCC) is a
body of law adopted throughout the United States
that standardizes a number of practices commonly
found in commerce and business
Article 6 covers the subject of bulk transfers
In real estate talk, the expression “bulk transfer”
means the same thing as a business opportunity-
an extraordinary sale of more than half of a seller’s
inventory and equipment
39. Notice
Whenever a bulk
sale or transfer is
made, the
transferee must
give public notice to
the transferor’s
creditors by
recording a Notice
to Creditors of Bulk
Sale at least twelve
days before the
bulk transfer is
consummated
40. C. Security Agreement &
Financing Statement
Under Article 9 of
the UCC, a filing
system is
established as
additional protection
for creditors and for
purchasers
41. D. Sales and Use Taxes
Whenever a merchant engages in a business where
sales of personal property at retail are made, he or
she must secure a seller’s permit from the State
Board of Equalization
42. E. Bill of Sale
The BILL OF SALE serves the same function in the
transfer of personal property as the grant deed does
for real property
43. F. Assignment of Lease
The reason why most businesses sell for comparatively
less in contrast to real property is because it is only
personal property that is being purchased, a lease is
generally assumed on the building
Not all leases are assignable, make sure it is before
negotiating to buy a business
45. Valuation
You should learn how to determine the value of a
business-before you embark on your first listing
The value of goodwill is the most difficult to measure
You should visit the establishment on different days and
at various times to determine business activities
One way to try to value a business is to use a NET
MULTIPLIER, which multiplies net income by some
standardized number or multiplier
In real estate a GROSS MULTIPLIER is often used for
income-producing real estate
47. Tax Consequences
Tax implications on a sale of a business are different
from those in the sale of real property
The method of allocation of various business assets
has tax consequences to both seller and buyer
The amount paid for leasehold improvement is
deductible by the buyer
The amount paid for goodwill is not deductible by the
buyer and is a capital item to the seller
49. Alcoholic Beverage Control
• The CALIFORNIA DEPARTMENT OF ALCOHOLIC
BEVERAGE CONTROL (ABC) is charged with
administration and enforcement of the Alcoholic
Beverage Control Act, which regulates liquor licenses
51. A. Real Property Securities
Dealer
A REAL PROPERTY SECURITIES DEALER is
engaged in the secondary money market, in addition
to a host of activities that come under the definition of
real property securities
Before selling real property securities to the public,
the broker must obtain a permit from the Real Estate
Commissioner
52. B. Notary Public Services
As a notary public, you can notarize your clients’
documents, but many successful brokers rely on
assistants to take care of this detail
54. Property Management
Managing properties is a natural adjunct to your general
practice as a broker
This is usually done on the basis of a percentage of gross
rentals or for a flat fee
Specific duties and functions will be discussed in our next
chapter 13
56. Escrow
Another supporting service, which a large number of
brokers offer, is that of escrow
Remember, that only the seller and buyer may select
the escrow company they wish to use
The escrow holder is a dual agent for both the buyer
and seller
58. The SAFE Act
A MORTGAGE LOAN ORIGINATOR (MLO) is an
individual who, for compensation or gain, or in the
expectation of compensation or gain, takes a
residential mortgage loan application or offers or
negotiates terms of a residential mortgage loan
60. Probate Sales
An executor possessing a power of sale under the
terms of a will may sell directly or through one or
more brokers
Brokers wishing to work in probate sales must
publish legal notice advising that the property is to
be sold on specified terms and conditions, and that
offers from interested parties are invited
Precise procedures must take place to properly
complete a probate sale, brokers need to know and
understand them well to complete the process
63. B. Real Estate Investment
Counselor
For brokers with considerable experience and
knowledge, you can become a real estate investment
counselor
A REAL ESTATE INVESTMENT COUNSELOR is the
broker’s broker or consultant, doing for other brokers
what those brokers cannot do for themselves, until
their own knowledge and experience is of such
magnitude as to qualify them for similar status
65. General vs. Specialization
The sale of residential property accounts for about ¾
of the sales made by the typical realty office
As a brokers you may then choose to specialize in :
A defined geographical section
A certain price range
Certain types of properties
Exchanges
Appraisals
Property management
67. A. Mobile Home Dealer vs
Real Estate Broker
New manufactured homes cannot be sold by real
estate licensees
Real estate licensees are not allowed to act as agents
in the sale of mobile homes that can be used as
vehicles on the highway
68. B. Marketing
Brokers may sell manufactured home that have been
registered with the Department of Motor Vehicles for
at least one year and are larger than 8 feet in width
and 40 feet in length
Manufactured homes create greater title problems
than ordinary real estate transactions
69. Chapter Summary
• Why Invest in Real Estate?
• Objectives
• Capacity
• Soundness
• Benefits of Investing
• Tax Shelter
• Appreciation
• Hedge Against Inflation
• Income
• Interim Use
• Stability
• Control and Use
• Refinancing
• Amenities
• Financing Income Properties
• Sources of Financing
• Available Funds
• Your Role in the Investment Process
• Apartment Prospecting and Marketing
• Investment Planning and Counseling
70. Chapter Summary
• Residential Income Properties
• Property Analysis
• Analyzing the Rental Market
• Study Area Characteristics
• Characteristics of the Rental Market
• Syndication
• Purchase Group
• Brokerage Opportunities
• Forms of Legal Organization
• Small Business Opportunities
• Selling a Business
• Listing Agreement
• UCC
• Security Agreement and Financing
Statement
• Sales and Use Tax
• Assignment of Lease
• Valuation of Business Opportunities
• Tax Consequences
• Alcoholic Beverage Control Act
71. Chapter Summary
• Ancillary Activities and
Specialty Roles
• Real Property Securities Dealer
• Notary Public Services
• Property Management
Activities
• Escrow Activities
• Loan Brokerage Activities
• Probate Sales
• State of California Sales
Opportunities
• Subdivision Sales Opportunities
• Real Estate Investment Counselor
• Manufactured Housing and the
Licensee
• Mobile Home Dealer
• Marketing
