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NEWS AND TIPS IN REAL ESTATE
As a service to our web-surfing clients, this page will review in as much detail as possible different real estate terms every six months.
Income property: refers to property that generates yield, i.e. income from annual rent paid on the property that is a source of income for the capital investment in the real estate.
Determining parameters: : (See, in addition, "Real Estate Values Key")
1. Type of Real Estate: residential, commercial, office and its location. It should be remembered that a real estate investment and its price relative to the market is an integral part of income property - for example: an investment in an office that was purchased for $2800 / square meter in the Ramat Gan Stock Exchange in 1995 -even though it generated a 10% yield, purchasers discovered that in 2004, the price of the office did not increase and did not maintain its value, so that the price in 2004 was $2400 / square meter. The direct result is a loss of $400 / square meter multiplied by the square meter for which it was purchased and in comparison with the yield that was obtained, $280 annually, so that we suffer a net loss of a year and a half. After taxes, the loss is even greater, with the yield dropping an aggregate 7% annually. The purchaser did not take into account the type of asset (office) in his assessments.
2. Type of Tenant: Tenants who rent are divided into four levels: Rgular A, AA, AAA. The A level refers to a stable, long-term tenant who is a professional, e.g. lawyer / doctor / accountant, etc. An AA tenant is defined as established publicly traded companies. AAA Tenants are government ministries, public housing, banks and supermarkets.
3. Guarantees: Guarantees for regular tenants include a high payment in advance + guarantors and personal security or bank guarantee. For Type A tenants, the guarantees generally required involve a personal security, known to all, that professions such as lawyers and accountants, personal signature is sufficient. For Type AA tenants, the parent company / genuine signatories will be signed on the company guarantee.
4. Term of the agreement: based on the yield method, a rigid 10-year agreement is recommended. The agreement, which is subdivided into several option periods, e.g. 3+3+4, constitutes a rigid agreement for 4 years only. It should be remembered that during the option periods, tenants can negotiate over rent and press on issues such as investment, etc. In addition, the security of receiving a yield is long-term so that there is no need to adapt to a new tenant and/or manage the property. On this matter, if the tenant signed a contract for 4 option periods of 5 years each, but has fully invested in the property, e.g. banks and supermarkets (their investment in the property is estimated at $600-$800 / square meter). In this case, there is reasonable basis to assume that the term will be automatically extended for an additional 5 years, inclusive. In addition, it should be remembered that Type AAA tenants work in accordance with an action plan and strategy, so that the location was selected following screening and deliberations by various committees in the system.
5. Independent property / non independent property: An independent asset has an advantage in terms of investment, since owners are no longer involved in house management once the rental period expires. In independent assets, it is customary that the tenant bears the full cost of house maintenance including even an amortization fund for routine maintenance. When purchasing a non-independent asset (which is not a new one) however, there is a good chance that amortization and depreciation works will be necessary during the tenant's stay, and the cost of these works will be deducted from the yield percentage.
6.Payment method: monthly, quarterly, semi-annually or a year in advance - each payment method entails management costs and yield calculation. It should be remembered that a payment in advance is also a good security for the period which had been paid for. In addition, on money paid in advance, profit on interest on the money is calculated. It should be remembered that payment in advance also facilitates cash flow management from the property.
7. Liquidity: It is known that investment in an income property is a long-term investment. Yet one should check if the price paid for the property, its quality, and the bank's attitude in terms of assessment of the capital risk in the property, will facilitate a fast sale at market price and that it is indeed possible to realize the property. These issues should be examined by an appraiser and other professionals, with the information being cross-referenced. The connection between the asset's value these issues can be found on the "Real Estate Values Key" page and to these should be added type of property, private ownership and clean registration with the land registry bureau.
8. Betterment potential: does the asset have an additional betterment potential, such as: rent increase, additional construction, significant development of the entire area, etc.
9. Alternative capital investments: the yield level is a derivative of the existing alternatives for capital investments. For example, if it is possible to receive the index + 5% for capital in the market, then it is clear that the income property has no betterment potential. And if there is a risk that the value of the real estate will not rise in the next few years, and the yield is approximately 8% - 8.5%, this property will be considered a poor investment in comparison with the alternatives.
Remember that it is not net yield and it is subject to tax, from which the investor can only deduct the index on the loan; therefore a cash flow analysis is due, in order to estimate the net yield and determine when the investment on the asset will be returned. Roughly, with 9% gross yield, the investment will be returned (net) in 13-14 years.
10. Yield Rate: the yield rate earned from the income property are directly and inseparably linked to all the parameters/aspects mentioned above. The question one must always ask is what is the ratio between percentage of the yield and the characteristics of the income property, such as the worth of an AAA tenant in percentage compared with a regular tenant and so on. The answers to such questions are not simple. Some of the assessors calculate this as follows: 2% of the yield is linked to liquidity, 0.75% of the yield to type of tenant and so on. I believe one should estimate risk versus chance individually, with reference being made to all of the parameters.
11. The level of investment: investment in an income property for sums up to $1 million, is not worth as much as an investment in an income property of $10 million, so that the level of investment does affect yield rates.
12. Account: The rent received for 12 months is multiplied and the sum divided into the cost of the purchased property. This is the yield received from the property.
13. General: supermarkets usually pay rent + a percentage of their turnover. We did not go into depth on this issue in this review.
· Note: In my opinion, one should multiply the rent by 11 month and not by 12, since one must consider one month per year for expenses and other costs over the property, such as: purchase tax, lawyer fees, broker fees, registrar charge, amortization and depreciation of the property, adjustments of the property when the tenant leaves, etc.
· In conclusion- an investment in an income property should be evaluated through all the above-reviewed parameters, along with the key for general property values. Then, examine the percentage of yield, in addition to the value of the asset that will rise through the years above the index level minus the deduction of income tax (which usually does not exist in the alternatives of the bank's channels of investments). What is left is the net capital profit.
Appraisers, accountants, brokers, and bank advisers could provide you with added value regarding the parameters specified here. In general, once the appraisal of the income property has been completed, the expected yield for the appraised property will become apparent.
·The information given here and/or on any other of our sites does not constitute professional or legal advice and must be used at the reader's sole responsibility.
· For "Real estates value key" at our sites, please click here.
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