The Top 5 Key Benefits of Purchasing and Owning Investment Real Estate

So… You may ask yourself, why should you buy or invest in real estate in the First Place? Because it’s the IDEAL investment! Let’s take a moment to address the reasons why people should have investment real estate in the first place. The easiest answer is a well-known acronym that addresses the key benefits for all investment real estate. Put simply, Investment Real Estate is an IDEAL investment. The IDEAL stands for:

• I – Income
• D – Depreciation
• E – Expenses
• A – Appreciation
• L – Leverage

Real estate is the IDEAL investment compared to all others. I’ll explain each benefit in depth.

The “I” in IDEAL stands for Income. (a.k.a. positive cash flow) Does it even generate income? Your investment property should be generating income from rents received each month. Of course, there will be months where you may experience a vacancy, but for the most part your investment will be producing an income. Be careful because many times beginning investors exaggerate their assumptions and don’t take into account all potential costs. The investor should know going into the purchase that the property will COST money each month (otherwise known as negative cash flow). This scenario, although not ideal, may be OK, only in specific instances that we will discuss later. It boils down to the risk tolerance and ability for the owner to fund and pay for a negative producing asset. In the boom years of real estate, prices were sky high and the rents didn’t increase proportionately with many residential real estate investment properties. Many naïve investors purchased properties with the assumption that the appreciation in prices would more than compensate for the fact that the high balance mortgage would be a significant negative impact on the funds each month. Be aware of this and do your best to forecast a positive cash flow scenario, so that you can actually realize the INCOME part of the IDEAL equation.

Often times, it may require a higher down payment (therefore lesser amount being mortgaged) so that your cash flow is acceptable each month. Ideally, you eventually pay off the mortgage so there is no question that cash flow will be coming in each month, and substantially so. This ought to be a vital component to one’s retirement plan. Do this a few times and you won’t have to worry about money later on down the road, which is the main goal as well as the reward for taking the risk in purchasing investment property in the first place.

The “D” in IDEAL Stands for Depreciation. With investment real estate, you are able to utilize its depreciation for your own tax benefit. What is depreciation anyway? It’s a non-cost accounting method to take into account the overall financial burden incurred through real estate investment. Look at this another way, when you buy a brand new car, the minute you drive off the lot, that car has depreciated in value. When it comes to your investment real estate property, the IRS allows you to deduct this amount yearly against your taxes. Please note: I am not a tax professional, so this is not meant to be a lesson in taxation policy or to be construed as tax advice.

With that said, the depreciation of a real estate investment property is determined by the overall value of the structure of the property and the length of time (recovery period based on the property type-either residential or commercial). If you have ever gotten a property tax bill, they usually break your property’s assessed value into two categories: one for the value of the land, and the other for the value of the structure. Both of these values added up equals your total “basis” for property taxation. When it comes to depreciation, you can deduct against your taxes on the original base value of the structure only; the IRS doesn’t allow you to depreciate land value (because land is typically only APPRECIATING). Just like your new car driving off the lot, it’s the structure on the property that is getting less and less valuable every year as its effective age gets older and older. And you can use this to your tax advantage. The best example of the benefit regarding this concept is through depreciation, you can actually turn a property that creates a positive cash flow into one that shows a loss (on paper) when dealing with taxes and the IRS. And by doing so, that (paper) loss is deductible against your income for tax purposes. Therefore, it’s a great benefit for people that are specifically looking for a “tax-shelter” of sorts for their real estate investments.

For example, and without getting too technical, assume that you are able to depreciate $15,000 a year from a $500,000 residential investment property that you own. Let’s say that you are cash-flowing $1,000 a month (meaning that after all expenses, you are net-positive $1000 each month), so you have $12,000 total annual income for the year from this property’s rental income. Although you took in $12,000, you can show through your accountancy with the depreciation of the investment real estate that you actually lost $3,000 on paper, which is used against any income taxes that you may owe. From the standpoint of IRS, this property realized a loss of $3,000 after the “expense” of the $15,000 depreciation amount was taken into account. Not only are there no taxes due on that rental income, you can utilize the paper loss of $3,000 against your other regular taxable income from your day-job. Investment property at higher price points will have proportionally higher tax-shelter qualities. Investors use this to their benefit in being able to deduct as much against their taxable amount owed each year through the benefit of depreciation with their underlying real estate investment.

Although this is a vastly important benefit to owning investment real estate, the subject is not well understood. Because depreciation is a somewhat complicated tax subject, the above explanation was meant to be cursory in nature. When it comes to issues involving taxes and depreciation, make sure you have a tax professional that can advise you appropriately so you know where you stand.

The “E” in IDEAL is for Expenses – Generally, all expenses incurred relating to the property are deductible when it comes to your investment property. The cost for utilities, the cost for insurance, the mortgage, and the interest and property taxes you pay. If you use a property manager or if you’re repairing or improving the property itself, all of this is deductible. Real estate investment comes with a lot of expenses, duties, and responsibilities to ensure the investment property itself performs to its highest capability. Because of this, contemporary tax law generally allows that all of these related expenses are deductible to the benefit of the investment real estate landowner. If you were to ever take a loss, or purposefully took a loss on a business investment or investment property, that loss (expense) can carry over for multiple years against your income taxes. For some people, this is an aggressive and technical strategy. Yet it’s another potential benefit of investment real estate.

The “A” in IDEAL is for Appreciation – Appreciation means the growth of value of the underlying investment. It’s one of the main reasons that we invest in the first place, and it’s a powerful way to grow your net worth. Many homes in the city of San Francisco are several million dollars in today’s market, but back in the 1960s, the same property was worth about the cost of the car you are currently driving (probably even less!). Throughout the years, the area became more popular and the demand that ensued caused the real estate prices in the city to grow exponentially compared to where they were a few decades ago. People that were lucky enough to recognize this, or who were just in the right place at the right time and continued to live in their home have realized an investment return in the 1000’s of percent. Now that’s what appreciation is all about. What other investment can make you this kind of return without drastically increased risk? The best part about investment real estate is that someone is paying you to live in your property, paying off your mortgage, and creating an income (positive cash flow) to you each month along the way throughout your course of ownership.

The “L” in IDEAL stands for Leverage – A lot of people refer to this as “OPM” (other people’s money). This is when you are using a small amount of your money to control a much more expensive asset. You are essentially leveraging your down payment and gaining control of an asset that you would normally not be able to purchase without the loan itself. Leverage is much more acceptable in the real estate world and inherently less risky than leverage in the stock world (where this is done through means of options or buying “on Margin”). Leverage is common in real estate. Otherwise, people would only buy property when they had 100% of the cash to do so. Over a third of all purchase transactions are all-cash transactions as our recovery continues. Still, about 2/3 of all purchases are done with some level of financing, so the majority of buyers in the market enjoy the power that leverage can offer when it comes to investment real estate.

For example, if a real estate investor was to buy a house that costs $100,000 with 10% down payment, they are leveraging the remaining 90% through the use of the associated mortgage. Let’s say the local market improves by 20% over the next year, and therefore the actual property is now worth $120,000. When it comes to leverage, from the standpoint of this property, its value increased by 20%. But compared to the investor’s actual down payment (the “skin in the game”) of $10,000- this increase in property value of 20% really means the investor doubled their return on the investment actually made-also known as the “cash on cash” return. In this case, that is 200%-because the $10,000 is now responsible and entitled to a $20,000 increase in overall value and the overall potential profit.

Although leverage is considered a benefit, like everything else, there can always be too much of a good thing. In 2007, when the real estate market took a turn for the worst, many investors were over-leveraged and fared the worst. They could not weather the storm of a correcting economy. Exercising caution with every investment made will help to ensure that you can purchase, retain, pay-off debt, and grow your wealth from the investment decisions made as opposed to being at the mercy and whim of the overall market fluctuations. Surely there will be future booms and busts as the past would dictate as we continue to move forward. More planning and preparing while building net worth will help prevent getting bruised and battered by the side effects of whatever market we find ourselves in. Many people think that investment real estate is only about cash flow and appreciation, but it’s so much more than that. As mentioned above, you can realize several benefits through each real estate investment property you purchase. The challenge is to maximize the benefits through every investment.

Furthermore, the IDEAL acronym is not just a reminder of the benefits of investment real estate; it’s also here to serve as a guide for every investment property you will consider purchasing in the future. Any property you purchase should conform to all of the letters that represent the IDEAL acronym. The underlying property should have a good reason for not fitting all the guidelines. And in almost every case, if there is an investment you are considering that doesn’t hit all the guidelines, by most accounts you should probably PASS on it!

Take for example a story of my own, regarding a property that I purchased early on in my real estate career. To this day, it’s the biggest investment mistake that I’ve made, and it’s precisely because I didn’t follow the IDEAL guidelines that you are reading and learning about now. I was naïve and my experience was not yet fully developed. The property I purchased was a vacant lot in a gated community development. The property already had an HOA (a monthly maintenance fee) because of the nice amenity facilities that were built for it, and in anticipation of would-be-built homes. There were high expectations for the future appreciation potential-but then the market turned for the worse as we headed into the great recession that lasted from 2007-2012. Can you see what parts of the IDEAL guidelines I missed on completely?

Let’s start with “I”. The vacant lot made no income! Sometimes this can be acceptable, if the deal is something that cannot be missed. But for the most part this deal was nothing special. In all honesty, I’ve considered selling the trees that are currently on the vacant lot to the local wood mill for some actual income, or putting up a camping spot ad on the local Craigslist; but unfortunately the lumber isn’t worth enough and there are better spots to camp! My expectations and desire for price appreciation blocked the rational and logical questions that needed to be asked. So, when it came to the income aspect of the IDEAL guidelines for a real estate investment, I paid no attention to it. And I paid the price for my hubris. Furthermore, this investment failed to realize the benefit of depreciation as you cannot depreciate land! So, we are zero for two so far, with the IDEAL guideline to real estate investing. All I can do is hope the land appreciates to a point where it can be sold one day. Let’s call it an expensive learning lesson. You too will have these “learning lessons”; just try to have as few of them as possible and you will be better off.

When it comes to making the most of your real estate investments, ALWAYS keep the IDEAL guideline in mind to make certain you are making a good decision and a solid investment.

The Hike To Mill Shoals Trail

The trail is an easy hike with fairly manageable switchbacks and is located at the Eastern Blue Ridge to Cooper Creek Recreation Area. Expect to see forests and a stream along the way. The whole stretch takes about 2.5 miles and the trail is easy to moderate. The trail starts at the parking lot about 0.3 miles from FS 236 and is marked by orange blazes. Some spaces at the FS 236 area are also allocated for campers. Regular army training exercises are done here so it is recommended to call Camp Frank D. Merrill in Dahlonega for the schedule of activities.

Cooper Creek Trail is about half a mile from the start of the trail which connects the trails for Mill Shoals and Yellow Mountain Trail. The footpath continues to an old roadbed and moves along the north side of the Yellow Mountain. At that point, the path follows the Mill Shoals Creek which is about 1.4 mile on the hike where you will pass by two rivulets. The Mill Shoals Trail has been rerouted where the trail ends at Duncan Ridge Road (FS 39) at the Shope Gap and forms a loop at the section of the Yellow Mountain Trail. From the start of the trail, the footpath ascends through a white pine and oak forest and emerges easily to the Cooper Creek Scenic Area on its northwestern edge. Then it turns into gradual and steady switchbacks as you continue around 0.7 miles before reaching Mill Shoals Trail at the top of a spur ridge. On this junction which is 0.7 mile on the hike, a blue-blazed trail sign informs that you are already at the Cooper Creek Trail. The path continues on an old roadbed on the right as it makes an easy ascent to the junction of Yellow Mountain where the Yellow Mountain trailhead is located.

Pace straight ahead to the path to Mill Shoals as it makes a descent onto a hardwood cove. There are American chestnut stumps in the area while other trees have already taken its place. You will then emerge out from this forest about 0.9 miles on the hike and continue to make a descent to an old logging road. The footpath makes a right turn and followed by a quick downhill switch to the left off the road towards Mill Shoals Creek. Cross two streams as the path follows through lines of tall white pine trees. The path then continues to pass along an old roadbed and sets onto Duncan Ridge Road (FS 39).At this point, the view offers a magnificent scene of Cliff Ridge and the Beebait Knob from a distance. The trail then turns right and continues to FS 39 for another mile onto Shope Gap at the FS 39 and old woods road junction. Then loop back by turning right towards the woods road by following Shope Gap Trail’s green blazes.

The Most Important Part of the Business Plan – The Financial Model

During the 2000s, business planning and entrepreneurship experienced a resurgence due to the massive and expansive growth of Web 2.0 businesses and the solid GDP growth of the US. There was a deep hiccup in terms of the 2008 Great Recession, but for all practical purposes, this was nothing more than a major market correction that signaled the exponential change business has undergone with the integration of technology in the way we live life and build wealth. As the saying goes, though, “the more things change, the more things stay the same, and this is true of starting and / or expanding a business. Business planning remains the cornerstone of improving the probability of survival and success in commerce. The tools of planning have improved and changed, but the purpose and foundation of it have not. This valuable resource is more than a “glorified document”; it is a roadmap that keeps the business owner and his / her team focused and also serves as a lever to enhance the business’s investment prospects with both debt and equity sources of capital. The definitive part of the plan rests in the logic of the financial model because it provides a comprehensive and integrated layout of how all the other components of the business work together to produce a sustainable flow of cash and ultimately profit.What Is A Business Financial Model?

This part of the plan documents and explains how the business makes, spends, and accumulates money in the language of numbers. The reality of business is that the operations of the firm must provide a reasonable value to the marketplace to justify an exchange of resources (i.e. products / services for money). The numbers included in the financial model provide the narrative of how the firm will accomplish these objectives. In order for these figures to have merit, the entrepreneur must provide “proof” of the business model via a sample of actual sales or rely on primary market data segmented specifically by location and industry. Depending on the stage of the business cycle, this portion of the plan includes financial projections of the main business financials (i.e. balance sheet, income statement, and cash flow statement), assumptions that motivate these projections, and supplemental disclosures such as notes to these projections.

What Are The Benefits of Producing and Using A Business Financial Model?
There are 2 main benefits to including this model in the business plan:

(1) Quick Access and Review by Capital Providers

For most entrepreneurs, debt and equity providers are key components of aiding the business in establishing or growing operations to a profitable level. The downside to this reality is that a majority of business owners are not prepared to pitch their businesses properly because they lack the proof. All is resolved, though, once the financial model of the business plan is completed. Not only does the entrepreneur have the proof of an actual document, he / she will have the ability to tell the story behind the numbers in a concise and targeted manner. The ability to tell the business’s story in such a way increases the odds of investment substantially because both management and business risk are mitigated by both knowledge and action.(2) Forces The Business Owner to Validate the Business Model

Once the entrepreneur completes the financial model, he / she will have a solid understanding of the business’s prospects of sustainability and profitability. The “mousetrap fallacy” cripples many prospective entrepreneurs into believing that their business is a necessity to the market when in reality they have not taken the time to really validate (i.e. prove) the business model. In the immortal words of the Apostle Paul, just because you can do a thing well does not mean you should do it. In order to give yourself a head start in business, do the homework and put in the action to build out the business financial model.

5 Challenges in Business Intelligence and How to Solve Them

Ever wondered what a well-planned and deployed business intelligence project can do for your business without all the challenges? By now if you’re not aggressively mining your data you’re not only leaving money on the table, you’re falling behind your competitors. Looking for basic aberrations and trends in data for sales, marketing, operations and customers is second nature to most companies. This will help you tread water for a time but did you know you unlock exponential value to your data once you reach cross functional, role based, and collaborative analysis which enables iterative business process improvement?

The challenges to operative data visibility are pretty easy to identify in a company. Do any of these ring a bell? You have a thousand spreadsheets stored on your network and different departments may have different values for the same measure? The executives have clear objectives and have a strategy but if you ask an individual contributor there is only a vague notion of what they are, or are pursuing their own department objectives? You have data, a vision for analyzing your marketing or industry metrics but your IT department takes so long to assist with setting up the reporting tools and infrastructure that it becomes irrelevant before you can act?

But let’s back up a little and first understand what business intelligence is in the first place. There are a lot of terms thrown around like analytics, ad hoc reporting, data warehouse, key performance indicators and forecasting to name a few. If you ask ten people you’re likely to get 20 answers to the same question. The fact is, business intelligence applied in a business environment is an ecosystem of both technical and business factors that drive performance in an organization aligned to strategic objectives. The business components like strategy mapping, business process improvement and collaboration are just as important to the technical reporting, warehouse and ETL tools.

The actual process for running or starting a business intelligence project is a prescriptive methodology that is very different from other types of projects and as such there are best practices based on the size of the organization, vertical, maturity, objectives and processes being measured. In some ways it’s both an art and a science.

In short form, you’ll thoroughly understand your company’s objectives and how your department fits into that story. Then analyze the different processes in your company that affect those performances. Determine the measures within those processes that can be affected by managing their performance. These should be as far back in the process as possible which we call leading indicators, those which can be changed before the results are locked into your balance sheet. Then on the business side you’ll start your internal marketing campaign, yes internal. And at the same time start to round up the data for your analysis. And this is when the real work begins!Though the following tips are not exhaustive or definitive, they are certainly some traps that a lot of organizations fall into while stepping up the BI Maturity Ladder from basic operational and transactional reporting to immersive and responsibility based performance management.

Executive sponsorship is critical but so is employee buy-in

Ever heard the term, “you can’t push a rope”? Leadership can have the greatest plans for moving the business forward but unless each and every contributor to the processes that affect the outcome have bought into the mission and actively participate, the movement won’t get very far. Yes you can use the hammer and tie incentives to performance immediately instead of over time for which you will receive immediate backlash as a result. Or better yet positive reinforcement by making progress and goals at a high level visible and celebrated for all to see and introduce some cross department competition on conformed measures. A good leader inspires the best in people, not the worst.

Pro tip: Leadership should make every effort to communicate not just on the metrics but also adoption and accuracy.

Drive vertical then go horizontal

Lofty enterprise goals are very hard to implement across an organization, it requires massive amounts of cooperation amongst departments to define measures, setup architecture and extract from complicated source systems which can be expensive. Instead start with one process that, for example, drives one channel of your sales funnel and then drive that vertical to the individual contributor level in the form or actionable reporting, “Here are the clients that need to be called today for satisfaction feedback”. In this way you can start to see immediate results and use it as a template to implement in your organization for other processes and departments.

Pro tip: Setup a regular BI governance and education roundtable meeting to foster communication and iterative improvement among the BI stewards at all levels.

Stay focused on the business drivers, not the technical hurdles

There is an odd dichotomy to business intelligence depending on your business or technical background. If you are a business person maybe you’ve heard of the Kimball methodology for data warehouse design. If you haven’t that’s okay but that’s what your IT professionals are using to build out your backend data repository and this may not always provide the data in the form that you need from a business perspective. It is an object oriented approach to data that, depending on the complexity of the data sources, can take months or years to develop and deploy. If your organization needs to be nimble shouldn’t you be able to make decisions faster than that? To overcome this as a business user, start with a coherent set of sample data and then prototype what you want in your role-based reports and dashboards, including objectives and goals. You should define the calculations, granularity, security, availability and as much agreement from business leadership as you can before approaching IT. Your month long sprints should include visible deliverables back to the business even if they are very small iterative improvements.

Pro tip: Your business intelligence architect is the best translator between business and IT, they will make this communication much easier.

Organizational change and data visibility is unsettling

When you first begin your BI initiative you will probably begin with interviews to better understand your processes from the different subject matter experts and data stewards. Through these interviews it will be pretty easy to spot who is not on board with your project. Everyone is busy and it’s not easy to squeeze out more time for yet another “pet” project of the higher-ups. Not to mention it may require change to already overburdened workers who are trying to do the best they can with less budget and time. But there can be other reasons as well, data visibility can expose weaknesses or mitigate control over a certain functional area. On the positive side, data visibility can also expose strengths and opportunities which may be leveraged in other areas. Once again, focusing on the ultimate objectives, clear an honest communication and support from the executive team is essential to moving through road blocks. The challenge is to make the change process as positive as possible for all involved. Rapid and successful improvements in processes leading to better metrics will help show value and increase confidence in the initiative.Pro tip: During requirements be sure to measure the current state process in terms of hours or cost or opportunity and then the improved state so later you can show your BI on BI in the form of ROI.

Don’t exclusively focus on financial metrics

At the end of the quarter or year it’s not uncommon to get a report on sales revenue, cost of goods sold, other expenses and profit. But by the time these are realized whatever variables led to these metrics are impossible to change for the current timeframe. You could only look in your rear view mirror for potential fixes to be applied to the next quarter or year. The goal should be to develop an early warning system amongst your operational, customer and employee metrics where if changes are made early enough you would still have time to moderate the effects. Think of your processes as a linear timeline that may intersect other processes. For example, if the goal is to reduce customer acquisition cost by increasing customer retention you might measure employee support training or development speed on customer requested functionality. Both of these processes affect financial performance but the leading indicators allow for much earlier identification and improvement prior to their impact on the bottom line.

Pro Tip: Use what-if scenarios to determine the highest impact leading indicators and set your goals. Indicators can be rated on impact, probability and complexity. Also be sure that you are using key performance indicators and not metrics, KPIs are mostly measured using percentages, indexes and ratios.

So the takeaway from starting and progressing a business intelligence initiative in your organization can have challenges but they can be overcome. Get strong executive sponsorship and involvement, start with a vertical challenge that can provide the best ROI, deliver a role-based solution that can be quickly deployed, understand that change and data visibility can be unsettling so make it a positive experience and finally, start with the financial metrics you want to improve but then identify as far back in the processes as possible those metrics and roles that affect them.