Friday, June 4, 2010

Profit from Investments

I just finished GRI 412 today in Sunrise Beach MO. Tom Lundstedt presented an excellent program "Profit from Investment Property". Some of the highlights I gleaned from this class: before buying any investment property fill in a pre printed form called "Investment Property Worksheet" (it is a step by step process of determining your return on investment), secondly always get a Schedule E from the investment owner, thirdly compare the return of investment among several properties before buying, and fourthly bifurcate your depreciation.

Bifurcation is very interesting. It is a separation of depreciable items. For example, there are 3 depreciable items to consider: land improvements, personal property, and the building. Land, of course, is not depreciable. So during bifurcation start with the total cost of the investment, subtract the value of the personal property and the land improvements. This leaves the land with the building. If you want, you can use the Assessor's ratio of land and building value. Subtract the land value from the building. With all components separated, then calculate the depreciation for each component. The building depreciates at different rates depending on whether it is a residential or non residental investment, the personal property depreciates at another rate, and the land improvements depreciate at even another rate.

We also talked about capital gain tax rates. If you ever sell a fully depreciated investment, watch out. You will feel like you got hit by a 200 ton train. To avoid capital gain tax, use the Section 1031 (Starker) tax free exchange.

Something else for current investment property owners to consider is their current rate of return on equity? Is it still as strong as it was originally?

I could go on and on. If you ever get the chance, I recommend attending Mr. Lundstedt's class.

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