Issue: #  42    JUNE 2012
Bautis Financial
Dear ,
 

Welcome to the June 2012 issue of The Wealth Chronicle!

Investing in Distressed Properties - Part II

 

 

 

In last month's Wealth Chronicle newsletter one of the articles was titled Distressed Properties 101 which providedthe details and differences from Foreclosures, Short Sales, and Bank REO properties. This month's article is the second part in that series; we will explore what to look for when buying a distressed property in order to decide whether it to be a successful investment.

When it comes to investing in distressed properties (or any type of property) there are four ways to make money

  1. Cash Flow
  2. Appreciation
  3. Loan Amortization
  4. Tax Shelter

Each property you invest in is unique and will blend the four benefits above differently. This article will detail each of these four topics

 

Cash Flow

Cash flow is simply money coming in and money going out. If you look at a particular period of time (usually 12 months) you will want to know if more cash comes in than goes out. (positive cash flow) If a property has a negative cash flow it means you, as the investor, will have to ante up your own personal money to make up the deficiency. Having an occasional negative cash flow does not automatically make it a flawed investment; you may make up your returns in the other three areas.

 

Example

You own a six-unit building. Two units rent for $800 a month, two for $900 a month, and two for $1,000. Each month you make a mortgage payment of $2,800. You pay $14,100 in real estate taxes, $3,800 in insurance, $4,200 for maintenance and repairs, $800 for water, and $75 for miscellaneous supplies

 

Cash In

(2 x 800) + (2 x 900) + (2 x 1000) = $5,400 per month
5,400 x 12 months = $64,800 per year

 

Cash Out

Mortgage (2,800 x 12 months   $33,600
Real Estate Taxes                     $14,100
Property Insurance                     $3,800
Maintenance                               $4,200
Water                                             $800
Supplies                                          $75
Total                                          $56,575

 

Cash Flow $8,225

 

Appreciation

Next to Cash Flow to most meaningful return is appreciation which is defined as growth in value of a property over time

The amount of appreciation is the difference between the selling price and your original purchase price.

 

Loan Amortization

When you use a mortgage loan to help you purchase an income property someone else (the tenants) are paying your bills. Each mortgage payment you make includes both interest and principal. Amortization is the liquidation of this debt by the application of installment payments over time

 

Example:

You make monthly mortgage payments of $1,500. At the end of the year, your bank reports that you have paid $15,00 in interest for the year your amortization for the year is

Annual Debt Service ($1,500 x 12)     $18,000
less interest paid for the year              $15,000
= Amortization for the year                    $3,000

 

Tax Shelter

As owner of an investment property, you take in taxable rental income, and pay out tax-deductible operating expenses like insurance and repairs, leaving you with a "net operating income" (NOI) on which you would expect to pay taxes. However, the tax code permits further deductions. The first of these deductions is for mortgage interest. The second source is through depreciation (cost recovery).

 

Example

Income                                       $64,000
less Operating Expenses           $22,975
= Net Operating Income             $41,825
less Mortgage Interest               $32,000
less Depreciation                         $8,000

= Taxable Income                        $1,825

 

Successful investors focus on the property's income stream. Don't make a decision to buy, hold, or sell based on emotional factors. To achieve a successful return you have to focus on the numbers carefully: the current financial data and at reasonable projections of how the investment will perform in the future.

Tapping your 529 plan to pay bills

 

When it comes to saving for college it's hard to beat the tax benefits the 529 plan affords. All things being equal you can come out thousands ahead by using a 529 plan versus saving in a regular savings account.

 

 

The question I get asked by almost everyone I talk with when exploring the option of 529 plans is "what if my kids don't go to college?" It is a valid question. If the 529 plan savings are not used for college there is a 10% penalty and you have to pay taxes on any of the gains in the account. However your contributions are not penalized nor are they taxed. This doesn't tell the whole story of how the 529 plan can be used. Here are a couple more benefits to consider:

 

1)      The funds in a 529 plan can be transferred and used by a family member without penalty. "Family member" in this case includes a son or daughter, brother or sister, father or mother, niece or nephew, aunt or uncle, spouse, or a first cousin. There is no time limit on when the funds have to be used; this means the 529 plan can be used for your grandchildren. Think of the savings you can accumulate if your account is left to grow tax free for 30-40 years, wow!

 

2)      The money in your 529 plan is not locked in and you can use it if a need arises. To cover for a job loss, medical bill, or unexpected house repair you may need to consider all of your options. One possibility is tapping into your 529 plan. Here is a great article  on how and when to tap into your 529 plan.

Summer Key Planning Dates

 

Happy Birthday iPhone

 

The iPhone turned 5 years old this month.  Over the 5 years Apple has sold 180 million of them and doesn't show any signs of slowing down especially with a couple billion Chinese in the market clambering for them.  I've had my iPhone for about four years.  Reflecting on it, I've come to realize that my iPhone has replaced a lot of devices that I use to use. Here is a list of them.  

 

Watch - Who needs a bulky watch on your wrist when your phone is always in your pocket?

 

Camera - While it's not a replacement for a professional camera on the iPhone 4s is an 8 megapixel camera that can zoom and has a flash. Not to mention the video camera and the Facetime app make having a video conference call a cinch.

 

Alarm Clock - The alarm clock app on the iPhone allows you to set 4 alarms and doesn't have to be wound up; this is great for home use as well as while away on business. Also since I leave my iPhone on my nightstand, I can always check my email if I wake up in the middle of the night.

 

Home Phone - I still have a home phone, I just never use it. It's only thanks to Cablevision for forcing me to have a land-line with their optimum triple-play package.

 

MP3 Player - Apple started their dominance with the iPod. The iPod touch is still popular, but most people listen to music stored on their phone.

 

Calculator - A basic one comes free on the iPhone. The HP 12C financial calculator I use for work cost $15. A real one cost $65. They both do the exact same thing.

 

Planner - No need to carry around a bulky day planner to keep track of appointments, meetings, and to do lists.

 

Compass - I have to admit I never used a compass much, but if I ever needed one I would just use the app on the iPhone.

 

GPS - Using the GPS application on the iPhone is so much better than seeing my Garmin stuck on "Acquiring Satellites" for 5-10 minutes at a time.

 

Bike Speedometer - Cyclemeter is one of my favorite apps; it keeps track and provides stats on your bike rides, walks, runs.

 

E-Book Reader - At first I thought I would never read a book on an iPhone. The Kindle app on the iPhone formats books perfectly and makes them easy to read

 

Voice Recorder - Like the compass, I don't use this too often. Nowadays if I ever need to take a note and don't feel like typing it, I'll have Siri take it down for me.

 

Round Timer - Used for working out, they can cost over $100. The iPhone app cost $4.99.

 

What has your iPhone replaced?

 

 The Watercooler

 

Warrior Dash Economics - On June 16th I ran in my first Warrior Dash with my friend Jeff. Warrior Dash is a 5k race with a dozen obstacles dispersed throughout the course, imagine something out of an army movie. It was a lot of fun, but one of the things that stuck out for me is how much money the event made. When we were checking in, the officials told us that there were 10,000 people registered for the event that day.

  

Entrance Fee - 10,000 participants x $70 entrance fee = $700,000

Parking - $20 per car (estimate of 5000 cars) = $100,000

Food and Drink - estimate that $20 is spent per participant = $200,000

 

The race lasts less than an hour but many people make a day out of it. There are tents selling food items like turkey legs and 32 oz beers.

Vendors and Sponsors - estimate ($50,000)

Campers - You could rent a space from Warrior Dash to pitch a tent for the weekend. Cost $75 (average). Estimate 200 campers = $15,000

TOTAL REVENUE - Over $1 MILLION

 

The event was very well run and I know there are a lot of expenses with putting on an event that size, but I wish I was the one who thought of the idea!

 

Germany kicks Greece out of the Euro, well not out of the European Union, even though they probably would like to, out of the Euro Cup! On June 22nd Germany eliminated Greece in the quarterfinals of the European Cup Soccer Tournament 4-2. Germany dominated the game, however as they are accustomed to, the Greeks made it dramatic tying the game 1-1 in the second half.

 

The Shanghai Composite stock market index fell by 64.89 points on June 4th, the anniversary of the 1989 Tiananmen Square massacre in Beijing, an event which is often called 6/4 in Chinese. Some saw this as coincidence; others believe the index had been hacked.


 

Company Spotlight

 

 

With recent energy deregulation in states such as NJ and NY consumers are free to decide where they get their electricity and natural gas from. By switching from your current provider you can see significant savings. Companies like PSE&G and Con Edison would still deliver your energy, however where it comes from would be different.

 

Ambit Energy on NBC News
Ambit Energy on NBC News

 

 I recently switched to Ambit Energy and was helped by consultant Ellen Rossetti. The process to switch was seamless and I see a savings of over 10% per month from what I was paying.

 

With the current state of the economy most people are looking to save some money on their expenses. Switching your energy supplier is one way you can potentially save a few dollars.

 

Ellen Rossetti

Independent Consultant

201-993-8174

light72energy@gmail.com

 

 

Please contact me if you have any questions about the articles above or about your personal or business finances.

  

Sincerely,

Marc Bautis
Wealth Manager

 

office: 201-842-7655
cell:    201-221-6895
fax:     201-754-9760
Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation.  You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter

What's Inside?
Investing in Distressed Properties
Tapping your 529 Plan
IPhone Birthday
Watercooler
Company Spotlight
Marc Headshow w Skyline, 9-2011
MEET MARC  

Marc Bautis is a Wealth Manager specializing in working with young families as well as retirees and those nearing retirement. He understands that everyone wants to not only protect their principal, but also be sure that their money lasts.  He is committed and proud to deliver independent advice, always in the interest of his clients.

Marc is the creator of the Retirement Fitness Challenge™,  a program designed to be sure his clients enjoy the retirement years as they have always envisioned them.  Marc's program is designed to prevent outliving your money but also to minimize expenses during retirement and find the best time to start taking Social Security benefits.   

Marc is a graduate of Seton Hall University.  He is a Bergen County native, from Lyndhurst, where much of his extended family still resides. He currently lives in Hasbrouck Heights with his wife Katie and Old English Bulldog, Winnie.

 

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