Purchasing a commercial real estate property - Deciding whether to buy or lease

Every other year, it seems like the US real estate market suffers through a crash or, rectification, and this underscores a dilemma for the middle and small-sized businesses. Most prospective commercial real estate buyers oscillate between whether to own a commercial property or rent it. In order to finance your commercial real estate property, you have to take out a commercial mortgage loan, after considering questions like ' How much can I borrow for a mortgage?' You must consider your financial capability before taking out the commercial loan so that you do not have to face financial consequences that may have a detrimental effect on your business operations.

Purchasing a commercial real estate property can become a daunting task, and even experts can't predict the best time to purchase in order to maximize returns. Buying a commercial real estate property is a venture that has enough risks, and agents, buyers and sellers can all suffer due to a change in demand. If you're deciding between buying or leasing a property, be aware that there is no easy answers. Read on to educate yourself on this.

Taking an informed decision while purchasing a commercial real estate property
When you're deciding whether to purchase a commercial real estate property, it's crucial to know about the risks and the benefits involved. The last thing any investor would want is to buy a property and then later realize that it would have been better to rent. Some of the risks that you may face include:

• Location may have an adverse impact later: The 'hot' neighborhood that you determine while buying your real estate may become a 'not' neighborhood in the near future. Locations are often trendy but suddenly you may see that the locations may go bust and the area that you choose today may become undesirable the next month.
  
  
• Restrained cash flow: Tenants may stop making timely rent payments, and other times the building may even need some expensive repairs. This may compromise your cash flow and lead to a financial crisis.
  
  
• Loss of liquidity: By buying a commercial real estate property, most businesses may tie up much of their liquid assets. While it may be pretty hard to sell real estate property during a slump. At the same time, those businesses that own property can sell it and maybe revive their lagging business.

Therefore, if you're keen on getting a commercial real estate property, you must take out a mortgage that suits your budget and that which you can repay with ease. Do take the time to figure out how much you can borrow for a mortgage before taking out that mortgage so that you don't default on that loan later on. Also, before you decide whether to buy or lease a property, take into account the risks and benefits of each decision.

What does LTV (loan-to-value) mean?

The LTV (loan-to-value) ratio on a mortgage basically describes how much you're borrowing compared with (as a percentage of) the value of the property you're buying.

Sound confusing? It is for a lot of people, but it's actually a lot simpler than you may think. The following chart should help:

Property value	Amount borrowed	LTV ratio
£100,000	£90,000	90%
£100,000	£75,000	75%
£100,000	£65,000	65%
£100,000	£50,000	50%

So basically, your LTV ratio describes the percentage of the property's value that you will be borrowing on your mortgage. The rest of the value will be made up by your deposit.

To work out your LTV, use the following simple formula:

(Amount borrowed ÷ property value) x 100 = LTV ratio

Why is the LTV ratio important?
In general, the higher the LTV, the higher the interest rate (and therefore your mortgage payments) will be.

So, let's say you have £40,000 to use as a house deposit. If you put this down on a house worth £200,000, you'd have to borrow £160,000 to make up the difference - which is 80% of the house value. Therefore you'd have access to mortgage deals with 80% LTV.

On the other hand, if you used that £40,000 as a deposit on a £100,000 house, you'd have to borrow £60,000 - just 60% of the value - meaning you'd have access to 60% LTV mortgage deals.

When it comes to choosing a mortgage, you have a choice: borrow more (on a deal with a higher LTV) and you'll probably pay a higher interest rate, or borrow less (on a lower LTV) and enjoy a lower interest rate.

However, this may not always be the case - you may sometimes be able to find a deal with a relatively high LTV that still offers a lower rate than some lower-LTV deals.

Why are higher-LTV mortgages more expensive?
It's basically a matter of perceived risk. A high LTV means the bank is lending you a relatively high proportion of your home's value.

This could cause problems if your home's value drops for any reason. For example, if you have a 10% deposit (90% LTV) and your home's value falls by more than 10%, selling your home wouldn't raise enough money to fully repay the mortgage - so it's simply riskier from your lender's perspective.

This is what people are referring to when they talk about 'negative equity', and it's a problem that has affected many people in recent years. People in negative equity often find themselves unable to get a remortgage, and it can make things much harder for those who want to sell their home.

Mortgages with a higher LTV have become relatively rare in recent years because of this risk (as house prices aren't particularly stable anymore).

How to opt out of phone books, junk mail, and telemarketers

When you are under financial stress, the last thing you need in your life are some of the more useless intrusions in your life, phone books you don't use, junk mail you don't open, and telemarketers who don't stop calling. There are several things you can do to get back control of that part of your life, and it is easier then ever to get these pests out of your life.

Stop Phone Book Delivery
Go to the site catalogchoice.org and put in your zip code. You will see a list of phone books that get delivered in that zip code. Sign in, fill out a form, and your deliveries should stop.

Chase Away the Telemarketers
Like roaches and other pests, even the best extermination techniques won't get rid of all of them, but at least you can take some steps to slow them down. Go to the US Federal Trade Commission's (FTC) Do Not Call Regisry at www.donotcall.gov. The best thing about this FTC registration is that our registration will not expire. Telephone numbers placed on the national Do Not Call Registry will remain on it permanently due to a federal law, the Do-Not-Call Improvement Act of 2007. You can also register by phone at 888-382-1222 (call from the phone you are registering).

Most calls should go away after about a month, but some calls will still happen for two reasons: some telemarketers don't follow the rules, and some classes of calls are not covered by the federal law. The classes of calls not covered include Business-to-business calls (the Registry is only for personal numbers), faxes, surveys, and companies with a prior relationship to you (you bought something from them or are making payments to them).

Your state may have a stricter law than the federal law, so it won't hurt to check.

Stopping Junk Mail
Things are a bit more complicated with junk mail. To stop unsolicited offers for credit, credit cards, or insurance, the three main credit reporting agencies have a central number you can call, 888-5-OPT-OUT (888-567-8688) where you can opt out of receiving these offers. You can also fill out a form at www.optoutprescreen.com to do the same thing.

For other kinds of junk mail, you can contact the Direct Marketing Association at www.dmachoice.org to register with their Mail Preference Service.

Newest changes on credit card fees and interest rates

Earlier in 2010, the federal government passed laws that changed how consumers get treated when it comes to credit card fees and interest charges. The changes have come in phases, with the latest changes starting on August 22, 2010.

Penalty fees
The new law limits late payments or over-the-limit purchases. You can't be charged more than your payment or the amount over the limit. For example, if you had a $10 minimum payment, your penalty fee can't be more than $10. The typical maximum penalty fee is $25. If a customer goes over the limit again within six months, the maximum penalty goes to $35. When it comes to going over your limit, the penalty will be no more than the amount you went over. For example, if you spent $15 more than your max. The charge for that cannot be more than $15.

Credit card rate increases
If your credit card company raises your interest rate, you will have to be told why. Your card issuer also has to review the rate increase every six months, and if you deserve it, the rate has to be lowered. Any rate hike after the beginning of this year would have to be reviewed.

Gift card protections
Starting August 22nd, all prepaid gift cards must be good for at least five years. If you have a gift card and with an expiration date on it sooner than that, any leftover money must be honored for at least five years. You can also request a free replacement for any expired gift card.

No more inactivity fees
These fees will now be banned. Even if they are called by another name, such fees are no longer allowed. For example, if your card has an annual fee that's waived if you spend a certain amount, that is an inactivity fee and that will not be allowed.

Short Sale on Your Income Property? - You May Owe the IRS Big Time

Remember last month when I talked about how you may owe taxes after a short sale on your personal residence? The same problem may happen if you have an investment property with problems. Depending on your situation, especially how much you owe on your property and to whom, you may have a huge tax problem on your hands.


Plenty of help for a primary residence
Over the past few years, there have been a number of new laws and government programs set up to help homeowers. For example, the Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief, and these advantages will be in place until 2012. Also, as the economy continues to be rough for the average taxpayer, there will be continued political pressure to provide relief in the form of tax breaks and rule changes.

Why investment properties are different
To put it simply, an investment property is not a primary residence, so many of the breaks that homeowners get when it comes to tax breaks for forgiven debt doesn't exist. For example, if you are personally insolvent on the day that you do a short sale on a personal residence, you probably don't owe any taxes on the value of the forgiven debt. If the same thing happens with an investment property, it isn't a personal residence, and you may owe on the forgiven debt.

Nightmare scenario: you lost money but still owe taxes
There are many ways that this can happen, and the following is an easy to follow example. An investor bought a four-unit apartment house for 0% down three years ago, and the rent from the tenants easily covered the mortgages and other costs. In the last year, two very bad things happened - real estate prices dropped 30%, three of the tenants moved out or just stopped paying rent, and you are bleeding money like crazy. You find another investor who takes it off your hands, and you think you are lucky because the mortgage holder allowed a short sale on your property.

Things look great until a few months later when you get the 1099C from the mortgage holder and you realize that the forgiven debt is considered income, and you owe taxes on the difference between the purchase price and the sale price. The only problem is your apartment house was your only significant investment, and after you sold it and took care of all the other costs, you were living paycheck to paycheck. You have a tax bill that is is equal to your annual income, and Uncle Sam doesn't want a sad story, he wants you to show him the money.

How to deal with this problem
The best way to deal with the problem is to avoid it by not selling the property. If this is not an option, then it is time to get either creative or proactive. Creative would be working with the mortgage holder to change the terms of the deal, or working with real estate management company to find paying tenants. If you have no choice but to sell, then at least prepare for the consequences by contacting the IRS about your situation. They will still want their money, but they may be open to negotiating a payment agreement with you.

Short sellers, who get lenders to forgive a portion of the debt in order to complete a sale, are also at risk because lenders will often leave their options open to come back and collect later. If you are involved in a short sale, make sure to review your agreements carefully, preferably with the help of a competent professional.

Photo credit: Wikipedia

Recovery Act can save you money on your 2009 tax bill

In February 2009, President Obama signed into law the American Recovery and Reinvestment Act, or Recovery Act, into law. One of the benefits of the law is that you may be able to get tax credits or tax reductions for your 2009 taxes.

To give you an idea of what benefits you can get, you can review the tax savings checklist on the White House web site that will give you an idea of what benefits you can get.

If you go through this checklist, you will have an idea of what you should look for when you do your taxes. A tax program like TurboTax, or a tax professional, may be able to find these benefits as well, but you should still go through this checklist so you will know what to look for or what to ask when it comes time to do your taxes.

Video about the Tax Savings Tool

First time homebuyer? - You may get $8,000 back from the IRS

Last November, the US government passed a law that lets any eligible taxpayer get an $8,000 deduction on your 2009 taxes. The credit reduces your tax bill or increases his or her refund, dollar for dollar. The first-time homebuyer credit is different from most tax credits in that if you are eligible whether or not you owe any taxes. For a home buyer, this is the closest thing to free money that you will see any time soon.

Top 10 things you should know
1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.

2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.

3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

4. A long-time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.

5. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.

6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.

7. The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009 – whether the credit is claimed for 2008 or for 2009 – and for all home purchases that are claimed on 2009 returns.

8. No credit is available if the purchase price of the home exceeds $800,000.

9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.

10. A dependent is not eligible to claim the credit.

Your situation may be different, but basically you can get the full benefit if

For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

Special IRS requirements

Because of the documentation requirements for claiming the credit, taxpayers who claim the credit on their 2009 tax return must file a paper — not electronic — return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit (see the Form 5405 instructions), and a properly executed copy of a settlement statement used to complete the purchase.

Check out the IRS Video

Where to go for more information
IRS information page on this tax credit
IRS news release March 18,2010
IRS news release Novemer 24, 2009

Do you qualify? - Take the quiz
You can take the Zillow quiz in the right column of this site to see if you qualify.