S.E.C. Real Estate Observer

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To know our investments requires thought, time devoted to each, consideration of taxes, the often overlooked depreciation recapture; and most importantly, to have a plan first, or to develop a plan during the process of accumulation.

So what is the plan about? For me, it’s about my life and considering what it is I really want – more to the point, what is my purpose in this life? There, most of us get to serious thinking, contemplation, and consideration. If my life is centered around the accumulation of wealth, then I have to ask, for what purpose? If it is about something larger than that, then how does the puzzle come together? How does building an estate fit into my life?

So knowing my investments is one thing…what they are for is another matter.

But, let’s talk about investments for a moment. What do we need to know, and of what do we need to be aware? The Broker’s Estate Building Class provides excellent tips, guidelines and stimuli around “need to know” and decisions to make, which helps clarify our thought processes and guide our plan.

Current position. What does that mean? In order to understand our investments, we need to know where we are. To know where we are requires a written document, or documents, which define the position. Having the property undefined, or just rolling around in our heads leads to a lack of clarity and sometimes anxiety about what’s really going on with that investment. It can also lead to loss of opportunity, income, and perhaps create a deficit position and loss of value.

There are choices for defining the current position – a summary chart with all the investment properties in a format with important detail – or a separate cover sheet for each property; followed by a complete business plan for the investment – or all of the above – Summary Chart, Cover Sheet, and Business Plan! The summary chart is a wonderful review mechanism, for all the properties are together and readily available in one location for easy review. However, with the chart, there is still an absolute need for a business plan for each investment which provides much more detail, purpose and position.

A summary page or chart for each investment property provides a snapshot of position including cash flow; adjusted basis; note information, including interest rate, balance, and payment amount; the estimated current market value and anticipated future market value; intensity of management; annual income tax owed, adjusted basis, legal description and address, ownership entity; partners, if any, and location of deeds, title insurance, loan documents, appraisals, and bank names and account numbers.

Having the adjusted basis in a written accessible format provides for a quick calculation of gain if sale is anticipated. Having the note information current and accessible provides a reminder to determine if there are advantages of refinancing the property.

A review of the snapshot chart can be done quickly and easily at any time, but should be reviewed, as well as updated with new information, no less than once a month. In some cases, a weekly review may be helpful.

There are several reasons for having this information readily available:

1. When deciding to sell a property with a plan to reinvest, it’s important to know our current position and to determine if it would improve by selling the property.

2. Upon death or incapacitation, my executor, partners and/or heirs will be able to carry on and make decisions with a minimum of confusion as well as not make decisions without information which could result in costly mistakes.

3. An investment may be headed for trouble and without the snapshot, the trouble may hit without our being prepared. Problems can probably be aborted or solved by just being conscious of the property and what’s going on.

Business Plan. Each investment should have a written business plan to be reviewed and updated, as needed – probably every 6 to 9 months. The business plan should include a narrative with general information about the investment, a section regarding the direction planned for the investment, purchase agreements, loan documents, appraisals, deeds, ownership entity and partners, names and addresses of critical parties (attorney, CPA, manager); and copies of the leases, rent roll, operating statements, maintenance/ anticipated or planned, along with cost estimates of such maintenance, and tax returns.

The snapshot chart referred to is an overview of all the investments within the portfolio. The cover sheet gives a summary of the business plan with salient points outlined. The business plan provides detailed information and direction for the project.

Financial Statement. With the written planning process, and “written” is again emphasized as an absolute necessity for truly “knowing your investment,” the update of a financial statement becomes a simple task. The financial statement should be a part of the snapshot review process. Having all the properties in your portfolio in a format for easy review and decision making is a comforting position emotionally.

With the financial statement current and available, it is pretty simple to measure where we are on our overall plan and its accomplishment, to make decisions to either further direct our plan, modify, or hold “status quo.”

Developing these documents: snapshot chart, cover sheet, and business plan, is invaluable to us personally in “knowing where we are” at all times.

Good decisions are based on good information. The guess work and the anxiety level is removed, opportunities can be spotted and problems solved by completing this provocative exercise.