S.E.C. Real Estate Observer

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Time for an Annual Check-up

It’s that time of year. Before the holiday season begins and all manner of distractions curb our attention, how about taking some time to do a cursory evaluation of your own and your clients’ real estate holdings over the past year? This may seem obvious or redundant, but some may need a reminder to do the numbers and get ready for the upcoming year. You may be looking at possibly reposturing your position, or that of your client, in the near future.

While you are gathering financial info for the year for tax purposes, do a quick Return on Equity (ROE) evaluation of your property. In brokerage-only cases, offer to do a quick equity evaluation for your clients.

First, to find your real equity positions, pretend that you have decided to sell. The reason? Transaction costs should be included in your evaluation. So, estimate current market value and subtract estimated transaction costs and the current loan balance to get to real net equity.

CURRENT MARKET VALUE
– TRANSACTION COSTS
– LOAN BALANCE                   
NET EQUITY

Now, add up total annual benefits flowing to the owner. These will include CF before tax, principal reductions, and depreciation, which may result in tax savings (add tax savings as a benefit).  Finally, subtract any tax liability for total annual benefit in the form of cash flow.

CASH FLOW BEFORE TAX
+ PRINCIPAL REDUCTION
+ DEPRECIATION
+ TAX SAVINGS (TAX LIABILITY)
TOTAL ANNUAL BENEFIT$$

For your current ROE, simply divide your net equity into total benefits in the form of cash flow.

TOTAL BENEFIT$$ ÷ NET EQUITY = ROE

Now you must ask yourself or your client if that ROE number is acceptable under whatever criteria is most important at the time. Perhaps there are opportunities in the marketplace for a better return. Perhaps this exercise might make apparent that it is time to sell, refinance, or exchange.

The ROE calculation is a simple yet very important tool to the equity Counselor, and it can be the lynchpin in the decision process with your business or your client’s business. Beginning with ROE you can begin to formulate a goal-driven strategy, which will inevitably also include nonmonetary benefit considerations that, as a proficient Counselor, you will take into account as you move ahead into the upcoming year.

Blessings,
Paul