Your final paycheck will be available when the clearance process is completed. An employee who is absent from duty for more than three 3 consecutive business days without giving notice to the appointing authority or appropriate manager concerning the reason for such absence and without securing permission to be on leave or who fails to report for duty or the immediate supervisor or the appointing authority within two 2 business days after the expiration of any authorized leave of absence, absent unusual circumstances causing the employee's absence or preventing the employee's return, is considered as having resigned not in good standing MTSU Policy MTSU, insofar as possible, is committed to providing a safe and secure environment to its students, faculty, and staff through a policy of zero tolerance for acts of violence committed on campus or within any university-owned or operated facility.
Any such acts may be prosecuted to the fullest extent of the law as well as subjected to normal university disciplinary procedure. Violence is defined as: "any act or threat of aggression intended to create fear of bodily harm or to otherwise threaten the safety of a co-worker, student, or the general public. Any assault or battery. Assault includes speech where the target is threatened and the individual making the threat has the capability to carry it out. The target is made to feel he or she is in danger. Battery is the actual physical contact. Any substantial threat to destroy or willful destruction of property.
If a violent or potentially violent situation occurs:. The table above lists the benefits available to regular employees based on percentage of employment. Middle Tennessee State University has different pay plans for each employment classification. To ensure competitive faculty salaries by discipline and rank, internal and external reviews are conducted for each faculty appointment. First, salaries are recommended by the department chairs based upon departmental cohort salaries in consideration of level of degree and total years of experience.
Second, salary ranges have been determined for each teaching discipline and rank using CUPA, AACSB, or other nationally published salary survey data from selected peer institutions. Individual placement within each range is determined by a consideration of three factors: total years of equated higher education experience, level of highest degree, and number of years in rank.
This formulaic method is used as an external measure of market competitiveness. Final approval of the recommended salary rests with the executive vice president and provost. Salary ranges for each of the nineteen 19 pay grades are determined using CUPA salary survey data for benchmarked position titles.
Non-benchmarked positions are assigned to pay grades based on their relationship to benchmarked positions. Individual placement within each salary range is determined by the years of experience of the employee as recommended by the Office of Human Resource Services. Final approval rests with the vice president of each division.
Individual placement within each salary range is based on the education and years of experience of the employee as determined by the Office of Human Resource Services. It considers support for educational expenses of personnel and their dependents is an important vehicle for addressing that need. The programs for MTSU employees and dependents are available subject to funds being budgeted and available within the institution.
Complete eligibility information is contained within each Guideline located online. The programs are:. Age 65 or Above Program. Ingram Building, Room or online. For more information or help locating forms you may call Human Resource Services at Described briefly below are the insurance options you have through MTSU employment. Participation in these plans is optional. The State of Tennessee offers two dental options to all regular full-time employees.
This coverage can be elected when first employed or during any annual enrollment period. Coverage is effective the first day of the month following the hire date. Disability insurance is available to you as a full-time employee. Support personnel are eligible to participate in the non-exempt plan and administrators and faculty are eligible to participate in the exempt plan. Both plans are designed to provide a monthly benefit should you become totally disabled.
Both plans are administered by The Standard Company. This coverage can be elected without answering health questions if application is made within thirty 30 days of employment. The Optional Special Accident plan provides an additional amount of accidental death or dismemberment coverage.
Participation is optional. The biannual employee benefits fair is sponsored by the Human Resource Services Office. The benefits fair provides the opportunity for employees to learn more about the benefits offered through MTSU and various other services available in the community. A benefits orientation is scheduled for you during the first three 3 days of employment. During this meeting, you are provided detailed benefits information and have the opportunity to discuss all options and to make enrollment decisions.
Benefits information is located on-line through PipelineMT. Change of name name must match Social Security card , marital status, dependents, telephone and address are of vital importance in keeping employee records and benefits information up-to-date. The Human Resource Services Office should be notified within thirty 30 days when you have a change of status. The thirty 30 day time-frame is crucial to benefits administration. Employees are eligible to make contributions through payroll deduction to charitable organizations.
Information on which organizations are available is provided in the Human Resource Services Office. Together, through these three facilities, MTSU employees can find childcare for their children-infants, toddlers and pre-schoolers during the daytime. Part-time and full-time care are both available.
The full-service Murfreesboro office offers checking accounts, free PC Banking, savings plans, signature loans, new car financing, home improvement loans, and many other Credit Union services. Effective July 1, , MTSU requires all newly hired regular employees to receive their paychecks through direct deposit. Direct deposit is offered with any Federal Reserve System financial institution.
The Employee Assistance Program EAP is a short-term counseling service available to you and your immediate family members who may be experiencing personal or workplace problems. Employees are eligible if they have worked for MTSU for at least one year and for 1, hours over the previous twelve 12 months. The following is a summary of some provisions of the Act:. Reasons for Taking Leave Unpaid leave must be granted for any of the following reasons:. At the employee's or MTSU's option, certain kinds of "paid" leave may be substituted for unpaid leave.
Advance Notice and Medical Certification The employee may be required to provide advance leave notice and medical certification. Taking of leave may be denied if requirements are not met. The Flexible Benefits program allows certain expenses, including medical premiums, dental premiums, certain medical expenses, and dependent day-care expenses, to be paid from pre-tax rather than after-tax income as authorized under Section of the Internal Revenue Code. Participation in the Flexible Benefits Program is optional.
You will begin receiving longevity pay after you have completed three 3 years of employment with the State of Tennessee. Longevity is paid up to a maximum of thirty 30 years of service and will be paid to you on the first pay period after your anniversary date. All regular employees participate in retirement. In recognition of employee's service and dedication to MTSU, service awards are presented annually.
Employees who have completed ten 10 , fifteen 15 , twenty 20 , twenty-five 25 , thirty 30 , thirty-five 35 , forty 40 or more years of service are honored at a luncheon and recognized for the number of years served. You are eligible to participate in a b , , or k tax-deferred annuity program. These programs allow you to establish a supplemental retirement plan with pre-tax dollars. You may also elect to participate in a post-tax Roth k plan. MTSU provides unemployment compensation as a benefit, however, the decision to award these benefits rests with the Department of Employment Security.
No deduction is made from the employee's pay for this benefit. This compensation should not be confused with Social Security or Worker's Compensation. All MTSU employees are covered under worker's compensation. In the event you are injured at work:. Employees who have a work related injury must choose a physician from the providers who are enrolled in the worker's compensation network. Employees must use providers listed in the network in order to have a claim paid. In addition, the worker's compensation claim for any other type of benefits lost time pay, disability, etc.
The Human Resource Services office also has a provider listing available for employees. All injuries should be reported as soon as possible. Benefits payable for injuries received on the job are determined by Sedgwick Claims Management Services. The Human Resource Services office provides forms and assistance in filing claims for job-related injuries. Leave for the previous month is entered by the individual employee and submitted for approval to their supervisor or department head by the first of each month. Detailed instructions as well as an online training module can be found here.
Time sheets are the official time records for payroll purposes and are completed online through PipelineMT by the individual employee. Employees enter their time worked and leave used for the pay period then submit for approval to the supervisor or department head by the deadline set forth by Human Resource Services. The standard workweek begins on Saturday and ends on Friday consisting of An alternative workweek used by some departments begins on Monday and ends on Sunday consisting of All administrative offices are open during this time.
A minimum of two 2 hours premium overtime will be provided for employees who are called back to work for emergency reasons. Holiday Pay. Inclement Weather Pay. If you are scheduled to be on-call, to provide services during off-duty hours, you will be paid as emergency call back time for actual hours worked. Overtime is any time worked in excess of Time taken as annual leave or sick leave does not count as hours worked for overtime computation purposes. Official University holidays will be counted as hours worked for overtime computation purposes. Overtime will be paid at straight time for hours worked in excess of The Family Medical Leave Act may directly affect the following leave policies.
For more information refer to the Other Benefits section. Annual and Sick Leave are provided as a benefit to you.
(Revised September 2003)
Part-time regular employees accrue annual and sick leave on a prorated basis. Regular employees with MODFY modified fiscal year appointments accrue annual leave during their appointment periods. MODFY employees who work during their normal non-duty period will accrue annual leave as full-time employees for each month of full-time employment. Requests for annual leave are subject to approval by the department head prior to the beginning of the leave. Annual leave or sick leave may not be advanced.
In the event annual leave reaches the maximum accrued leave, excess will be transferred on June 30th each year to the employee's accumulated sick leave. Upon separation from MTSU, employees are paid at their regular rate of pay for the exact number of hours of unused annual leave. Unused accumulated sick leave is not paid to the employee at the time of separation. See Transfer of Leave section. In the event of death of an employee, any unused annual leave and sick leave will be paid to the estate or designated beneficiary of the deceased employee.
Faculty members employed on a twelve-month basis earn annual leave at the rate of Academic-year faculty do not accrue annual leave. Faculty members accrue sick leave at the rate of 7. Faculty members on an academic year appointment earn a total of Academic year faculty who teach during summer sessions may accrue additional sick leave provided that when such employment is less than full-time, sick leave will be earned on a prorated basis. The maximum accrual for full-time summer employment is MTSU Policy MTSU provides all regular, full-time and part-time employees time off without loss of pay due to the death of a spouse, child, stepchild, parent, stepparent, foster parent, parent-in-law, grandparent, grandchild, or sibling.
A maximum of three 3 days bereavement leave is available. In addition to bereavement leave, an additional two 2 days sick leave may also be granted for employees. In instances of the death of a relative to which bereavement leave does not apply, sick leave may be granted for sons- and daughters-in-law, brothers- and sisters-in-law, foster brothers and sisters and other members of the family who reside within the home.
A maximum of three 3 days is available. You will be granted civil leave when in obedience to a subpoena or direction by proper authority you appear as witness for the Federal government, the State of Tennessee, or a political subdivision of the state, or when it is necessary to attend any court in connection with official duties or serve on a jury in any State or Federal Court.
In accordance with TCA , a regular employee who is a certified disaster service volunteer of the American Red Cross may be granted leave with pay for up to fifteen 15 work days each calendar year to participate in specialized disaster relief services for the American Red Cross. The request for the employee's services must come from the American Red Cross and is subject to approval by the employee's supervisor. The institution may require the employee to provide verification of service following the disaster period.
Additional guidelines are available to employees through the MTSU policies and procedures manual. All employees who are members of any reserve component of the armed forces of the United States or of the Tennessee National Guard will be entitled to leave of absence from their duties, without loss of time, pay, regular leave, or vacation, or any other rights or benefits to which otherwise entitled, for all periods of military service during which they are engaged in the performance of duty or training in the service of this state, or of the United States, under competent orders.
With regard to adoption, the four 4 month period shall begin at the time the employee receives custody of the child. The non-faculty sick leave bank and the faculty sick leave bank were established to provide emergency sick leave for employees who have exhausted their personal sick leave and annual leave. Emergency leave includes unplanned personal illness, injury, disability, or quarantine. Each year enrollment for both banks is conducted during the month of October. Employees must donate two 2 days of personal sick leave to become a member of the bank. Trustees of the sick leave bank meet when a request has been submitted to the bank.
Decisions made by trustees cannot be appealed. Enrollment in the sick leave bank is optional.
Only members of the sick leave banks are eligible to receive donated leave. Refer to transfer of leave between employees for more information concerning donated leave. Terminal leave begins the next workday after the last full day worked. If you have accrued annual leave, upon separation from MTSU, the annual leave will be converted to terminal leave and paid. The bottom line here is that you are the CEO of your business, and you decide who does what, when, and for how much. The roots of lending Most people dont realize that the minute they earn some extra money and put it in the bank, they become an investor.
A sav- ings account is the simplest investment you can make. To most of us, making a deposit into our savings account is nothing more than putting money away for a rainy day. In reality, the small amounts of cash deposited by millions of people form the foundation for most lending in our country. At their inception, building and loans, now called savings and loans, were started by the little people of a community as a safer place to put their extra money when their mattress just would not suffice anymore.
When they were fortunate enough to do a little better financially, they went to the building and loan and borrowed enough money to buy or build a first home. Until that point, they were forced to rent a place to live from someone else. From simple beginnings, as seen in the movie, savings and loans have grown in huge proportions. Nonetheless, they still are based on the simple economic concept of small investors banding their money together and then having that institution lending the money to others to purchase propertylending it to people like you.
Bankers know that real estate is one of the safest products to loan against. To begin with, they are aware of all the basic eco- nomic facts previously mentioned. Second, unlike a car loan, you cant drive their asset away if you quit making payments. For this reason, they can get their security back fairly quickly if something goes wrong.
Finally, lenders do an appraisal and check your credit to ensure that you and the property are qual- ified for the loan they are making. The message here should be clear; if bankers are confident that their loans are safe for you and them , shouldnt you help them out and use their money to buy some properties? Moneysaver Real estate loans usually get the lowest interest rate, the longest repayment term, and the lowest down payment requirements of any bank loan.
This is because bankers are convinced that these loans have the lowest risk of loss to the bank. One of the reasons we have it so good is that we all have an uncle that watches over us. His name is Uncle Sam. Many live in fear of him because they think he is always looking over their shoulder, but these people arent seeing the whole picture. To the real estate investor, Uncle Sam is our best friend and our staunchest supporter. When were just starting out, Uncle Sam gives us quite a hand.
First, he loans us the money at great terms to buy our first prop- erty. He then tells the guy who collects the taxes on the money we earn the IRS to give us as many breaks as he can. Finally, in areas where its tough for some people to pay the fair market rent, Uncle Sam pays it for them HUD subsidies. What a guy! Even if youre young, energetic, and ambitious, the fact remainsyou still need cash to get started investing. If money is tight and all seems lost, the federal government has two excel- lent programs geared toward helping the beginning investor get started.
We will discuss all the specifics of the FHA and the VA in Chapter 5, Borrowing Big Bucks, but knowing some of the basic details at this point will give you the encouragement you need now. The FHA is a government loan-insurance program that is open to any citizen who can meet some basic qualifying guide- lines.
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These guidelines are very generous and give most of us the opportunity to buy our first property. And by first property, we mean residential real estate, which means anything from one to four units. The most important advantage of this program is that it only requires a minimum down payment of 3 percent of the purchase price. In the case of the purchase of small units, the transfer of the rents and security deposits at closing can lower your actual out-of-pocket cost even more. The second program the government provides is Veterans Administration loans. The VA guarantees loans to people who have served in the military.
Because home ownership is one of the most important tenets of our society, there is no better way to reward someone who has served their country than to help them buy their first home. An eligible veteran can purchase a qualified property with no down payment and, in most cases, with no other out-of-pocket costs. What a country! Contrary to popular belief, Uncle Sam is also on your side when it comes to keeping your taxes owed to a minimum. Once you are a property owner, the government steps in every year with some extra help in making your new business work through various tax breaks and incentives offered by the IRS.
Most of these benefits are mirrored by the states in our country that have a state income tax. As a property owner, you now will be filing a Schedule C with your regular tax returns, wherein you will be reporting all income and expenses from your real estate business. The money you spend to run the property will be a deduction from the rental income you receive in determining your taxable. By using an FHA loan, I bought my first home and made an invest- ment at the same time. I bought a four-unit apartment building.
It has a three-bedroom owners unit that I use for my family, and it also has three attached rental units. The income from those units pays for almost all of my mortgage payment. This then is taxable, just as any other earnings are. Any legitimate expense of running your property can be a deduc- tion including the money you spend to upgrade the property to increase its value. Major expenses need to be deducted over sev- eral years, but they still can help decrease your taxable profit.
The most important tax incentive Uncle Sam provides is the ability to sell a property and trade all your equity into another property while deferring the taxes due on any profit you have made. This is called an IRS tax-deferred exchange. The number refers to the code section that contains all the rules governing such an exchange. We will tackle exchanges in earnest in Chapter 10, Planning for the Tax Man. For now know that because you can defer the taxes owed, you can have more equity available to trade in for bigger and better buildings in the future.
The end result will be a better chance at a higher return. The beauty is that, under the current code, an IRS exchange can be done over and over again for as long as you choose to grow your nest egg through real estate. Here is an illustration of how a exchange may pencil out: Lets assume you just sold a duplex that you have owned for several years.
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Assuming you are in the 30 percent tax bracket and are going to buy another property with 10 percent down, the following table shows the difference in the property you can purchase: Moneysaver The IRS offers extra benefits to people who own historical properties. Rather than a normal depreciation deduction, the IRS gives these property owners tax credits against any money due come tax time.
In a sense, Uncle Sam now becomes your partner in the next property you purchase. This is because you are investing his money the taxes owed along with your own. If you do a good job with it, you actually will be increasing his investment, too. Leveraged compound interest The biggest little secret of them all is leveraged compound interest.
Albert Einstein, when asked what the most powerful force on Earth was, answered without hesitation, Compound interest! Ben Franklin defined the term as the stone that will turn lead into gold. You all know about compound interest because it is the concept the banks and savings and loans talk about when they tell you how your money will grow when you leave it with them. You leave the interest in the bank along with your original investment. In a short period of time, the interest earned on the interest of your original investment makes your return multiply significantly.
We will go over the compound interest formula in great detail in Chapter 9, Building an Investment Plan, but we want you to get a glimpse now of the reason this works so well with leveraged real estate. The truth is that the return you get on real estate if you pay for your purchase using all cash without get- ting a loan isnt much higher than you get on most other types 17 CHAPTER 1.
With real estate, however, you usually dont pay using all cash. Instead, you use leverage to buy properties. That is, you put down a small down payment on the property, usually percent, and you then finance the balance. The great mathematician Archimedes said, Give me a lever long enough and a fulcrum on which to place it, and I shall move the world. As investors, we dont want to use a lever to move the world; we just want to use it to buy as much of it as we can. The ability to finance percent of your real estate business is the rule, not the exception.
On the other hand, most commodities in which you can invest require that you pay all cash to purchase them. At best, you can obtain some financing that usually requires a substan- tial down payment and exceptional credit. Take the stock mar- ket, for example; unless you are buying on margin, you are required to pay all cash for the shares you want to purchase. This is true whether youre buying stocks, bonds, or mutual funds. This also is true for most investments in coins, stamps, art, and commodities. If you want to own it, youll be paying for it with your own hard-earned money.
The ability to use leverage with real estate significantly increases the percentage of profit you can make, but more importantly, it allows you to purchase a significantly larger investment than you normally would have been able to. Leverage is a wonderful way to multiply the profit on the dollars you invest. Remember, however, that because leverage increases your potential profit, it will also increase your risk because you are obligated to pay back the entire debt on the borrowed money.
You can do it, but it will require running your real estate business in a professional way. And 3 percent is all an FHA loan requires you to put down. For the purposes of this example, lets say you put 10 percent down and borrow 90 percent of the purchase price. At first glance, this doesnt seem so goodthat is, until you see what it means in terms of a percentage return on your investment. In this scenario, it would give you a As you will learn later, when you put the power of leverage together with Ben Franklins stone that will turn lead into gold, compound interest, you canand willmake phenomenal returns.
Just the facts. To create wealth, you must rid yourself of the belief that trading time for dollars is the way to go. Because an investing mentality is not inherent in human behavior, it is a skill you will have to learn in order to get ahead. The opportunity to use leverage to buy property is the greatest advantage real estate has over all other investments. The profit you see in the beginning. Researchthe key to success The Process and the Plan I n Chapter 1 we covered some of the basic rea- sons why an investment in real estate can work for you.
Now we will explain what you can expect over the entire span of your investment career. As you are learning, real estate is a long-term investment. With the liquidity of stocks, bonds, or mutual funds, you can get in and out very quickly. Real estate investing, however, requires you to invest with a different mindset.
That is, you need to be committed to invest for the long haul. To that end, your goal cant be to buy a property and then hope to flip it and turn a windfall profit overnight. This is because real estate, by nature, doesnt lend itself to making a quick buck. However, by making a long- term commitment youll come to see that this invest- ment has longevity. In fact, levelheaded real estate investing is destined to pay great returns over the entire course of a lifetime. Whats unique about this investment is that the profits youll earn through the years are distinctly 22 PART I.
Youll note that these different types of profits all build on each other. You retain your short-term profits into your middle years, and you carry both of these profits into your retirement. Well begin this chapter by talking about the earnings you can look forward to in the short term. Short-term profits You can expect to earn two types of profits in the short term: cash flow and tax benefits.
Either one of these by itself can give you just as good a return as most other investments. Taken together, the return they offer usually is far superior to any other investment you might choose. Cash flow Cash flow is probably the most sought-after return from any investment. Simply stated, cash flow is the monthly or annual cash return you receive from your investment. Take your savings account, for instance. When you deposit your excess earnings in your account, the bank pays you interest on your money; this interest is your cash flow from that investment.
Generally speak- ing, the greater the cash flow you desire from any investment, the greater the effort and sometimes the greater the risk you will need to take to obtain your goal. With real estate, its important to understand that cash flow is a direct function of how much you put down on a property. If you bought a property without the aid of a loan, for example, your cash flow would be substantial.
This is because all the Moneysaver Negative cash flow exists when your payments are greater than your income. It may sound simple, but one way to avoid negative cash flow is to make sure your rents are at least at market rate. Some investors get too friendly with their tenants.
In turn, the investors big hearts keep them from charging the market rents for their properties that they truly deserve. Conversely, if you buy a property with a minimal down payment and take out a loan to cover the balance, your cash flow will be adjusted accordingly. This is because paying back the loan reduces your cash flow.
To calculate cash flow, use the following formula: Gross income Operating expenses Loan payments Net cash flow Cash flow doesnt mean much unless you relate it to the amount of money you have invested. Most investors like to talk about the cash-on-cash return they get on their money. Smart investors have the most financing on their properties when they begin their investment careers and have the least when they retire. This is intelligent because when youre working full time, a good goal is to have your steady paycheck cover your current standard of living.
That way, your investments can do the job they are supposed to do. Once you retire, however, and arent getting paid on a regular basis, you will have a greater need for steady monthly income. Reducing the amount of your mortgage by the time you retire is the best way to achieve this result.
Tax benefits The second short-term benefit in real estate investing relates to taxes. You should view the tax benefits you receive from prop- erty ownership as frosting on the cake. With real estate, you can receive a nice cash-on-cash return from your property at the end 24 PART I. This is because you are allowed to deduct your losses from operating expenses on your federal taxes.
Most states that have state income taxes also offer a state tax benefit. The theory behind the tax deduction for operating expenses is rooted in the costs most companies incur to replace expensive equipment needed to produce durable goods. Because machines wear out or become obsolete in just a few years, the IRS allows companies to take a deduction against profits to replace equipment.
The business is allowed to deduct the cost of the machine over its useful life so that it can be replaced when it wears out. With real estate, you can produce a positive cash flow and still have a loss as far as the IRS is concerned. Well be reviewing ongoing and capital expenses in detail in Chapters 14 and 15, but we want you to understand the benefits to the real estate investor now. As a real estate investor, you will have an opportunity to take a deduction against earnings for an expense that probably will never occur. That is, you will never have to replace your building because it wore out.
In truth, real estate never wears out. Structures that sit on land do, but the dirt itself does not. Note that this depreciation deduction, especially in the early years of ownership, usually shelters all cash-flow profits. In addi- tion, there usually are enough extra write-offs to offset taxes on some of your earnings from your regular job. Middle-years payoffs The middle years of ownership should keep you both busy and happy.
Youll be busy because you will have the responsibility of Moneysaver Ordinary and reasonable expenses connected to real estate are deductible as investment expenses including interest, utilities, insurance, property taxes, maintenance, supplies, legal fees, and more. Youll be happy because you will be making money. Lots of it. During the middle years, you can expect to spend most of your time on three phases of operation: 1. Running the day-to-day operation of your properties like a business.
Utilizing the equity in the properties like a savings account to provide for some of the finer things in life. Fine-tuning your investment plan to make sure you reach your stated goals according to your set timetable. The day-to-day operations Youll recognize that you are in the middle years of ownership when certain clues pop up time and again. For one thing, youll find yourself skipping over the front-page and sports sections of your newspaper to get to the real estate ads. Perusing that section of the paper, youll become a blood- hound for rental rates, upcoming vacancies, and any other kinds of informa- tion that could impact your business.
Additionally, in these years, youll discover that your Home Depot or Orchard Supply credit card bill is consistently larger than your Macys or Nordstroms bill. Finally, when you travel to your favorite vacation spots, youll always be checking out rental rates and the price of small units. Your master plan will be to buy a vacation home there and let tenants pay the mortgage when youre not on holiday.
At this point, you have arrived. Youre in business for your- self, and youre enjoying the challenges and the profits. This is. We worked hard on our properties, and after five years, we were able to refinance. Because of the appreciation that took place in that time period, we were able to pull out enough money to help build ourselves a brand new home. You will see this business as just thata business. The profit plans you have designed will become as important as your paycheck is at your day job. Going to your property wont seem like a chore; instead, itll feel like an opportunity to check on your investment.
Did the gardener do his job? Does anything need to be painted or fixed? Are the tenants happy? Can I charge more rent? Youll start taking trips around the neighborhood to see what the competition looks like. Yes, you will now see all the other buildings in your neighborhood as competition. How do they look? What are they charging for rent? Which ones always seem to stay full and why? Just as grocery stores and department stores compete for customers, youll begin to compete for ten- ants with the other building owners in your neighborhood. The first few days of the month will now have a new mean- ing for you; they will be the days you collect your rents and pay your bills.
The first challenge will be getting all the rents in on the first of the month. Even in the best areas, it takes work to get your tenants trained to pay on time. After collecting rent, youll have to pay out a lot of it to cover bills. This will become a game to you, and you will constantly be asking yourself, How can I keep the most for myself? At your day job, your boss asks you to increase revenue and to do what you can to cut down on expenses.
You do it there because it is your job; now youll do it because the money you save is yours to keep. Utilizing your equity As your real estate holdings move into the middle years, the cash flow and equity grow. This is because, by this time, you will have raised your rents and found ways to curtail expenses.
Now is the time when you can use your property as you would use a savings accountto buy things you couldnt afford on your salary alone. These middle-years items should be the kind of things that will give you the extra incentive to work that much harder at this second career. Indeed, education comes with a large price tag. These are stag- gering numbers, especially when you multiply them by the num- ber of children you have. There are, however, some more pleasurable things you can look forward to doing with your money.
The equity in your properties can be tapped to help provide for that larger home in the better neighborhood where you have always wanted to live. You also might choose to invest some of the money youre making into a vacation home in the mountains or the desert. Instead of sitting vacant while not in use, it becomes another holding in your investment portfolio.
You earn income from renting it when youre not vacationing there. A vacation home offers an interesting mix of benefits. You might be able to take depreciation, but if not, then you may be able to deduct expenses as a second home. The best news is that you can probably use the tax-deferred exchange to shelter your profit. Well tackle this subject in detail in Chapter 7, Subdividing Your Options. Finally, lets talk about all the other luxuries you would like if you had a few extra thousand dollars at your disposal.
How about a couple of jet skis like your neighbor has? What about a trip to Hawaii or Europe with the family? In short, your proper- ties should provide you with the funds to pay for all those Watch Out! Avoid the idea of buying a property for your child to live in while he or she is away at college. Prices in college towns usually are pretty high, and kids are known to transfer schools or drop out all together. Whats worse, college- age tenants tend to trash your units. Of course, new water toys and vacations sound great, but do you want to know how it is realistically possible?
Heres how: Your real estate is going to produce some income through cash flow, and it will also provide you with a nice cushion come tax time. But, in truth, your nest egg will grow to truly astounding heights due to two other areas of return. They are 1. By paying down your mortgage Lets first talk about value appreciation. Inflation has always been a part of our economy. In the past, you werent happy dur- ing high inflation because the cost of everything you needed to live seemed to correspondingly grow. Now, however, higher inflation will be your best friend. This is because not only will the value of your property increase because of inflation, but you also can increase your monthly income by raising rents during inflationary times.
Additionally, your equity will increase as you pay off your mortgage. In the beginning, principal reduction will only con- stitute a small portion of the pie. But as the years go on it becomes a significant part of equity growth. It takes longer to see the big dollars add up from this component of return, but every dollar paid off increases your net worth correspondingly. This increased equity also gives you borrowing power at the bank. Your banker should gladly loan you money based on the appreciation that has taken place on your property as well as the increased value you have created by paying down Moneysaver Be sure to contact your existing lender when its time to refinance.
Many times, you can save on loan fees, escrow fees, and other costs by using the same lender the second time around. They want your business, so dont be afraid to try and negotiate their fees down. Any new loan you get will first be used to pay off your old loan. Then, if there is money left over, you can do with it what you choose. One of the greatest advantages of refinancing is that the funds you pull out are not taxable. Conversely, if you sell stock and realize a profit, you will have to pay the tax. But when it comes to refinancing real estate, because you are borrowing your profit, there is no tax to pay.
This is because you are oblig- ated, at some point, to pay the loan back. The good news is that you will be doing that with tenant income. If you have increased your rents to keep up with the market, these increased rents usually will pay any increase in your payments because of the higher loan you now have. Tweaking your plan You will use the middle years to fine-tune your knowledge of any and all real estate investment opportunities. The more you get involved, the more you will want to know about real estate and the business of owning it.
This should lead you to seminars, books, lectures, tapes, and discussions with other investors. Through the years, you probably will be following in your mind various types of properties you might consider buying. There are single-family homes, small units, commercial build- ings, and developable land that you might try your hand at. Additionally, you might consider buying distressed properties. Situations such as fixer-uppers, mismanaged properties, bank repossessions, use conversions, and development deals all pro- vide opportunities to make more money see Chapters 7 and 8 that is, after you gain the proper knowledge and experience from taking a more traditional route to wealth-building through real estate first.
At some point, you will make a decision whether real estate will remain a secondary career to you or whether you will quit working for someone else and hire yourself to manage your real estate holdings full time. Whatever your choice may be, you will find that the middle years of property ownership will provide 30 PART I. In Chapter 10, Planning for the Tax Man, you will see that there are some great tax advantages to being directly involved in your real estate ventures. The IRS calls this being in the business of real estate.
The retirement years As you make your decisions about your future in real estate, youll also be setting the stage for your retirement. For some people, real estate will be one part of a diverse retirement port- folio, a true passive investment. Many investors choose to pur- chase only one property in their careers and to manage the financing so that it is paid off by the time they retire.
This isnt such a bad idea. By the time they retire there is no mortgage to worry about, which will provide plenty of positive cash flow. Other investors purchase many properties in their careers and decide that they just want to call it quits. For them, a per- fect life would be fishing in the mornings and golfing in the afternoon.
If that is their goal, their properties can be sold, they can settle up with Uncle Sam, and then bank the remaining cash. From that point forward, they can fish and golf to their hearts content. Another option is to sell the properties and become the banker by carrying notes against the property. This strategy will be discussed in detail later in this book, but in short, carrying notes against your properties offers two distinct advantages over an outright sale: 1.
You dont pay your taxes until you receive your profit. This means you can carry interest-only notes and defer any taxes due for the entire term of your contract. As you can see, by utilizing this technique you can earn interest on all your equity including the money you eventually will give to the IRS for taxes. You will find out that you will earn a greater interest rate on your money by being the banker than by letting the banks pay you interest.
By carrying the financing yourself, you cut out the middle- man the bank and keep the profit all for yourself. Many people find that their real estate holdings make a great part-time retirement business. Managing the properties is just enough to keep them busy, but doesnt require a daily 9 to 5 commitment. For others, real estate might grow into a family business, with the kids learning at a young age the lessons you had to learn while working two jobs.
A last option is to relinquish all the operations of your busi- ness to a property management company. At this point, your new job will be to supervise your management company rather than your properties. The management company will have all the duties of running the properties and paying the bills. They will then send you a check each month for your profit. Even better, they can easily deposit your funds to the bank of your choice, and you can draw on them from anywhere in the world.
A systematic approach to investing Now that you understand the kinds of profits you can expect, you need a plan for attaining the biggest return. What we intro- duce to you now is a systematic plan for investing in real estate that worksperiod. We dont make that claim idly. We know that the plan works because we have seen it work for years for our- selves and for our clients.
You need not reinvent the wheel. Instead, learn the plan here, and then implement it for yourself. The wheel will then roll for you too. This approach to investing has five phases. Learn about real estate as an investment vehicle. Research the market in your local area.
Plan how to invest your money. Invest your funds according to your plan. Manage your investment to meet your plans goals. Learning about real estate as an investment vehicle For starters, recognize that the education you are putting your- self through now isnt meant to be a course called Real Estate that goes in one ear and out the other. Instead, you must think of this kind of learning as if it were a continuing- education classone that you chose and will be involved with for the rest of your investment career.
Just as you educated your- self for your day job, we want you to educate yourself for this investment career. You go to work each day and trade your time for dollars. In your real estate career, you will be letting your investments do most of the work, but you need to be the brains behind the operation.
We know that this learning phase can be the most difficult step for lots of people. This is because learning anything new requires lots of personal effort and time. The truth is, not many of us have the time to brush our teeth in the mornings, let alone the time to learn all about a new business venture. As a partial cure, what about spending your morning commute listening to books on tape about real estate and investing? You can literally turn your daily drive into a classroom by listening to educational tapes instead of more sports talk or a Top station.
It would be a trade-off, but one that could get you that much closer to catch- ing the golden goose. The truth is, if you want to take this game seriously, there are literally thousands of books, tapes, newspaper articles, magazine articles, classes, and seminars available to help you get edu- cated. Even better news is that most of the books, articles, and tapes will probably be available free at your local library.
Your only job will be to seek them out. Whats great is that these classes usually dont cost much, especially at the community-college level. The biggest advantage is that peo- ple who have hands-on knowledge of the subject matter usually teach the classes. In addition, if you have an apartment owners association nearby see Appendix B , it might offer property- management seminars where you can learn management skills and the latest rules and regulations for your local area. Finally, many authors and lecturers offer weekend seminars covering a range of real estaterelated subjects.
Often held only in larger cities, these courses can be a great source of information. The lesson here is to take this road seriously. By turning your- self into an expert, you will shave years off your learning curve. The end result will be more money in your pocketway more. Researching the market in your local area While you are learning about real estate in general and real estate investing specifically, you need to begin educating your- self about the actual market for property in your area.
Our book, and most others, can only provide a broad overview of real estate investing. Markets can change drastically within a few miles, let alone across the entire country. Therefore, its critical to truly understand your own market and how it performs before you start buying. Make sure to do some stringent checking before you pay big money to attend some of the get rich quick real estate seminars offered. Be especially wary of the ones that are free; often they are designed to just get you in the door so that they can sell you some expensive books, tapes, or additional training.
Dont worry; you wont have to pay him anything because he will earn a commission paid by the seller only if, and when, you purchase a property. Your goal at this stage is to get a basic understanding of the pricing of prop- erties in the area where you expect to buy. You wont be calcu- lating returns or looking for something to actually buy at this point. Your goal is simply to get a basic understanding of what properties sell for. If you can answer the question What would a duplex cost in my neighborhood? If, when asked those questions, you said, I need to know whether the units are one or two bedrooms and how many bathrooms they each have, you probably have an excellent handle on value.
While you are researching value, it also is important to become familiar with rental rates in your market area. Working with an agent, youll be able to see what current properties rent for, but this is only part of the picture because all of those rents are based on units that have rented at some time in the past. You also will want to find out what owners are asking for units cur- rently on the market. Keep in mind that many small-property owners dont do a very good job of keeping up on rental rates.
In fact, its not unusual for some owners to rent a vacancy at the last rate they were getting without verifying the true current market rate.
Your goal will be to discover what the trend is. Are rental rates in the area going up or down over a period of time? Is the area stable, improving, or declining? Once you have a current understanding of property values, youll want to research the historical value in your area.
If you can find an agent who specializes in investment property, he may have the data you want readily available for the asking. You will want to look for the same information about prop- erties in the past as you got for the properties on the market today. Information about rental rates also will be helpful because you want to see the trends for increase over the years. The further back you can get information, the better. You then will be able to see how trends in real estate values in your area compare to the trends in our economy in general.
The accompanying chart shows the historical trends of real estate values in the city of El Segundo, California. This chart uses a mathematical calculation called linear regression analysis to determine the change in the values from the first year to the last. This is the kind of historical data that would be helpful for your own market. At the very least, the most important facts you want are the trends in values for as many years as you can get. Knowing this percentage increase is important when doing for- ward projections for an investment plan.
Although past history is no guarantee of the future, it often is a prologue and therefore is a better way to make an estimate than picking one out of thin air. In Chapter 6, Real Estate, the Economy, and Your Target Market, well illustrate a specific technique that you can use to estimate value appreciation for yourself. Once you have a handle on the present and the past, its time to start worrying about the future. This is when you have to go back to school for a review of some basic economic princi- pals. When doing this kind of study, you will learn that lots of outside factors can impact your real estate business.
Therefore, in order to protect your bottom line, you will have to have the skill necessary to recognize changes in the economy that can affect you both positively and negatively. Finding out about future business expansion, for example, will mean that there will be more people to rent your units. Likewise, a new shopping mall in your area should bring both more revenue to the city and more employees who need a place to live close to work. Increased inflation means higher prices for goods and services and, best of all, higher rents for you. In addition to the newspaper, you also should look for other publications that will give you insight into changes in your local economy.
Most chambers of commerce have information about what is happening in the local economy. Some banks and sav- ings and loans have research departments that compile this kind of information. Finally, most cities have departments designed for the sole purpose of attracting new businesses. These city departments can be a good source of information about the existing state of your local economy and what they project for the future.
This way, you can take advan- tage of any positive changes in the economy and can make provisions to protect your investments if you see that negative changes are on the way. Planning how to invest your money Now that you have accumulated the knowledge to invest and you understand the product, it is time to put a plan together.
The foundation of the plan will be your goals. For many years, we have observed investors andwith very few exceptionsthe most successful all had very well-defined goals. There is nothing unique about this observation. Hundreds, if not thousands, of authors, scholars, teachers, and so on have, over the centuries, touted the need for goal orientation as a key to success. Its amaz- ing how many of us have a job that requires us to make plans at work for our performance and the performance of the depart- ment we head up, but we dont ever do the same for our own lives. Until now, most of us have really been missing the boat.
Chapter 9, Building an Investment Plan, will teach you how to put your investment plan together. Nonetheless, it is important at this point to start thinking about some specific things you want to accomplish through investing in real estate. Its not enough just to say that you want to find some good deals, or that you want to get rich.
These concepts dont have anything personal to hang on to. Instead, getting specific is the key. Moneysaver By properly defining your goals, you will avoid paying extra for a property to satisfy an unfounded emotional need. We always say to buy the ugly property for less; spruce it up with flowers, paint, and awnings; and then manage it into profitability.
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The reporter invariably asks, What are you going to do with the money? The answer usually is a list of things like a new house, a car, trips, and doing something nice for a relative or friend. Its not the money; its what you can do with the money that keeps people buying the tickets. The right set of personal goals will give you the incentive to work your new business, and in a few years, youll have the payoffs just like youd won the lottery yourself. Investing your funds according to your plan The last step in our plan is where you make your move.
This is when you get to put that knowledge and research to work by investing and buying a piece of rental property. Know that this is where the real work starts because its not just a mental game nowits the real McCoy. When youve finally decided that its time to buy something, this can be as exciting as your first kiss, and as scary. At this point, take a deep breath and review all youve learned and researched. The first investment will be a big step, but you should have a higher level of confidence than most.
You have edu- cated yourself about invest- ing, you are knowledgeable about your target market, you have a plan that lays out what you are trying to accomplish, and you know the kind of property you need to get started. As they used to say in the Old West, Just go ahead and pull the trigger! Though youll surely be excited at this point, you must also be prudent.
To that end, we dont recommend trying to hit a. It was tough to make the decision to buy that first property. My agent, Eve, suggested that we start with just half the capital we planned to start with. This cushion gave us the courage to make the move on that first one. Many beginning investors make a colossal mistake in the beginning by seeking out bank- owned repossessions or fixer-uppers right out of the gate because they have heard how much money they can make by doing so.
Money can be made, but it takes the experience of many years in the business to find success that way. On the other hand, a mistake in buying one of those kinds of buildings from the onset could sour you on real estate investing long before you ever get out of the starting gate.
Instead, we recommend that you use your first purchase to apply the sound business skills you are learning here. By starting smart, you will help ensure your success. Managing your investment to meet your plans goals Once you are trained, the good news is that you will own the property and you can do as much or as little of the work as you like.
You are in charge of the building, the rents, and the ten- ants. Of course, you can subcontract the management of your property if you so choose. This can be very tempting, especially because the cost of management usually is just a small percent- age of the gross income collected. We strongly recommend, however, that you dont hire out management on your first few properties.
Its important to experience firsthand the duties of running a property yourself. You need to put the knowledge you have learned to the test to see how the real world works. This hands-on experience will also be invaluable to you later, when you do turn your properties over to a management com- pany.
At that point, your job will be to manage the management company. To do this effectively, you need to have had the actual experience doing the job yourself. Its one thing to read about something in a book; its another thing to actually have gotten your hands dirty down in the trenches. Youll find that if you are doing your job right as the man- ager, youll be constantly revisiting the first four steps of the 40 PART I. As you manage, you learnnot from books this time, but from the actual doing of the job.
Running a property is really an on-the-job research pro- ject. Youll become quite an expert as you handle the day-to-day operations of your property. Along the way youll take the time to assess the current mar- ket and compare your position with the goals of your plan. At some point you will make the decision as head of this company that its time to trade up or refinance. Either way, you may real- ize that the time is ripe to acquire more property and you are going to use your prior properties to help you do it.
When this happens, its back to step 4 all over again as youll have a new building to manage. The party is just getting started! Real estate ownership has three phases of profitsshort term profits, middle-years payoffs, and retirement rewards. One of the greatest advantages of real estate is the fact that it is a business you can start while you keep your regular job.
As your property equities grow, you can use them to finance luxuries you never thought you could afford. Dont swing for the fences on your first purchase; make it a learning experience. Determining cash flow. The tax benefits of real estate ownership Elements of Return W ith an investment in real estate, four ele- ments of return will help you reach your goals.
These elements are cash flow, equity growth from loan reduction, equity growth from appreciation, and tax benefits. In this chapter, you will learn about each of these elements of return individually, and how to calculate the combined effect of all four to give you an estimated overall return on your investment.
Learning how to do this properly will tell you two things. First, it will show you what kind of profit you can achieve on any potential investment. Once you are able to do an apples-to-apples comparison and have a benchmark on which to consider potential purchases, your decision on which property to actu- ally buy should become easy. Second, by knowing how to calculate return yourself, you can make sure your percentage return always stays high enough to ensure that you reach your investment goals on schedule.
Well call our example Richmond Street, in honor of the building that has housed our own real estate sales office for the past 30 years. Four garages Watch Out! Remember that the four elements of return dont arrive at the same time. As a result, many investors fail to pay close enough attention to all of them and end up missing out on earning the highest possible return on their equity. Simply put, cash flow is the money left over after you pay the bills. To deter- mine cash flow on any property, you need to know three key pieces of information: 1.
The annual gross income 2. The annual expenses 3. The total debt payment on your loans We will use the example property at Richmond Street to illustrate. Many investors think cash flow is the ticket to getting rich. In reality, a high cash flow at the onset of property ownership, more often than not, indicates that the investor isnt taking advantage of as much leverage as he could. The first thing to decipher is how much money a building really brings in.
The annual gross income There are three ways to look at the income stream of a building. The first way is by examining the scheduled rent. The scheduled rent is the total of all the agreed-upon-rents in the building, assuming that all the tenants are paying and that there are no vacancies. The second way to look at the income is by analyzing poten- tial rent.
Potential rent is the income you feel you could earn based on the rents other property owners are receiving in your market area. Alternatively, potential rents are those you feel you could earn provided that your building had more attractive amenities, and you could charge more than the competition. The third way to analyze the income of a building is by evaluating the collected rent.
The collected rent is the actual amount of money the current owner took in over a given period of time. It reflects the market, but more than that, it reflects the current owners ability to manage in that market. You may do Bright Idea Dont buy into the mistaken belief that a big cash flow is the most important element of return. While youre young and still able to work, it might be wiser to structure your deals so they will produce a large cash flow only after you retire.
That way, you will have cash available when you truly need it. Collected rent is impacted by the vacancy factor and credit losses incurred from tenants who did not pay. The annual expenses The second thing you must do in order to calculate a buildings cash flow is to determine the buildings true expenses.
As the owner of residential income property, you will encounter the following three types of expenses: 1. Fixed expenses 2. Variable expenses 3. Planned capital expenses Fixed expenses are the regular recurring costs encountered in holding a property. These expenses include items such as property taxes, insurance, and city business-license fees.
They are called fixed expenses because the amount you pay does not fluctuate, or if it does, it usually is only a nominal change one time per year. Variable expenses do fluctuate. They are all the other costs you might incur while managing your rental property.
The biggest variable expenses you will encounter will be utility pay- ments, necessary repairs, general maintenance, and vacancies in your building. Planned capital expenses are major items that have a useful life of more than one year. These are items such as a new roof or exterior paint.
According to the IRS, these expenses must be capitalized for tax purposes. This means you must write the expense off over a period of years. To account for these types of Moneysaver Make sure you get into the habit of inquiring about available units in your area. By knowing what the competition is charging for rent, you can avoid underestimating the market when it comes time to market your own vacancies.
We will cover this in greater detail in Chapter 14, Managing the Expenses. The management of all these expenses will play a major role in how much cash flow your property produces. Reviewing the former owners records before you buy can give you insight into how the property might perform, but this information also can be misleading. The seller might be a great manager who has been able to keep expenses under control, or he might be an awful manager who cant control a thing.
Therefore, it is impor- tant for you to do your homework on the types and cost of normal expenses for your area. Your ability as property manager to use the information you gain from your research will deter- mine whether or not your property outperforms that of your competition. The debt payment on your loans The final component of the cash flow equation is the payment on your loan or loans. Recognize that there is always a direct correlation between the amount of your down payment your equity and your cash flow. It stands to reason that if you pay for a property without getting any loans at all, your cash flow will naturally be significantly larger than if you have loan payment obligations.
Conversely, if you buy property with leverage by means of a loan , your cash flow will be much less, but your per- centage return will be much higher. You cannot build an investment plan for your area based on expectations from other areas of the country. Your own market will dictate the amount of cash flow you can expect based on typical down payment amounts and financing. When you first close escrow on a piece of property, your initial equity is your down payment. Know that this equity will change over the years as you make monthly payments on your mort- gage. The principal portion of your payment decreases your loan balance, which increases your equity.
At first, the lions share of your mortgage payments will go toward paying off interest, but dont fret. As the years go by, principal reduction accelerates considerably and becomes a significant cause of equity growth. For the purposes of the following calculation, assume that the loan payoff is a constant amount.
Note that you will be able to get the exact payoff at the end of each year when your lender sends you the form that you use to file your tax return. That payment included principal reduction and interest at 9 percent per year. This way, you will get your loan paid off early, and you will have that much more cash flow available for retirement.
As mentioned previously, principal begins to pay off at a much faster clip in future years of ownership, and your per- centage return dramatically increases. Equity growth from appreciation The third, and most significant, way you are going to earn money in real estate is through value appreciation. Value appre- ciation results from two factors: 1. Inflation 2. Demand Inflationary appreciation Inflationary appreciation sounds just like what it isthe increase in a propertys value due to inflation. This is the same phenomenon you see in supermarket prices.
Even when the number of items you purchase at the store stays the same, the prices nonetheless continue to go up every year. This apprecia- tion rate is related to the general inflationary rate of our overall Watch Out! A common mistake many investors make is to calculate their return after many years of ownership by using the original down payment in the calculation. You must remember that, with a pay-down on your loans, your true equity will be much larger than your original down payment. When the countrys inflation rate is up, the apprecia- tion rate of property is usually also up.
Two components make up the value of any piece of prop- erty: the structure itself and the land. Although land never wears out, structures do.
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