Month: September 2017

Evaluating Real Estate as an Investment

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When Charles first entered the real estate field while attending college decades ago, his father, a prominent real estate investor, advised that he use his monthly income primarily to pay day-to-day living expenses and allocate money each month into long-term financial investments like real estate. This solid advice has served Charles well over the years.

For many people, a comprehensive wealth-building strategy can help with the challenges of funding future education for children and ensuring a comfortable retirement. However, this requires a lot of planning and discipline, especially where you intend to invest in real estate. Contacting an investment company and purchasing some shares of your favorite mutual fund or stock is a lot easier than acquiring your first rental property, but with a financial and real estate investment plan, a lot of patience, and the willingness to do some hard work.

Compared with most other investments, good real estate can excel at producing current income for property owners. So in addition to the longer-term appreciation potential, you can also earn income year in and year out. Real estate is a true growth and income investment.

Major benefits of investing in real estate

  • Tax-deferred compounding of value: In real estate investing, the value of your properties appreciates at compound interest, while tax payment is deferred during your years of ownership. You don’t pay tax on this profit until you sell your property, and even then you can roll over your gain into another investment property and avoid paying taxes.

 

  • Regular cash flow: If you have property that you rent out, you have money coming in every month in the form of rents. Some properties, particularly larger multiunit complexes, may have some additional sources, such as from facilities management fees.  When you own investment real estate, you should also expect to incur expenses that include your mortgage payment, property taxes, insurance, and maintenance. The interaction of the revenues coming in and the expenses going out is what tells you whether you realize positive operating profit each month.

 

  • Reduced income tax bills: For income tax purposes, you also get to claim an expense that isn’t really an out-of-pocket cost — depreciation. Depreciation enables you to reduce your current income tax bill and hence increase your cash flow from a property.

 

  • Rate of increase of rental income versus overall expenses: Over time, your operating profit, which is subject to ordinary income tax, should rise as you increase your rental prices faster than the rate of increase for your property’s overall expenses. What follows is a simple example to show why even modest rental increases are magnified into larger operating profits and healthy returns on investment over time.

Despite all its potential, real-estate investing isn’t lucrative at all times and for all people, here’s a quick outline of the biggest caveats that accompany investing in real estate:

  • Ups and downs: Although you have the potential for significant profits, you’re not going to earn an 8 to 10 percent return every year. Like stocks and other types of ownership investments, real estate goes through down as well as up periods. Most people who make money investing in real estate do so because they invest and hold property over many years.

 

  • Relatively high transaction costs: If you buy a property and then want to cash out a year or two later, you may find that even though it has appreciated in value, much (if not all) of your profit has been wiped away by the high transaction costs. Typically, the costs of buying and selling, which include real estate agent commissions, legal fees, title perfection, and other closing costs could amount to up to 30 percent of the purchase price of a property. So, although you may be elated if your property appreciates 15 percent in value in short order, you may not be so thrilled to realize that if you sell the property, you may not have any greater return than if you had stashed your money in a lowly bank account.

 

  • Tax implications: Last, but not least, when you make a profit on your real estate investment, the federal and state governments are waiting with open hands for their share in the form of capital gains tax, assessment taxes, land use charges, legal fees, tenement rates and such other taxes as may arise from time to time on real estate. What really matters is the profit you have left after the government takes its bite, not your pretax income.

These drawbacks shouldn’t keep you from exploring real estate investing as an option; rather, they simply reinforce the need to really know what you’re getting into with this type of investing and whether it’s a good match for you.

Milton and Cross provides legal advisory and real estate advisory services. We may be contacted by telephone on +2348036258312 or +2348188474167 or by email at info@miltoncrosslexng.com

 

Why Lawyers Make Good Early-Stage Startup Hires

Posted on by admin in Compliance, Corporate Governance, entrepreneurship, International Investment, investment advisory, mergers and acquisitions, real estate, rule of law, Small Businesses, strategy, transaction advisory, Uncategorized, upscale, wealth

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By Daniel Doktori and Sarah Reed (culled From hbr.org)

It’s a startup shibboleth that entrepreneurship and formal education don’t mix. For icons such as Mark Zuckerberg and Bill Gates, so goes the lore, finishing a bachelor’s degree would have only stifled the creativity that fueled their companies to stratospheric success. PayPal founder Peter Thiel offers a $100,000 fellowship to “young people who want to build new things instead of sitting in a classroom.” Graduate degrees are thought to merely exacerbate the problem of too much thinking, too little doing. And while high-profile efforts by top business schools to teach and promote entrepreneurship have lessened the stigma around the MBA, the law degree continues to occupy a unique place of villainy among the startup set. After all, YouTube, Uber, and Airbnb, among many others, were founded on ideas that challenged, if not broke, laws and regulations. When it comes to a tech startup, lawyers are a bug, not a feature. Right?

Maybe not. Lawyers can add value in the obvious ways, helping to avoid early mistakes like issuing stock too late in the game, when the company has grown in value and the employees can no longer take advantage of favorable tax treatment. But more importantly, a lawyer on the early team can contribute to a thriving company culture by asking the right questions at the right times, providing perspective on crucial transactions, and getting smart fast on issues where the rest of the team lacks expertise.

Lawyers help startups deal with common transactions and avoid costly mistakes.

Issuing equity to the early team often triggers time-sensitive filings with the IRS. Successfully commercializing a product depends upon clean and clear lines of intellectual property ownership. Raising outside financing requires compliance with complex securities laws. A misstep on any of these items could mean an early exit for a startup company (and not the good kind). A corporate lawyer with a few years of relevant training can help navigate these and other common set-up requirements.

Moreover, lawyers, particularly corporate transactional lawyers, have repeated exposure to the types of deals — and the associated risks — that a startup will face. The dynamics between a CEO and the investors on her board are a function of the legal arrangements articulated in the financing agreements. The relationship between a company and its customers stems from a license agreement governing how users may interact with a product. Partnering with a larger company in a similar industry can, in the best case, open new markets or, in the worst, box a company into a corner, severely limiting options for growth and eventual acquisition. Lawyers understand these transactions and the perspectives of the negotiators involved.

And when the complexity of the particular deal exceeds the expertise of the lawyer on the team, she can play the savvy procurer of legal services, knowing how to target efforts and limit costs. Such experience comes in handy in managing other third-party service providers such as bankers, accountants, and consultants.

While these benefits are valuable, however, they don’t in and of themselves justify a startup hiring a full-time in-house lawyer. Early stage companies — at least those with founders sufficiently experienced or savvy to recognize that they walk a road pitted with legal potholes — tend to manage such standard risks by hiring outside counsel. And while the costs associated with that outside attorney often rank among the highest in a startup’s budget, they do not typically rise to the level of a full-time annual salary. To justify her presence among the first dozen employees, a lawyer must add something beyond legal knowledge to the equation.

Lawyers are trained to ask the right questions at the right times.

Counterintuitively, lawyers can add the strategic absence of knowledge. President Harry Truman famously longed for a “one-handed economist” when presented with the equivocating analysis of his advisers, but executives in politics and business need to understand opposing viewpoints in order to make informed decisions. Legal education and training includes a strong emphasis on questioning assumptions and probing for further information.

Rather than crippling the company through risk aversion and overanalysis, however, having a lawyer on the early team contributes to a data-driven, analytic culture of thoughtful decision making. Further, lawyers are trained as advisers and service providers. They can ask questions, explore options, and execute on answers, but they don’t expect to make the final call. This comfort with playing a supporting role helps avoid the egocentrism that can cripple any organization, particularly a nascent one.

The lawyer’s craft sometimes can be boiled down to a willingness to immerse herself within the “fine print,” offering to read what no one else will on account of complexity, length, or sheer dryness. Trained to ensure that even simple advice is backed by evidence, lawyers read closely to the point of comprehension as a matter of professional responsibility. Such a skill enables a lawyer to take responsibility for a wider variety of important matters. Fledgling startups inevitably have to rely on analysis over experience. Lawyers fit well in such situations.

Not every lawyer is well suited for the gig, however. A lawyer with the qualifications outlined above needs a tolerance for risk. For one thing, she must be willing to give up her plush office and lucrative salary for a computer station at a long table and compensation in the form of prayers, otherwise known as stock options. Her professional risk tolerance must follow suit. An essential attribute of a business attorney is providing “risk-adjusted” advice, and the level of tolerable risk for a startup generally far exceeds that for a Fortune 500 company. Lawyers at startups need to recognize that a workable answer today is often preferable to the perfect answer tomorrow; hand-wringers need not apply.

But risk tolerance must be accompanied by a stiff spine in situations where the company’s momentum (and the CEO’s vision) hurtles on a collision course with the law or the company’s outstanding commitments. In these cases, a willingness to speak up is one of the many things lawyers can bring to the table.

Daniel Doktori is the Chief of Staff and General Counsel at Credly, a digital credential service provider. He previously represented startup companies at WilmerHale, a law firm.

Sarah Reed is the Chief Operating Officer and General Counsel of MPM Capital, a venture capital firm that invests in early-stage life sciences companies. Previously, she was the general counsel of Charles River Ventures, an early-stage technology venture capital firm.