Historical Returns on Real Estate Investments

There are many emotional factors connected with the ownership of Real Estate. Do the historical returns on Real Estate investments justify the confidence so many investors have in them?

The ownership of land has been something that has been rooted deep in the minds of man. Land is seen as the one investment that is solid and permanent. The American Dream has long included the ownership of your own home, but when you move beyond this natural impulse to own property that you can call yours and look at Real Estate purely from an investment opportunity, how does the picture change? Have the historical returns on Real Estate Investment measured up to the confidence it has received.

The answer is a cautious yes. Between 1926 and 1996, the annual average rate of return on Real Estate was 11.1%. During the same period the rate of inflation was around 3%. So, it was obviously a better investment to buy Real Estate than to bury cash in jars in your backyard. However, the rate of return for small stocks checked in a bit higher at around 12% while the Dow Jones Industrial Average was a bit lower at 10%. These figures would suggest that Real Estate investments were right there at a par with Stock Market Investments.

Real Estate Investors might want to make the claim that land ownership and its value as an investment predates the Stock Market by thousands of years. They will point to the role that the ownership of land played in the Middle Ages in determining wealth and even nobility. This is true, of course, but in many ways irrelevant to a discussion of the historical returns on Real Estate investments. The new global economy has created a whole new playing field and return of investment must be determined within the scope of this. It is all well and good to study the past to get clues to the future, but in investment the past only offers clues and not answers.

A look at the historical rates of return on Real Estate investments shows that they tend to be more stable and less likely to spike up and down in erratic and unpredictable fashion like the Stock Market. Many investment advisors suggest all portfolios have at least 10% invested in Real Estate for a hedge against market fluctuations. On the other hand, Real Estate investments tend to have high transaction costs and to be in larger units. All properties are unique and each has its own characteristics and potential.

These negative factors have led to the popularity of investments in Real Estate through REITs which are Real Estate Investment Trusts. REITs are a sort of mutual fund of Real Estate which gives investors a way to invest in Real Estate without the problems of high transaction costs or property uniqueness. If you are considering Real Estate investment, either on an individual basis or through a REIT, the historical record should give you some confidence. As much as past performance can reassure us of future success, Real Estate’s past has indicated that it is a safe, sound, and high return investment.

RI Real Estate Law – Purchase and Sales Agreements – Single Family

In Rhode Island most buy and sell agreements (purchase and sales agreements) for single-family homes are on a form prepared by the Rhode Island Association of Realtors. The Purchase and Sales Agreement is a very important legal document that typically sets forth the sales price, time, date and place of the residential real estate closing, contingencies based on financing, as well as many other provisions.

You may attempt to negotiate modifications to this agreement and are not obligated to sign the standard form. Prior to signing the Purchase and Sales Agreement, the buyer should contact a Rhode Island lawyer / attorney who specializes in real estate law, residential real estate closings and title law.

This agreement was drafted with the intent to be fair to both buyers and sellers of residential real estate; however, the buyer should not sign this agreement without paying careful attention to all of the provisions including the following provisions:

1. The agreement provides for a certain number of days within which buyer must apply for his/her mortgage. Pursuant to the terms of the standard Rhode Island Purchase and Sales Agreement, if the buyer fails to apply for the mortgage, his deposit will be forfeited. Please make certain that you allow enough days for this application to be made.

2. The agreement provides that if the buyer applies for a mortgage greater than the amount set forth in the Purchase and Sales Agreement, buyer will have no right to obtain a return of his deposit if his mortgage application is denied. Buyer should be certain that the amount filled in for his proposed mortgage is in fact the highest amount that he intends to apply for.

3. The agreement provides that the buyer must accept the property with any easements or restrictions of record that impact the property. The buyer should read the Rhode Island Real Estate Sales Disclosure Form prior to signing the Purchase and Sales Agreement. Rhode Island Law requires that the seller of residential real estate in RI notify the buyer of any restrictions or easements. Buyer should check the disclosure form and if the seller indicates that there are restrictions or easements, buyer should read them prior to signing the Purchase and Sales Agreement. If the buyer does not understand the legal implications of the restriction or easement, then they should contact their real estate attorney.

4. Buyer’s right to a return of their deposit in the event they are not satisfied with house inspections, such as physical/mechanical, pest infestation and septic system, depends on the inspector finding a substantial / materially deficient condition which has not been disclosed to the buyer prior to the execution of the Purchase and Sales Agreement. This means that the buyer should carefully read the Real Estate Disclosure supplied by the seller prior to signing the Purchase and Sales Agreement to make certain that seller has not disclosed existing deficient conditions on the property in this form. If deficient conditions have been disclosed, the Purchase and Sales Agreement should be amended to indicate that buyer may terminate the agreement based upon these deficient conditions

Laws Governing Real Estate Buying and Selling in France

One real estate transaction that requires the involvement of French law is the relationship between a landlord and a tenant. Here the law specifically lists out the buying and selling obligations of each party and serves to create an atmosphere of trust and understanding that creates an amicable business relationship.

The overriding law

In France, the dominant law that regulates the relationship between landlord and tenant is the Mermez Act of 1989. Despite minor amendments this law has largely remained intact and has become the overriding law on tenancy agreements.

The tenant and landlord under French law

Occupany

  • The tenant is highly favored by the law
  • The landlord and tenant are permitted to reach agreement on the amount of rent payable but the amount can only be revised once a year and as the occupier and user of the house, the tenant is obliged to take out home insurance.
  • Any suggested increase in rent must conform to the INSEE index. The owner is equally obliged to confirm that the rent paid is below those paid in the vicinity by landlords who own rentals with identical furnishings, accessories, fixtures and fittings. If the increase exceeds 10%, it must be spread over 6 years even if the contract is of shorter duration.
  • A 2 months deposit may be paid only if payment of the rent in advance is not made.
  • For a privately owned unfurnished rental, the duration of occupancy is 3 years minimum but six years if the rental is owned by a company or society. For furnished rental, occupancy is one year, renewable each year provided no notice has been given by either side. Furnished accommodation is more relaxed than unfurnished rental in terms of deposits, charges and obligations.
  • Furnished accommodation is taxed as professional income but no VAT is payable. The landlord is required to pay all local taxes.
  • The tenant can vacate the rental accommodation anytime he wishes but must issue a 3 month notice before doing so. The notice can be reduced to 1 month for special circumstances e.g. the tenant’s loss of employment or bad health. The landowner is not permitted to issue notice.

Notices

  • A 2 month notice is the standard procedure given by the tenant who wishes to vacate the rental accommodation.
  • The landlord is obliged to issue a notice of at least 6 months before the tenancy contract expires. The notice is sent either by post or by safe hand of a bailiff. If the landlord intends to sell the rented accommodation, a copy of the offer must be sent to the tenant together with the price. The tenant holds first preference to buy the accommodation.

Occupancy

  • Under no circumstances can a tenant be evicted from his rental premise except for cases where the house is about to collapse, in which case the Mayor is the only person who can evict the tenant, or where the tenant has not paid rent or has failed or refused to take out a home insurance
  • The landlord must wait out the period of the contract when the tenant either freely leaves the rental accommodation or elects to renew the agreement.

Evictions

Strictly speaking, the tenant cannot be evicted from his/her rented accommodation but there are exceptions to the rule.

  • A tenant may be evicted by the Mayor if the house is about to collapse
  • The tenant has not paid the agreed rent amount
  • No home insurance has been taken out by the tenant
  • The tenant has abused his rights of occupancy by misusing the paid rental.

Re-occupation

The landlord is not strictly permitted to re-enter the rented accommodation but there are exceptions where he may be permitted to re-occupy the premises.

  • If he or a member of his immediate family intends to occupy the rental to live.
  • If he intends to sell the rental accommodation.
  • If the tenant has failed to pay rent, take out a home insurance or abused his/her rights of occupancy.

Termination of contact

  • A contract must be drawn up to include obligatory and forbidding clauses.
  • A resolution clause has the ability of terminating the agreement after a 2 month notice if an obligation in the contract has not been fulfilled.

How to Buy Commercial Real Estate

The first question to ask is ‘what for’? Are you buying commercial real estate to use in your business? Will you be an owner/occupier? Or are you buying as an investor?

While your answer will separate the buyers into different camps, the advice to both is pretty much the same. Proceed with caution. Be as sure as you can be about the chances of the occupiers doing well. Rely on expert opinion.

Owner occupier

Again we can differentiate between a newbie and an experienced operator. If you are seeking to buy commercial real estate to house your brand new business, you need to be sure you don’t buy too big, expand too quickly and pay too much. Mind you that applies to almost everyone in business.

But if you already have a business and wish to relocate or even expand, again be aware of the economic times and don’t over-extend yourself and your business.

Investor

Buying a commercial property worth a great deal of money can be a risky venture. What if you can’t find a tenant or tenants? Of course if the property is already occupied with strong leases then you are on far more solid ground. But buying the property requires detailed and informative research with, if necessary, the help of experts.

Your expert team

The local chamber of commerce, your lawyer, accountant and even the state’s economic advisers are all capable of helping you make the right decision. Some of the advice will be free, some will cost you. But if it helps you make the right decision then it will be time and money well spent. Rely on those who are experts in the areas you are not.

Finance

It’s the same deal, well almost, for someone buying a one bedroom apartment. You have to get the finances right. Foreclosure applies equally to commercial real estate as it does to residential properties. This is just one area where your accountant is essential but knowing your banker and getting good advice from your lending authority is likewise invaluable. One of the main causes of the sub-prime mortgage meltdown was greed on behalf of certain lenders. Borrow wisely from reputable sources.

Owner advantages

In some ways it’s like owning or renting your apartment. If something goes wrong with the building, as the owner, you have to fix it and pay for the repairs. As a tenant, that’s not your responsibility. Be aware of this as you consider buying. The operating costs of a commercial building are not cheap. But then the lease income can be substantial. Get advice from those who know before you take the plunge.

One of the major factors in any commercial real estate purchase is you. It’s largely about your credit worthiness, your business reputation and your ability to know what you want. When you are strong and reliable, your business will often follow suit.

Required Legal Forms for Buying or Selling Real Estate

For individuals looking to buy or sell property with the help of a real estate agent, making sure the necessary legal forms are completed is generally not a concern. It is agent’s job to help ensure that all the proper steps are taken to make the property transition as smooth as possible.

Unfortunately, real estate agents are pricey, and in this housing market homeowners are looking for any way to cut back on overall net cost of putting a house on the market and make the most from their investment. This means that more and more buyers and sellers are wading into the real estate market unassisted.

DIY home buying and selling can pay off big in the end, but navigating through the legal obstacle course can be a challenge. Read below to review a checklist of legal documents you need to complete before buying or selling a property.

Sales Contract

A sales contract is the legal document which specifies and binds the agreement between the buyer and seller. Sample contracts can be obtained, but traditional sales contracts include the final purchase price, as well as any contingencies allowing the deal to be nullified, such as a failed home inspection or a buyer who is unable to find financing. Both the buyer and seller must sign the contract to make it legal.

Property Disclosures

Sellers must fill out, sign, and submit a disclosure form before finalizing the sale of their property. A property disclosure is where the seller lists all of the defects of the property as honestly as possible. Failure to provide a complete list of property defects can result in a lawsuit where the seller is held liable.

Occupancy Agreements

Occupancy agreements are responsible for defining the date the seller must move out, and when the buyer is permitted to move in. If the buyer is moving into the property prior to the finalization of the deal, or if the seller is occupying the property after the deal is confirmed, then separate pre-occupancy and post-occupancy documents must be completed.

Lead Paint Record

If a property was built before 1978, under federal law the seller must submit a lead paint hazard form. The form must contain a lead paint warning, statement that the seller has fulfilled all lead paint legal requirements, and an acknowledgment that the buyer received a pamphlet (approved by the EPA) on the dangers of lead paint poisoning. Both the buyer and seller must sign and date the document as well.

Offer and Counter Offer Forms

Sellers have the option of giving the buyer an offer form to fill out when bidding on the property. The seller, in turn, can either submit a counter offer form to the buyer, or sign and approve the buyers offer. These forms aren’t necessary, but can prevent future misunderstandings.

Third-Party Financing Addendum

If the buyer intends to take out a mortgage to finance the purchase of the property, then a third-party addendum will be required. This document allows for the deal to be terminated if the buyer is unable to receive financing in a specified amount of time.

Homeowner’s Association

For properties that are members of a homeowner’s association, a couple additional documents will need to be filled out and submitted: a resale certificate, and an addendum transferring over the membership fees of the homeowner’s association. In most states, failure to provide the buyer with association information can result in termination of the deal at the seller’s expense.

Title Documents

The job of a title company in a property sale is to schedule and prepare for the sale closing, and handle the transfer of funds. If a buyer or seller decides to hire a title service to oversee the sale, make sure the necessary documents are included in the deal.

Real Estate Attorneys

Deciding to put your property up for sale by owner, or buying a property from a seller without an agent, can be financially beneficial to both parties involved. However, it also means there is an increased risk of failing to complete the complicated legal procedure of transferring property.

If you need help discerning the paperwork involved in buying or selling a property, defining an agreement between you and the buyer/seller, or have questions regarding the legal procedure of transferring ownership of a property, then consider consulting a qualified real estate attorney.