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Person holding house keys, representing real estate closing

What is a Real Estate Closing?

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A real estate closing is the final execution and exchange of documents to complete the buying and selling of real estate, whether commercial or residential. The real estate closing is like a well-oiled machine: many different, individual parts come together for a seamless function, but if one part of the machine is slightly off, it will not run correctly. When one part of the closing is off, the entire transaction may be delayed until the issue can be resolved and the closing rescheduled. 

What Happens before the Closing?

Prior to the closing, all legal documentation for the transaction will be drafted and agreed to. The parties involved in the preparation are:

  • The buyer and seller and their respective agents and attorneys 
  • The lender
  • The title company
  • The title insurance company
  • The escrow company or closing attorney

While the lender’s role is well known – providing the debt to buy the property – few know the role of the title company, the title insurance company, and the escrow company (or closing attorney). The title company reviews the deeds and legal history of the property to ensure that it is available for sale by the seller and does not have any encumbrances. The title insurance company then offers an insurance policy to the buyer based on the title company’s opinion. The title insurance protects the buyer from any unknown defects in the title, such as a previously unknown, but valid, legal claim (e.g., easement, claim of ownership, restrictive covenant). The escrow company or closing attorney will receive funds from the lender or buyer to hold until the closing. 

Who Will Be at the Closing?

The people who attend the real estate closing will transaction-specific, but those most likely to attend are:

  • Your real estate agent
  • Buyer’s attorney
  • Seller’s attorney
  • Representative from the lender
  • Representative from the title company
  • Representative from the title insurance company
  • Representative from the escrow company or the closing attorney

You’ll note that the buyer and seller aren’t listed. While the buyer and seller are generally welcomed to attend the closing, their presence is not required.

What Happens at the Closing?

As noted, the closing is the final execution and exchange of documents between the relevant parties. This is the last chance to ask questions and clarify or rectify any issues. Once all parties are content with the documents and the deal, the necessary legal documents will be executed and notarized. Upon execution of the documents, the escrow company or closing agent will release the funds to the seller. The buyer will take the keys to the property following closing. Once the closing is complete, the seller no longer owns the property and the buyer has now acquired the property. 

Real Estate Lawyer in Rhode Island, Massachusetts, and Connecticut

At PALUMBO LAW, we have helped thousands of homeowners, investors, and businesses with real estate closings. Whether you’re buying your first home or acquiring a commercial property, our attorneys have the experience and skillset to ensure that your transaction closes on time. If you are considering buying or selling property, please contact our office to set up a consultation or complete the contact form. 

Houses and piles of change, representing real estate investment

What Is House Hacking?

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Are you an aspiring real estate investor in Rhode Island, Massachusetts, or Connecticut? If so, you’ve probably come across the term “house hacking”, but may not understand what it is or why people do it. House hacking is acquiring a property to live in while renting out other rooms or units to generate cash flow to pay the mortgage and other ongoing expenses. House hacking is most common with multi-family homes, such as a duplexes, triplexes, and quadplexes. It is possible with a single-family homes, but the lack of privacy from sharing common areas doesn’t appeal to many investors.

Why House Hack?

House hacking is a common way for younger investors to enter the real estate market and build wealth. House hacking blends your primary residence with a revenue-generating investment property. Depending on the specifics of the property, the revenue generated from the rental units will partially or fully cover the mortgage payment and ongoing expenses. In some cases, the property may produce positive cash flow after all payments are made, resulting in an additional income source for the investor. For many real estate investors, it’s a chance to build wealth early on while enjoying the freedom of owning their own place. 

Financing

Owner-occupiers receive better financing terms than investors, and when considering a property that may be held as a long-term investment, having the best financing terms possible can drastically improve the property’s returns. As a result, house hackers prefer to take advantage of FHA lending. FHA loans have several requirements that must be met:

  • The borrower must live in the property as his or her principal place of residence for at least 12 months.
  • The borrower must have a FICO® score of at least 500.
  • The borrower must have a debt-to-income ratio of less than 43%.
  • The borrower must have proof of employment and recurring income. 

If these requirements are met, then a borrower is likely to be able to use the FHA loan program. One of the biggest benefits to the FHA loans is the reduced down payment. Under the FHA loan, borrowers can put down as little as 3.5% with a FICO® score of at least 580, or 10% down with a FICO® score between 500 and 579. These loans still require mortgage insurance because their loan-to-value ratios are higher than 80%. Once a borrower has lived in the property for at least 12 months, they can move out and rent the unit they were living in while retaining the FHA loan. For many, house hacking from one property to the next is a great way to build wealth and a real estate portfolio. 

House hacking is a well-trodden path to real estate investing. Our attorneys have significant experience in acquiring, leasing, and selling multi-family properties. If you are a real estate investor or are planning to become one, please contact our office to set up a consultation or complete the contact form. Our attorneys have successfully helped hundreds of individuals like yourself navigate real estate investing across the states of Rhode Island, Massachusetts, and Connecticut. 

Construction worker and man agreeing on business contract.

Three Common Construction Contracts

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If you’re investing in real estate or are otherwise involved in real estate development, you will quickly find that construction contracts are often extremely complex. Who is liable for cost overruns? Who benefits if actual costs are lower than budgeted costs? The answers to many of these questions are resolved in the contract’s pricing. The three most common construction contracts are (1) fixed price, (2) cost-plus, and (3) maximum guaranteed price (“MGP”). Each method differently shifts cost overrun risk between owner and contractor.

Fixed Price

In a fixed price contract, the contractor and owner agree to a single amount to be paid for construction prior to construction commencing. For example, a business owner may negotiate a construction contract with a contractor to build a storage facility for $200,000. In a fixed price contract, the contractor’s profit is the agreed price minus costs. The advantage to owners is that they have price certainty as the contractors take on the risk of cost overruns. However, this certainly comes at a price – fixed price contracts tend to be the most expensive method of pricing construction contracts. Additionally, there is concern for owners that contractors may cut corners to keep costs low to maximize profits. This issue is exacerbated when cost overruns become certain. 

Cost-plus

In a cost-plus contract, the owner agrees to pay the contractor a fee in addition to the costs. The fee can be fixed or flexible, such as costs plus an agreed sum, or it could be costs plus a percentage of the project’s total costs. Here, the risk of cost overruns is placed on the owner – opposite that in a fixed price contract. Because contractors are not responsible for costs, there is often concern that contractors will take a relaxed approach to control costs. Similarly, setting the fee to a percentage of project costs could incentive contractors to drive up construction costs to increase their fee (and therefore profit). 

Maximum Guaranteed Price

The MGP contract is a hybrid of the fixed fee and cost-plus contract. Here, the cost-plus structure is used with a maximum cap set on price. This structure shares cost overrun risks between the owner and contractor, whereas fixed price and cost-plus contracts generally allocate cost overrun risk to a single party. As a result, an MGP contract more evenly balances incentives and liabilities between the owner and contractor. Construction contracts are complex documents with significant consequences for the parties involved. A proper construction contract should be drafted in light of a project’s specific needs, such as those for price certainty or minimizing overall costs. The experienced real estate and construction attorneys as the Law Offices of Richard Palumbo have successfully advised individuals and business owners in Rhode Island on construction contracts for decades. If you have questions relating to construction contracts or need legal advice, please contact our office to set up a consultation or complete the contact form.

Attorney discussing Rhode Island's landlord-tenant laws to client.

An Overview of Rhode Island’s Landlord-tenant Laws

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Every landlord and tenant should have a basic understanding of their state’s laws governing the landlord-tenant relationship. In the case of Rhode Island, the residential landlord-tenant relationship is governed by R.I. Gen. Laws §§ 34-18-1 to 34-18-57 and the commercial landlord-tenant relationship is governed by R.I. Gen. Laws §§ 34-18.1. The laws themselves are complex and often ill-defined. Worse, some of the landlord-tenant relationships are governed by court decisions, which can be difficult to identify and fully understand. Landlords and tenants should be aware of the following laws that apply to the landlord-tenant relationship in Rhode Island:

Required Disclosures by the Landlord

In Rhode Island, landlords must disclose to the tenant in writing:

  • Any person authorized to act on behalf of the landlord
  • Any person authorized to manage the premises
  • The proper person for the purpose of service of process or receiving and receipting notices and demands

Security Deposit Limits and Returns

Rhode Island law states that the residential security deposit cannot exceed more than one month’s rent. Once the lease terminates or has been terminated, the landlord has 20 days to return the deposit less any allowed deductions for reasonable expenses such as repairs, cleaning, etc. If the landlord does not return the security deposit as required, the tenant may file a claim in Rhode Island’s small claims court if the amount is $2,500 or less. In some cases, the tenant may be entitled to punitive damages. 

Rent-related Rules

When increasing rent, the landlord must give at least 30-days notice of the rental increase prior to the increased rent becoming effective. Landlords should note that Rhode Island requires the notice of a rental increase to be at least 60 days when the tenant is 63 years of age or older. 

Tenant’s Right to Withhold Rent

In Rhode Island, tenants may withhold a small amount of rent as further explained the RIGL 34-18 if the property fails to meet the standards set out in the landlord-tenant laws. If the landlord fails to properly complete important repairs in a timely manner, tenants can exercise their right to “repair and deduct.” This means that a tenant may hire someone to repair a broken hot water heater and deduct the cost from the rent. 

Lease Termination and Eviction

Landlords may terminate a month-to-month tenancy by giving at least 30-days notice prior to the vacation date. For week-to-week tenancies, the notice period is at least 10 days, and for year-to-year tenancies, the notice period is at least 3 months. 

Landlord’s Access to Property

Rhode Island requires landlords to give written notice at least 2-days notice to the tenant prior to entering the property. Landlords cannot freely access leased properties. 

Landlord-tenant Lawyers in Rhode Island, Massachusetts, and Connecticut

At PALUMBO LAW, we represent landlords in landlord-tenant disputes and provided legal counsel to investors on handling tenant issues. State landlord-tenant laws are complex – compliance with the laws can make or break an investment. If you have questions pertaining to the landlord-tenant relationship, or real estate investing more generally, please contact our office to set up a consultation or complete the contact form. Our experienced attorneys have successfully helped hundreds of real estate investors navigate the complex landlord-tenant laws in Rhode Island, Massachusetts, and Connecticut.

Partition in Sale

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PALUMBO LAW handles complex partition actions when the parties involved are unable to agree on the fair market value of real estate jointly owned to effectuate the sale of said real estate in accordance with the parties’ respective interests in the property or when one of the parties outright refuses to cooperate with the sale of the real estate.  Attorney Nicole Labonte is an experienced real estate litigation attorney who regularly represents clients in partition matters and real estate disputes.  

Partition is defined as follows “something that separates one part of a space from another, the act of dividing; especially the division of real property held jointly or in common by two or more persons into individually owned interests.  

A good example of a Rhode Island partition in sale action is described below.

Plaintiff (Ms. S.) and Defendant (Mr. B.) jointly acquired real estate, which they resided in together.  Ms. S. and Mr. B. received delivery of an executed Warranty Deed, granting ownership of the Real Property to Ms. S. and Mr. B., as tenants in common, with Ms. S. owning a one-half (½) or fifty percent (50%) interest and Mr. B. owning a one-half (½) or fifty percent (50%) interest in the Property.  

A few years after the execution of the Warranty Deed, Ms. S. and Mr. B.’s relationship ended.  Mr. B. demanded that Ms. S. begin paying rent or vacate the Property. Ms. S. opted to move out.    Notwithstanding Ms. S.’s requests for the same, Mr. B. has refused to cooperate with the sale of the property.  As such, Ms. S. commenced this partition action, seeking to exercise her rights as an owner of the Property and to partition and sell the Property under R.I.G.L. §§ 34-15-1, et seq.

Pursuant to R.I.G.L. § 34-15-16, entitled “Order of sale”: In an action for partition, the superior court may, in its discretion, upon motion of any party to the action, order the whole premises sought to be divided, or any particular lot, portion, or tract thereof or the interest of the plaintiff or plaintiffs or of the defendant or defendants in the whole premises, or in any particular lot, portion, or tract thereof, to be sold, either at public auction or by private contract, under the direction of the court, by the commissioner or commissioners appointed to divide or sell the same; provided, that if the sale is made by private contract, it shall not be made for less than the sum fixed by the court in its decree authorizing the sale by private contract.  Id. (emphasis added).

The above-cited statute seeks to achieve one of the ultimate goals of any partition action, namely, determining whether a division of the real estate may be made by physical metes and bounds, and if not, to order a sale of the real estate in order to complete the partition between two co-owners who are no longer able to cooperate with respect to owning the real estate together.  As also stated in the Rhode Island General Laws concerning partition: All joint tenants, coparceners, and tenants in common, who now are or hereafter may be actually seised or possessed of any estate for life or years in any lands, tenements, or hereditaments, may be compelled to make the partition between them of such lands, tenements, and hereditaments, to continue until the estate of some of the parties to the lands, tenements, or hereditaments shall determine, and no longer, by civil action. R.I.G.L. § 34-15-2 (emphasis added).

The Rhode Island Supreme Court has made clear that, in regard to R.I.G.L. § 34-15-2, “[t]he intent of the statute is to provide in the first instance for the partition of realty by metes and bounds giving to each owner therein his fair and equitable portion of the same, but in the event of its not being practicable to make such a division, and in that event only, the court may in this discretion order a sale of the property and a division of the proceeds.”  Bianchini v. Bianchini, 76 R.I. 30, 34, 68 A.2d 59, 62 (1949) (quoting Lannon v. Lannon, 40 R.I. 60, 62, 9 A. 819, 820 (1917)) (emphasis in original).  In Bianchini, where the real estate sought to be partitioned and/or sold could not practicably be divided by metes and bounds, the Supreme Court held that R.I.G.L. § 34-15-2 “does not apply in the present cause since partition here admittedly cannot be made by metes and bounds. In such circumstances this cause is controlled by the provisions of § 16.” Id. (citing R.I.G.L. § 34-15-16 (Order of sale, quoted supra)). One must be an owner of a fee interest in the property in order to demand partition. Stanton v. Sullivan, 63 R.I. 216, 216, 7 A.2d 696, 698 (1939). Originally, the purpose of the partition laws was to resolve disputes that would arise between fee co-owners of land, who were unable or unwilling to use and/or reside on the co-owned property together.  The partition statutes disallow one co-owner from being able to keep the other co-owner from being able to use and enjoy their jointly-owned land, by permitting the wronged co-owner to seek partition of the land. See Stanton, 63 R.I. at 216, 7. A.2d at 698-99 (citing Freeman, Cotenancy and Partition, § 440, p. 582 (2d ed. 1886)).

Here, Ms. S. is entitled to an Order from this Court appointing a Commissioner to sell the Property and disburse the proceeds from the sale.  It would be impracticable to physically divide the Property by metes and bounds, particularly based upon the location of the home built on the Property and other homes in the vicinity.  Further, there is no question that Ms. S. has not been permitted to use the Property, while Mr. B. has resided therein and used the Property freely, for several years after their relationship ended.  Therefore, this is just the type of situation where an Order appointing a Commissioner and requiring a sale of the Property is warranted.  

Our experienced Rhode Island partition attorneys at PALUMBO LAW are ready to assist you with your partition matter or real estate dispute.  Don’t hesitate – call our office TODAY at 1-401-490-0994.  

Adverse Possession

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PALUMBO LAW and its experienced adverse possession attorneys understand boundary line disputes, adverse possession and boundary by acquiescence. In fact, our boundary line lawyer, Nicole Labonte is one of the few boundary line attorneys in the history of Rhode Island adverse possession cases to ever win an adverse possession case in RI Superior Court on a Motion for Summary Judgment. Adverse possession is a legal method of acquiring title to real estate by possession for a statutory period under certain conditions, especially a non-permissive use of the land with a claim of right when that use is continuous, exclusive, hostile, open and notorious.

Our Rhode Island adverse possession attorneys have years of experience litigating matters concerning boundary line disputes, adverse possession, prescriptive easements, boundary by acquiescence and quiet title actions. We are your Rhode Island adverse possession attorneys, your boundary line dispute lawyers and are ready to assist you with this type of real estate dispute.

The below example is a good illustration of a typical adverse possession litigation matter in Rhode Island.

If the recorded boundary line of Mr. Doe’s Narragansett, Rhode Island real estate is several feet beyond a fence dividing his and his neighbors properties, and Mr. C has a barn located on his recorded property, then Mr. Doe has adversely possessed the disputed land area (the tract of land several feet beyond the fence, up to and including the barn).

The first step in the process would be for an experienced boundary line dispute attorney from PALUMBO LAW to file a complaint in Washington County Superior Court because, in our example, the property is located in Washington County. In our case, all of the necessary elements of adverse possession have clearly been established. The Doe’s purchased their property in 1990. It was their belief at the time, and continues to be their belief, that the tract of land in question belonged to them. They began maintaining the land and kept two horses in the barn right away, consistent with this belief. The fence was in place and the barn had long existed prior to their purchase of the property. The Doe’s affected numerous repairs to the barn including new shingles, windows, and a new roof. The Doe’s have, therefore, made effective use of the property in question for the last thirteen (13) years. The Rhode Island General Laws state that where any person was in the uninterrupted, quiet, peaceful and actual seisin and possession of any lands claiming the land as his for the space of (10) ten years may establish conclusive title. (See R.I.G.L. 34-7-1). The Supreme Court has long held that the elements to establish adverse possession are that it must be actual, open, notorious, hostile, under claim of right, continuous, and exclusive for at least ten (10) years. Sherman v. Goloskie, 188 A.2d 79, 83 (R.I. 1963).

To meet the open and notorious requirement, our real estate dispute attorney must show that our clients’ use of the land would “put a reasonable property owner on notice of their hostile claim.” Gammons v. Caswell, 447 A.2d 361, 367 (R.I. 1982). The court found that it is sufficient for the claimant to go upon the disputed land and use it adversely to the true owner and the owner then becomes chargeable with knowledge of whatever occurs on the land is in an open manner. Lee v. Raymond, 456 A.2d 1179, 1183 (R.I. 1983). The court held that the owner was still chargeable with knowing that whatever was done openly on the land he owned, even though it could not be observed from the road or from the boundary of the property, was done in an open manner. Tavares v. Beck, 814 A.2d 346, 352 (R.I. 2003). The Doe’s kept horses they purchased in 1990 in the barn and maintained the property in dispute. As set forth in Gammons, as a reasonable property owner, Mr. C was put on notice by the placement of the fence and the Doe’s open and notorious use of the land. In addition, many neighbors believed that the Doe’s owned the property as well.

The Does’ use of the land was hostile and under a claim of right because permission was not given and the Doe’s treated it as their property. To establish hostile use, the claimant must only establish a use “inconsistent with the right of the owner, without permission asked or given” such as would entitle the owner to a cause of action against the intruder for trespass. Tavares, 814 A.2d at 351 (citing 16 Powell on Real Property, § 91.05[1] at 91-23 (2000). The court held that where the claimant mistook his boundary, but continuously asserted dominion over the property for the statutory period, he was a hostile occupant of the land. Taffinder v. Thomas, 381 A.2d 519, 523 (R.I. 1977). A claim of right is established “through evidence of open, visible acts or declarations, accompanied by use of the property in an objectively observable manner that is inconsistent with the rights of the record owner.” Tavares, 814 A.2d at 351. The Does’ use was continuous and exclusive, as well, since they maintained the property and kept their horses in the barn from the time they purchased the property through the present. They have owned the property for thirteen (13) years and, thus, meet the statutory period of ten (10) years, far exceeding the limit because the fence and barn had been in place at least ten (10) years prior to the Does’ purchase.

As argued by an experienced boundary line dispute lawyer from PALUMBO LAW, the facts of this matter fully support all of the elements of adverse possession. The Does’ use was actual, open, notorious, hostile, under claim of right, continuous, and exclusive for over ten (10) years. If this were an actual adverse possession case, then the Does should win and take the disputed property by adverse possession.

The experience adverse possession attorneys at PALUMBO LAW are here to assist you with your adverse possession matter, boundary line dispute, real property litigation or real estate dispute. Call the Rhode Island Real Estate Dispute attorneys at PALUMBO LAW for your free consultation today.

Real estate agent and couple looking over a triple net lease.

Understanding Single, Double, and Triple Net Leases

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Many real estate investors begin in residential real estate but eventually move into commercial real estate as they become more comfortable. As a result, real estate investors are often familiar with Rhode Island’s laws governing residential leases. Rhode Island’s law governing residential leases is explicit in what can and cannot be delegated, and generally holds the landlord to retain responsibility over the property. However, the landlord-tenant relationships in commercial real estate are not governed by the same restrictive legislation, and thus allow for significantly greater flexibility in allocating rights and obligations between the landlord and tenant. In addition to real estate investors, business owners seeking their first lease, renegotiating an existing lease, or pursuing a new location may find the flexibility in commercial leasing overwhelming. 

The Differences Between Single, Double, and Triple Net Leases

A common example of the difference between common residential and commercial leases is responsibility for the building itself. Whereas the landlord is almost always responsible for the condition of the building in a residential lease, responsibility for the building’s structure can be that of the tenant in a commercial lease. The greater flexibility to allocate responsibilities between the landlord and the tenant in commercial leases has resulted in a basic reference to leases as being single, double, or triple net, with triple net being the most common form of a commercial lease in Rhode Island. The defining characteristic of the single net, double net, and triple net leases are given below:

  • Single net lease. The tenant is responsible for paying property taxes in addition to rent. This is also referred to as a “net lease.”
  • Double net lease. The tenant is responsible for paying property taxes and insurance in addition to rent. 
  • Triple net lease. The tenant is responsible for paying property taxes, insurance, and the cost of all structural/building maintenance and repairs.

Additionally, some commercial leases are structured similarly to residential leases in regard to the tenants’ only obligation being to pay rent. These leases, where the tenant is only responsible for paying rent, are called “gross leases.”

Contact Our Experienced Real Estate Attorneys Today 

While this may all seem confusing, the different obligations are allocations of risk between the tenant and landlord. Experienced real estate lawyers can help you understand the different leasing structures and which are most appropriate for your situation and goals. 

At PALUMBO LAW, our attorneys have successfully represented businesses and investors in commercial lease negotiations across Rhode Island and have a thorough understanding of the market. Similarly, our diverse representation ensures that we understand your needs and goals and negotiate your commercial lease accordingly. 

Whether you’re a business seeking a new location or a commercial landlord seeking a new tenant, we are here to help. If you’re interested in speaking about commercial leasing or investing in commercial real estate, or have more specific questions, please contact our office to set up a consultation or complete the contact form.

What Is an FHA-approved Condominium?

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When buying a home or condo, traditional bank lending requires 20% of the purchase price to be paid upfront. For many prospective buyers, making a 20% down payment is simply not possible. These prospective home buyers would thus be locked out of the housing market based on their inability to provide a 20% down payment, despite the ability to afford the monthly repayments. For prospective buyers finding themselves in this position, the Federal Housing Administration (“FHA”) provides a solution: home loans requiring as little as 3.5% down.

When buying a house, an FHA-eligible borrower can get FHA financing so long as the property conforms to certain requirements, such as price. However, unlike homes, condos must be FHA-approved via a certification for eligible buyers to finance their purchase via FHA loans. This certification restriction can significantly restrict the pool of potential buyers given that condos are often a vehicle for first-time homebuyers to enter the market.

Requirements for an FHA-Approved Condo

To be an FHA-approved condo, the following requirements must be met for certification:

  1. The property must be completed – selling “off the plan” does not qualify as an FHA-approved condo
  2. A maximum of 50% of units can be rentals or investor-owned
  3. The property must be insured with at least 10% of the HOA budget in a cash reserve
  4. A maximum of 35% of the property can be commercial use

If a condo meets all of the above requirements, the association or owner(s) can apply for FHA certification. If approved, the condo must be recertified every 3 years. In a recent change to the FHA certification rules, individual condo units can now be FHA-certified rather than the entire building. Thus, for condo associations that do not wish for the entire building to be eligible for FHA loans, individual units can now apply for certification.

The approval process is dependent upon the building and association. While the above-referenced requirements are necessary, the FHA will investigate other matters in relation to the association and building prior to determining certification. Some of these factors include recent or pending litigation, special assessments, governing documents, and building quality.

Contact the Law Offices of Richard Palumbo Today to Discuss Your Options

Whether you’re seeking an advisor to evaluate the merits of seeking FHA certification, have questions relating to FHA certification, or have decided to pursue FHA certification, the lawyers at the Law Offices of Richard Palumbo offer more than 100 years of combined legal experience to provide you with the most expertly tailored legal advice in Rhode Island. Having successfully represented condo associations, developers, and investors in condo-related legal matters, our attorneys are able to see the big picture and ensure that all aspects of FHA certification are analyzed in light of your specific circumstances. If you are interested in learning more about FHA-approved condos and the process or have specific requests, please contact our office to set up a consultation or complete the contact form.

What Determines Real Estate Yield?

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In real estate, yield is calculated by dividing the annual cash flows received by the value of the asset:

 Yield:   Annual Cash Flow
 Current Value of Asset

For example, a property that is worth $500,000 and returns $50,000 per year in rental income has a yield of 10%. Note that yield does not account for net cash flow or profits – only the amount of cash that an asset generates over a period of time. Comparably, for stocks and bonds, yield is the dividend or coupon payment divided by the security’s value.

For real estate, there are two methods for which investors are compensated: rental cash flows and capital appreciation. Total return for an investor is a combination of rental cash flows received plus capital appreciation of the asset. Given an expected total return, yield (rental cash flows) and capital appreciation will adjust based on expectations.

How Yield Is Determined

So, what determines yield for real estate? Unfortunately, this topic is worthy of book to itself. Nonetheless, as a basic overview, yield is determined by several primary factors:

  • Asset quality and characteristics
  • Stability of cash flows
  • Yields on stocks and bonds

First, asset quality and characteristics is a major determinant of an individual asset’s yield. Generally, the newer and nicer the building, the lower its yield will be. This is because current prices and returns must factor in all future expenditures. Additionally, factors such as location and asset type are major determinates. These factors contribute to capital appreciation expectations. Generally, the higher the capital appreciation expectations, the lower the yield – all else equal (an investor is compensated for total return).

Second, the stability of cash flows is a primary determinant. Properties with longer-termed leases with reputable tenants, such as major retail stores or corporations, will demand a lower yield for the reduced risk in cash flows. Properties with leases soon to expire or poor tenant quality will most often offer higher yields.

Third, in the spectrum of risk and return, real estate sits between stocks and bonds. Stocks offer the highest risk and highest returns, with bonds offering the lowest risk and lowest returns, all on average. If bond yields are compressed (as they are now), property yields will also compress for a multitude of factors beyond the scope of this blog post. However, the takeaway is that real estate returns tend to float between stocks and bonds, so if expected returns for stocks and bonds drop, so too will those for real estate. Ultimately, yields for real estate are determined by investor expectations for return and risk.

At the Law Offices of Richard Palumbo, we have successfully helped individuals and businesses plan their real estate acquisitions and overall strategies. We combine our in-depth legal acumen with business know-how to help you evaluate the risk of a real estate investment in light of your overall portfolio and need. Similarly, we have significant experience advising sellers to ensure that they receive the greatest price possible. If you are considering acquiring or disposing of a property in Rhode Island, please contact our office to set up a consultation or complete the contact form.

What Are the Tax Benefits of Real Estate Investing?

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Real estate is an extremely popular asset class among the wealthy. In addition to stocks and bonds, wealthy investors often have significant direct real estate investments within their portfolios, whether that be residential, commercial, or industrial. Likely the biggest reason for direct real estate investing is diversification. However, the tax benefits of real estate investing offer immense benefit through tax benefits – boosting returns compared to other assets. Thankfully, you don’t have to be wealthy to enjoy the tax benefits of real estate investing, and for many, real estate investing is more comfortable to engage in than stocks and bonds. So, what are the tax benefits?

An Overview of Tax Benefits

The tax benefits of real estate investing can be summed up as “deductions, depreciations, and capital gains.” Each of these offers significant tax advantages to real estate investors and are explored in more depth below.

Deductions

Tax deductions are one of the great advantages of real estate. A tax deduction is an amount that can be deducted from your taxable income. Generally, the following expenditures are tax-deductible in real estate: mortgage interest, property tax, operating expenses, depreciation, and repairs. Note that depreciation is a specific tax-deductible expense rather than a standalone benefit and is addressed below. Deductions become more important the higher your marginal tax rate. At a 25% marginal tax rate, a deduction of a $4000 expenditure will result in $1000 in tax savings, meaning that $4000 expenditure actually only cost the investor $3000.

Depreciation

Property is a depreciable asset, meaning that you can take a tax deduction for the annually depreciated value. The IRS determines the timeframe for depreciation, but currently, that timeline is 27.5 years for residential properties and 39 years for commercial. In effect, depreciation is a phantom expense in that it can be deducted as an expense, but it doesn’t actually cause negative cash flows.

Capital Gains

Depending on specifics of your property, you may be entitled to certain capital gain benefits and deferrals through programs such as Opportunity Zones and the 1031 Exchange. Capital gains benefits are too situational to accurately discuss in this blog, so please contact our office if you have questions as to how you may qualify for certain capital gains benefits through real estate.

Contact the Law Offices of Richard Palumbo Today

With more than 100 years of combined legal experience, the attorneys at the Law Offices of Richard Palumbo have provided zealous and unmatched knowledge to Rhode Island real estate investors seeking to minimize risk while maximizing returns. Our experienced attorneys have assisted investors and businesses in all property-related needs, ranging from acquisition to disposition. Additionally, our litigators successfully pursue complex real estate litigation should the need arise. If you are interested in learning more about real estate investments in Rhode Island or are considering investing or reinvesting capital, please contact our office to set up a consultation or complete the contact form.