There are many risks when it comes to property investment as a business. I think sometimes people, especially investors forget the steps involved when obtaining a loan and how this process may open them up for risk. There are many concepts to understand mostly because the bottom-line is determined by capitalization (CAP) rates, return on investments (ROIs), and other net operating incomes.

It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.

This opens you up to a different class of loan and areas of predatory lending practices which may incur high fees and other terms or conditions that are not always explained up front. Sometimes loans that allow you to flip properties are called rehab loans as they use hard money via private lenders. This not only means steeper interest rates but an area of lending that is not strictly regulated by the federal or local governments. These hard money loans only work to your benefit when they can get you out of a deal quickly. In other words, these loans only serve the lender because of the amount of leverage that increases the return.

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If you are a real estate professional then you know about the gross income multiplier, GIM or the formula that determines the value of rental real estate. It has been used for decades.

There are many schools of thought on how to determine the value of rental property but I always use my readings as a rule of thumb.  Any real estate textbook will tell you not to invest in a property with a GIM of more than 8.  The formula is simple enough: divide the price by the gross annual rents to get the GIM.

With this definition in mind it seems that particular author wants me to never pay more than 8 times the annual rent for a rental property.  This helps the buyer open their eyes to mow much of a rental property they can afford to buy.  It makes plenty of sense really.  Seems that if a property was selling for 6 times the rental income, then that was a really good deal.  I mean anything higher than 8 times the rental income and that becomes a dangerous proposition.  This simple method makes it easy for the average Joe to know what they are getting into. 

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Investors who own properties that have appreciated significantly and investors who have written off a portion of an investment that has depreciated, both face a similar problem when considering making a sale: capital gains taxes. Those with properties that has increased in value may face large capital gains taxes on the property's increased value, and others will be faced with a depreciation recapture tax on the funds that were written off each year.

Both kinds of investors can benefit from a 1031 tax deferred exchange. Under section 1031 of the IRS tax code, investors can defer taxes on gains in business or investment properties by rolling gains over into another similar ("like kind") property.

The IRS created the tax-deferred exchange to encourage continuous investment. The folks in our government knew that imposing capital gain taxes when people sold an investment property would make people want to hold onto those properties. In addition to discouraging those people from selling, those capital gains taxes would make investors think twice before buying more property. With the 1031 exchange, the IRS encourages the continuation of real estate investments.

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