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Did you know that tattoo ideas crosses is most likely the most popular topics in this category? Did you know cute school hairstyles for short hair has become the hottest topics on this category? Did you know that abdominal tattoos for girls is most likely the hottest topics in this category? A real estate investment trust (REIT) is a real estate company that offers common shares to the public. Tutorial: Exploring Real Estate InvestmentsThe REIT StatusTo qualify as an REIT with the IRS, a real estate company must agree to pay out at least 90% of its taxable profit in dividends (and fulfill additional but less important requirements). While a handful of hybrid REITs run both real estate operations and transact in mortgage loans, most REITs focus on the "hard asset" business of real estate operations.
However, our REIT doesn't actually spend this money in year 10; depreciation is a non-cash charge.
We should note that FFO gets closer to cash flow than net income, but it does not capture cash flow. Our hypothetical balance sheet can help us understand the other common REIT metric, net asset value (NAV). From a top-down perspective, REITs can be affected by anything that impacts the supply of and demand for property.
Capital market conditions are also important, namely the institutional demand for REIT equities.
At the individual REIT level, you want to see strong prospects for growth in revenue, such as rental income, related service income and FFO. As mortgage debt plays a big role in equity value, it is worth looking at the balance sheet. The Bottom LineREITs are real estate companies that must pay out high dividends in order to enjoy the tax benefits of REIT status.
Other things to consider doing with the money is fully funding your tax deductible retirement plan, or perhaps donating to charity.  Charitable donations are another one of those itemized deductions, so if you have enough money you could consider investing the money and then contributing to charity each year an equivalent amount as to what your mortgage deduction would have been.
Bottom line if you inherit some money, find time to have fun with it, invest it wisely, and make good financial decisions.  You do not want to pay off all your debt to later learn you lost a lot of tax deductions and end up paying a lot in taxes.  Make sure you contact a CPA and a financial planner if you are ever so lucky! This entry was posted in Tax and tagged accountants in Maumee, accountants in Toledo, gift tax limit, i inherited money, if i inherit money is it taxable, inheritance tax news, inheriting money, inheriting money from a will, inheriting money taxes, investing inherited money, Maumee CPA firm, pay off high interest or high balance, pay your debts, pension contributions tax deductible, reasons to pay off mortgage, should i pay off credit card, toledo cpa, what debt should i pay off first, what to do with an inheritance, what to do with inheritance, which debt should i pay off first, william vaughan, william vaughan company, your inheritance. Demonstrate how changes in the balance sheet may be explained by changes on the income and cash flow statements. Financial statements are valuable summaries of financial activities because they can organize information and make it easier and clearer to see and therefore to understand. Since the three statements offer three different kinds of information, sometimes it is useful to look at each in the context of the others, and to look at specific items in the larger context. On common-size statementscommon-size statementsFinancial statements where each itema€™s value is listed as a percentage of or in relation to another value., each itema€™s value is listed as a percentage of another. On the cash flow statement, each cash flow can be listed as a percentage of total positive cash flows, again showing the relative significance and diversification of the sources of cash, and the relative size of the burden of each use of cash.
On the balance sheet, each item is listed as a percentage of total assets, showing the relative significance and diversification of assets, and highlighting the use of debt as financing for the assets. Alice can look at a common-size income statementcommon-size income statementAn income statement that lists each kind of revenue and each expense as a percentage of total revenues. Seeing the common-size statement as a pie chart makes the relative size of the slices even clearer (FigureA 3.13, a€?Pie Chart of Alicea€™s Common-Size Income Statement, for the Year 2009a€?). The biggest discretionary use of Alicea€™s wages is her rent expense, followed by food, car expenses, and entertainment. Looking at Alicea€™s negative cash flows as percentages of her positive cash flow (on the cash flow statement), or the uses of cash as percentages of the sources of cash, creates the common-size cash flowscommon-size cash flowsA cash flow statement that lists each cash flow as a percentage of total positive cash flows.. Again, rent is the biggest discretionary use of cash for living expenses, but debts demand the most significant portion of cash flows. On the balance sheet, looking at each item as a percentage of total assets allows for measuring how much of the assetsa€™ value is obligated to cover each debt, or how much of the assetsa€™ value is claimed by each debt (FigureA 3.16, a€?Alicea€™s Common-Size Balance Sheet, December 31, 2009a€?).
This common-size balance sheetcommon-size balance sheetA balance sheet that lists each asset, liability, and equity as a percentage of total assets.
Common-size statements allow you to look at the size of each item relative to a common denominator: total income on the income statement, total positive cash flow on the cash flow statement, or total assets on the balance sheet. For example, Alice has only two assets, and onea€”her cara€”provides 95 percent of her assetsa€™ value. Likewise, both her income and her positive cash flows come from only one source, her paycheck. Common-size statements put the details of the financial statements in clear relief relative to a common factor for each statement, but each financial statement is also related to the others.
For example, what happens in the income statement and cash flow statements is reflected on the balance sheet because the earnings and expenses and the other cash flows affect the asset values, and the values of debts, and thus the net worth.
There are many other possible scenarios and transactions, but you can begin to see that the balance sheet at the end of a period is changed from what it was at the beginning of the period by what happens during the period, and what happens during the period is shown on the income statement and the cash flow statement. The significance of these relationships becomes even more important when evaluating alternatives for financial decisions.
The financial ratiosfinancial ratiosRatios used to understand financial statement amounts relative to each other. These ratios all get a€?bettera€? or show improvement as they get bigger, with two exceptions: debt to assets and total debt. While you may have a pretty good a€?feela€? for your situation just by paying the bills and living your life, it so often helps to have the numbers in front of you. The ratios that involve net wortha€”return on net worth and total debta€”are negative for Alice, because she has negative net worth, as her debts are larger than her assets. Looking at the ratios, it is even more apparent how mucha€”and how subtlea€”a burden Alicea€™s debt is. Another useful way to compare financial statements is to look at how the situation has changed over time. Alicea€™s balance sheet is most telling about the changes in her life, especially her now positive net worth. Although income taxes and rent have increased as a percentage of income, living expenses have declined, showing real progress for Alice in raising her standard of living: it now costs her less of her income to sustain herself. Changes in the balance sheet show a much more diversified and therefore much less risky asset base. Finally, Alice can compare her ratios over time (FigureA 3.28, a€?Ratio Analysis Comparisona€?). Most immediately, her net worth is now positive, and so are the return on net worth and the total debt ratios.
By analyzing over time, you can spot trends that may be happening too slowly or too subtly for you to notice in daily living, but which may become significant over time.
On the cash flow statement, each cash flow is shown as a percentage of total positive cash flow. On the balance sheet, each asset, liability, and net worth is shown as a percentage of total assets.


Ratio analysis is a way of creating a context by comparing items from different statements. Comparisons made over time can demonstrate the effects of past decisions to better understand the significance of future decisions. Prepare common-size statements for your income statement, cash flow statement, and balance sheet.
If you increased your income and assets and reduced your expenses and debt, your personal wealth and liquidity would grow. Determine and visualize monthly payment, total interest, principal, payoff amount and balance. In this way, an REIT stock is similar to any other stock that represents ownership in an operating business. These REITs make loans secured by real estate, but they do not generally own or operate real estate.
Therefore, we add back the depreciation charge to net income in order to produce funds from operations (FFO). Mainly, notice in the example above that we never counted the $1 million spent to acquire the building (the capital expenditure).
In year 10, the book value of our building was only $500,000 because half of the original cost was depreciated. In the above example, we see the building generates $100,000 in operating income ($200,000 in revenues minus $100,000 in operating expenses).
You want to see if the REIT has a unique strategy for improving occupancy and raising its rents. Stable income that can exceed Treasury yields combines with price volatility to offer a total return potential that rivals small capitalization stocks. Each onea€”the income statement, cash flow statement, and balance sheeta€”conveys a different aspect of the financial picture; put together, the picture is pretty complete. This is the purpose of financial statement analysis: creating comparisons and contexts to gain a better understanding of the financial picture.
This compares items, showing their relative size and their relative significance (see FigureA 3.11, a€?Common Common-Size Statementsa€?).
Her income tax expense is a big use of her wages, but it is unavoidable or nondiscretionary. Repayments and interest together are 30 percent of Alicea€™s casha€”as much as she pays for rent and food. The relative size of the items helps you spot anything that seems disproportionately large or small.
Because her positive net earnings and positive net cash flows depend on this one source, she is exposed to risk, which she could decrease by diversifying her sources of income.
Each is a piece of a larger picture, and as important as it is to see each piece, it is also important to see that larger picture. So, as shown in the figure, the income statement and cash flow information, related to each other, also relate the balance sheet at the end of the period to the balance sheet at the beginning of the period (FigureA 3.18, a€?Relationships Among Financial Statementsa€?). When you understand how the statements are related, you can use that understanding to project the effects of your choices on different aspects of your financial reality and see the consequences of your decisions. Any ratio shows the relative size of the two items compared, just as a fraction compares the numerator to the denominator or a percentage compares a part to the whole. For example, net income margin will always be less than one because net income will always be less than total income (net income = total income a?’ expenses). For example, the interest coverage ratio should be greater than one, because you should have more income to cover interest expenses than you have interest expenses, and the more you have, the better. Here is Alicea€™s ratio analysis for 2009 (FigureA 3.21, a€?Alicea€™s Ratio Analysis, 2009a€?). She can see how much larger her debt is than her assets by looking at her debt to assets ratio. In addition to giving her negative net worth, it keeps her from increasing her assets and creating positive net wortha€”and potentially more incomea€”by obligating her to use up her cash flows.
Her debt does not keep her from living her life, but it does limit her choices, which in turn restricts her decisions and future possibilities.
Comparisons over time provide insights into the effects of past financial decisions and changes in circumstance. For the sake of simplicity, this example assumes that neither inflation nor deflation have significantly affected currency values during this period. Her income tax withholding and deductions have also increased, but she still has higher disposable income (take-home pay). Operating cash flows, like net income, have almost doubleda€”due primarily to eliminating the student loan interest payment. Interest expense has decreased substantially as a portion of income, resulting in a net income or personal profit that is not only larger, but is larger relative to income.
Although her investing activities now represent a significant use of cash, her need to use cash in financing activitiesa€”debt repaymenta€”is so much less that her net cash flow has increased substantially. Although almost half of Alicea€™s assets are restricted for a specific purpose, such as her 401k and Individual Retirement Account (IRA) accounts, she still has significantly more liquidity and more liquid assets.
As her debt has become less significant, her ability to afford it has improved (to pay for its interest and repayment). You would want to keep a closer eye on your finances than Alice does, however, and review your situation at least every year. Financial statement analysis puts the financial statement information in context and so in sharper focus. Farrell focuses on three ratios: savings to income, debt to income, and savings rate to income. In My Notes or in your personal financial journal, outline a general plan for how you would use or allocate your growing wealth to further reduce your expenses and debt, to acquire more assets or improve your standard of living, and to further increase your real or potential income. We had taken this picture on the net that we consider would be probably the most representative pics for tattoo ideas crosses. We took this picture from the net that we think would be one of the most representative pictures for cute school hairstyles for short hair. We took this image on the net we think would be one of the most representative pics for abdominal tattoos for girls. But an REIT has two unique features: its primary business is managing groups of income-producing properties and it must distribute most of its profits as dividends.
A regular corporation makes a profit and pays taxes on its entire profit, and then decides how to allocate its after-tax profits between dividends and reinvestment; an REIT simply distributes all or almost all of its profits and gets to skip the taxation. Our income statement deducts $190,000 of expenses from $200,000 in revenues, but $50,000 of the expense is a depreciation charge. The idea is that depreciation unfairly reduces our net income because our building probably didn't lose half its value over the last 10 years. So, book value and related ratios like price-to-book - often dubious in regard to general equities analysis - are pretty much useless for REITs.
Top-down starts with an economic perspective and bets on themes or sectors (for example, an aging demographic may favor drug companies).
For example, REIT stocks did quite well in 2001 and the first half of 2002 despite lackluster fundamentals, because money was flowing into the entire asset class. REITs typically seek growth through acquisitions, and further aim to realize economies of scale by assimilating inefficiently run properties. Analyzing an REIT requires understanding the accounting distortions caused by depreciation and paying careful attention to macroeconomic influences.


The three provide a summary of earning and expenses, of cash flows, and of assets and debts. On the income statement, each income and expense may be listed as a percentage of the total income.
This shows her how much of her income, proportionately, is used up for each expense (FigureA 3.12, a€?Alicea€™s Common-Size Income Statement, for the Year 2009a€?). For example, it is immediately obvious that Alicea€™s student loan dwarfs her assetsa€™ value, and creates her negative net worth. The common-size analysis is also useful for comparing the diversification of items on the financial statementa€”the diversification of incomes on the income statement, cash flows on the cash flow statement, and assets and liabilities on the balance sheet. Her asset value would be less exposed to risk if she had asset value from other assets, to diversify the value invested in her car. She could diversify by adding earned incomea€”taking on a second job, for examplea€”or by creating investment income. To make sound financial decisions, you need to be able to foresee the consequences of a decision, to understand how a decision may affect the different aspects of the bigger picture. The percentages on the common-size statements are ratios, although they only compare items within a financial statement. Some of the more common ratios (and questions) are presented in the following chart (FigureA 3.19, a€?Common Personal Financial Ratiosa€?).
The larger that ratio is and the fewer expenses that are taken away from the total income, the better. FigureA 3.20, a€?Results of Ratio Analysisa€? suggests what to look for in the results of your ratio analyses. Although she has a lot of debt (relative to assets and to net worth), she can earn enough income to cover its cost or interest expense, as shown by the interest coverage ratio. That insight can guide you in making future financial decisions, particularly in foreseeing the potential costs or benefits of a choice.
She has paid off her student loan and has begun to save for retirement and perhaps a down payment on a house.
Many of her living expenses have remained consistent; rent and entertainment have increased.
The improved cash flow allowed her to make a down payment on a new car, invest in her 401k, make the payments on her car loan, and still increase her net cash flow by a factor of ten.
She has begun saving for retirement and has more liquidity, distributed in her checking, savings, and money market accounts. The cash that used to have to go toward supporting debt obligations now goes toward building an asset base, some of which (the 401k) may provide income in the future.
Debt has fallen from ten times the assetsa€™ value to one-tenth of it, creating some ownership for Alice. Where, how, and why might these ratios appear on the chart of Common Personal Financial Ratios in this chapter?
They are finance companies that use several hedging instruments to manage their interest rate exposure.
Equity REITs tend to specialize in owning certain building types such as apartments, regional malls, office buildings or lodging facilities. Counting capital expenditures gives a figure known as adjusted FFO, but there is no universal consensus regarding its calculation. A rise in interest rates usually signifies an improving economy, which is good for REITs as people are spending and businesses are renting more space.
Economies of scale would be realized by a reduction in operating expenses as a percentage of revenue. This shows the contribution of each kind of income to the total, and thus the diversification of income. It is also valuable in framing financial decisions, pointing out which expenses have the largest impact on income and thus on the resources for making financial decisions. In order to create investment income, however, she needs to have a surplus of liquidity, or cash, to invest.
Cash may be received when an asset is sold, so a decrease to assets may create positive cash flow. If your debt to assets ratio is greater than one, then debt is greater than assets, and you are bankrupt.
Interest expense on her car loan has increased, but since she has paid off her student loan, that interest expense has been eliminated, so her total interest expense has decreased. Since her net income margin (and income) has grown, the only reason her return on asset ratio has decreased is because her assets have grown even faster than her income. Some are diversified and some are specialized, meaning they defy classification - such as, for example, an REIT that owns golf courses. Each year we will deduct $50,000 in depreciation expense ($50,000 per year x 20 years = $1 million). Rising interest rates tend to be good for apartment REITs as people prefer to remain renters rather than purchase new homes. In the current low interest rate environment, an REIT that uses only floating-rate debt will be hurt if interest rates rise. It shows the burden of each expense on total income or how much income is needed to support each expense. If Alice wanted more discretionary income to make more or different choices, she can easily see that reducing rent expense would have the most impact on freeing up some of her wages for another use.
Alice has run head first into Adam Smitha€™s a€?great difficultya€?[12] (that it takes some money to make money; see ChapterA 2, Basic Ideas of Finance). Cash may be received when money is borrowed, so an increase in liabilities may create a positive cash flow. For example, you can see how much debt you have just by looking at your total liabilities, but how can you tell if you can afford the debt you have? If the total debt ratio is greater than one, then debt is greater than net worth, and you a€?owna€? less of your assetsa€™ value than your creditors do.
In fact, her debt repayments dona€™t leave her with much free cash flow; that is, cash flow not used up on living expenses or debts.
Overall, her net income, or personal profit, what she clears after covering her living expenses, has almost doubled. On the other hand, REITs can often take advantage of lower interest rates by reducing their interest expenses and thereby increasing their profitability.
That depends on the income you have to meet your interest and repayment obligations, or the assets you could use (sell) to meet those obligations. If you seek income, you would consider them along with high-yield bond funds and dividend paying stocks. Ratio analysisratio analysisA way of comparing amounts by creating ratios or fractions that compare the amount in the numerator to the amount in the denominator. The final step is to divide NAV into common shares to get NAV per share, which is an estimate of intrinsic value.



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