Posts Tagged ‘Real’

Asset Retirement Obligation: Definition and Examples

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Annualized Income Definition, Formula, Example

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What Is Asset Protection?

Asset protection is the adoption of strategies to guard one’s wealth. Asset protection is a component of financial planning intended to protect one’s assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets while operating within the bounds of debtor-creditor law.

Key Takeaways

  • Asset protection refers to strategies used to guard one’s wealth from taxation, seizure, or other losses.
  • Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.
  • Jointly-held property under the coverage of tenants by entirety can work as a form of asset protection.

Understanding Asset Protection

Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.

Experts advise that effective asset protection begins before a claim or liability occurs since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing, and family limited partnerships (FLP).

If a debtor has few assets, bankruptcy may be considered the more favorable route compared to establishing a plan for asset protection. If significant assets are involved, however, proactive asset protection is typically advised.

Certain assets, such as retirement plans, are exempt from creditors under United States federal bankruptcy and ERISA (the Employee Retirement Income Security Act of 1974) laws. In addition, many states allow exemptions for a specified amount of home equity in a primary residence (homestead) and other personal property such as clothing.

Asset Protection and Real Estate

Jointly-held property under the coverage of tenants by entirety can work as a form of asset protection. Married couples who hold mutual interest in property under tenants by entirety share a claim to a whole piece of property and not subdivisions of it.

The combined ownership of the property means that creditors who have liens and other claims against one spouse cannot attach the property for their debt reclamation efforts. If a creditor has claims against both spouses, the tenants by entirety stipulations would not protect the asset from being pursued by that creditor.

Some attempts at asset protection include putting the property or financial resource in the name of a family member or other trusted associate. For example, an heir might be gifted ownership of real estate or other property while the actual owner continues to reside in the property or make use of it. This could complicate efforts to seize property as actual ownership must be determined. Financial accounts may also be domiciled in offshore banks in order to legally avoid paying taxes against those funds.

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After-Tax Real Rate of Return Definition and How to Calculate It

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After-Tax Real Rate of Return Definition and How to Calculate It

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What Is the After-Tax Real Rate of Return?

The after-tax real rate of return is the actual financial benefit of an investment after accounting for the effects of inflation and taxes. It is a more accurate measure of an investor’s net earnings after income taxes have been paid and the rate of inflation has been adjusted for. Both of these factors must be accounted for because they impact the gains an investor receives. This can be contrasted with the gross rate of return and the nominal rate of return of an investment.

Key Takeaways

  • The after-tax real rate of return takes into consideration inflation and taxes to determine the true profit or loss of an investment.
  • The opposite of the after-tax real rate of return is the nominal rate of return, which only looks at gross returns.
  • Tax-advantaged investments, such as Roth IRAs and municipal bonds, will see less of a discrepancy between nominal rates of return and after-tax rates of return.

Understanding the After-Tax Real Rate of Return

Over the course of a year, an investor might earn a nominal rate of return of 12% on his stock investment, but the real rate of return, the money he gets to put in his pocket at the end of the day, will be less than 12%. Inflation might have been 3% for the year, knocking his real rate of return down to 9%. And since he sold his stock at a profit, he will have to pay taxes on those profits, taking another, say 2%, off his return, for an after-tax real rate of return of 7%.

The commission he paid to buy and sell the stock also diminishes his return. Thus, in order to truly grow their nest eggs over time, investors must focus on the after-tax real rate of return, not the nominal return.

The after-tax real rate of return is a more accurate measure of investment earnings and usually differs significantly from an investment’s nominal (gross) rate of return, or its return before fees, inflation, and taxes. However, investments in tax-advantaged securities, such as municipal bonds and inflation-protected securities, such as Treasury inflation protected securities (TIPS), as well as investments held in tax-advantaged accounts, such as Roth IRAs, will show less discrepancy between nominal returns and after-tax real rates of return.

Tip

The difference between the nominal return and the after-tax real rate of return isn’t likely to be as great on tax-advantaged accounts like Roth IRAs as it is on other investments.

Example of the After-Tax Real Rate of Return

Let’s be more specific about how the after-tax real rate of return is determined. The return is calculated first of all by determining the after-tax return before inflation, which is calculated as Nominal Return x (1 – tax rate). For example, consider an investor whose nominal return on his equity investment is 17% and his applicable tax rate is 15%. His after-tax return is, therefore:
0.17 × ( 1 0.15 ) = 0.1445 = 14.45 % 0.17 \times (1 – 0.15) = 0.1445 = 14.45\%
0.17×(10.15)=0.1445=14.45%

Let’s assume that the inflation rate during this period is 2.5%. To calculate the real rate of return after tax, divide 1 plus the after-tax return by 1 plus the inflation rate, then subtract 1. Dividing by inflation reflects the fact that a dollar in hand today is worth more than a dollar in hand tomorrow. In other words, future dollars have less purchasing power than today’s dollars.

Following our example, the after-tax real rate of return is:


( 1 + 0.1445 ) ( 1 + 0.025 ) 1 = 1.1166 1 = 0.1166 = 11.66 % \frac{(1 + 0.1445)}{(1 + 0.025)} – 1 = 1.1166 – 1 = 0.1166 = 11.66\%
(1+0.025)(1+0.1445)1=1.11661=0.1166=11.66%

That figure is quite a bit lower than the 17% gross return received on the investment. As long as the real rate of return after taxes is positive, however, an investor will be ahead of inflation. If it’s negative, the return will not be sufficient to sustain an investor’s standard of living in the future.

What Is the Difference Between the After-Tax Real Rate of Return and the Nominal Rate of Return?

The after-tax real rate of return is figured after accounting for fees, inflation, and tax rates. The nominal return is simply the gross rate of return before considering any outside factors that impact an investment’s actual performance.

Is the After-Tax Real Rate of Return Better Than the Nominal Rate of Return?

Your after-tax real rate of return will give you the actual benefit of the investment and whether it is sufficient to sustain your standard of living in the future, because it takes into account your fees, tax rate, and inflation.

Both figures are useful tools to analyze an investment’s performance. If you are comparing two investments, it would be important to use the same figure for both.

My Nominal Rate of Return Is 12%, Inflation is 8.5%, and My Applicable Tax Rate Is 15%. What Is My After-Tax Real Rate of Return?

Your after-tax real rate of return is calculated by, first, figuring your after-tax pre-inflation rate of return, which is calculated as Nominal Return x (1 – tax rate). That would be 0.12 x (1 – 0.15) = .102 = 10.2%

To calculate the after-tax real rate of return, divide 1 plus the figure above by 1 plus the inflation rate. That would be [(1 + .102) / (1 + .085) – 1 ] = 1.0157 – 1 = .0157 = 1.57% after-tax real rate of return. As you can see, the high inflation rate has a substantial impact on the after-tax real rate of return for your investment.

The Bottom Line

When you are assessing the value of your investments, it’s important to look at not just your nominal rate of return but also the after-tax real rate of return, which takes into account the taxes you’ll owe and inflation’s effect. The after-tax real rate of return can tell you if your nest egg investments will allow you to maintain your standard of living in the future.

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Average Daily Rate (ADR): Definition, Calculation, Examples

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Average Daily Rate (ADR): Definition, Calculation, Examples

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What Is the Average Daily Rate (ADR)?

The average daily rate (ADR) is a metric widely used in the hospitality industry to indicate the average revenue earned for an occupied room on a given day. The average daily rate is one of the key performance indicators (KPI) of the industry.

Another KPI metric is the occupancy rate, which when combined with the ADR, comprises revenue per available room (RevPAR), all of which are used to measure the operating performance of a lodging unit such as a hotel or motel.

Key Takeaways

  • The average daily rate (ADR) measures the average rental revenue earned for an occupied room per day.
  • The operating performance of a hotel or other lodging business can be determined by using the ADR.
  • Multiplying the ADR by the occupancy rate equals the revenue per available room.
  • Hotels or motels can increase the ADR through price management and promotions.

Understanding the Average Daily Rate (ADR)

The average daily rate (ADR) shows how much revenue is made per room on average. The higher the ADR, the better. A rising ADR suggests that a hotel is increasing the money it’s making from renting out rooms. To increase the ADR, hotels should look into ways to boost price per room.

Hotel operators seek to increase ADR by focusing on pricing strategies. This includes upselling, cross-sale promotions, and complimentary offers such as free shuttle service to the local airport. The overall economy is a big factor in setting prices, with hotels and motels seeking to adjust room rates to match current demand.

To determine the operating performance of a lodging, the ADR can be measured against a hotel’s historical ADR to look for trends, such as seasonal impact or how certain promotions performed. It can also be used as a measure of relative performance since the metric can be compared to other hotels that have similar characteristics, such as size, clientele, and location. This helps to accurately price room rentals.

Calculating the Average Daily Rate (ADR)

The average daily rate is calculated by taking the average revenue earned from rooms and dividing it by the number of rooms sold. It excludes complimentary rooms and rooms occupied by staff.


Average Daily Rate = Rooms Revenue Earned Number of Rooms Sold \text{Average Daily Rate} = \frac{\text{Rooms Revenue Earned}}{\text{Number of Rooms Sold}}
Average Daily Rate=Number of Rooms SoldRooms Revenue Earned

Example of the Average Daily Rate (ADR)

If a hotel has $50,000 in room revenue and 500 rooms sold, the ADR would be $100 ($50,000/500). Rooms used for in-house use, such as those set aside for hotel employees and complimentary ones, are excluded from the calculation.

Real World Example

Consider Marriott International (MAR), a major publicly traded hotelier that reports ADR along with occupancy rate and RevPAR. For 2019, Marriott’s ADR increased by 2.1% from 2018 to $202.75 in North America. The occupancy rate was fairly static at 75.8%. Taking the ADR and multiplying it by the occupancy rate yields the RevPAR. In Marriott’s case, $202.75 times 75.8% equates to a RevPAR of $153.68, which was up 2.19% from 2018.

The Difference Between the Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR)

The average daily rate (ADR) is needed to calculate the revenue per available room (RevPAR). The average daily rate tells a lodging company how much they make per room on average in a given day. Meanwhile, RevPAR measures a lodging’s ability to fill its available rooms at the average rate. If the occupancy rate is not at 100% and the RevPAR is below the ADR, a hotel operator knows that it can probably reduce the average price per room to help increase occupancy.

Limitations of Using the Average Daily Rate (ADR)

The ADR does not tell the complete story about a hotel’s revenue. For instance, it does not include the charges a lodging company may charge if a guest does not show up. The figure also does not subtract items such as commissions and rebates offered to customers if there is a problem. A property’s ADR may increase as a result of price increases, however, this provides limited information in isolation. Occupancy could have fallen, leaving overall revenue lower.

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Absorption Rate: What Is the Absorption Rate in Real Estate? How to Measure

Written by admin. Posted in A, Financial Terms Dictionary

What Is the Absorption Rate in Real Estate? How to Measure

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What Is Absorption Rate?

Absorption rate most commonly refers to a metric used in the real estate market to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the allotted time period by the total number of available homes. This equation can also be reversed to identify the amount of time it would take for the supply to be sold.

Absorption rate is also a key part of the accounting industry. In this context, absorption rate refers to the way in which businesses calculate their overhead costs.

Key Takeaways

  • The absorption rate is commonly used in the real estate market to determine how many homes are sold in a market at a particular time.
  • The equation can also be used to figure out how long it would take to sell the supply of homes on the market.
  • Realtors, appraisers, and lending institutions use absorption rates to understand market conditions and adjust terms accordingly.
  • An absorption rate above 20% typically signals a seller’s market and an absorption rate below 15% is an indicator of a buyer’s market.
  • Absorption rates are also used to determine and allocate overhead costs in accounting.

Understanding Absorption Rate

Absorption rate provides insight into how quickly or slowly houses are selling in the real estate market. Absorption rate does not take into account additional homes that enter the market at various times. While an absorption rate calculation can be projected, it’s most commonly used based on current available data and actual inventory.

A high absorption rate may indicate that the supply of available homes will shrink rapidly. A homeowner is typically able to sell their property faster during periods of high absorption. However, the time period associated with an absorption rate calculation is important to consider.

Traditionally, an absorption rate above 20% signaled a seller’s market in which homes are sold quickly. An absorption rate below 15% is an indicator of a buyer’s market in which homes are not being sold as fast.

Real estate professionals, such as brokers, use the absorption rate in pricing homes. During periods of higher absorption rates, homes are often priced higher.

Influence in the Real Estate Market

In market conditions with low absorption rates, a real estate agent may be forced to reduce a listing price to entice a sale. Alternatively, the agent can increase the price without sacrificing demand for the home if the market has a high absorption rate. The absorption rate is also important for buyers and sellers to follow as they make decisions on the timing of purchases and sales.

The absorption rate is also a signal for developers to start building new homes, though developers often use long lead times to forecast periods of higher absorption. During market conditions with a high absorption rate, demand may be high enough to warrant the further development of properties. Meanwhile, periods with lower absorption rates indicate a cooling period for construction.

Appraisers use the absorption rate to determine the value of a property. Some procedures require an addendum showing that absorption rates were considered in appraisal calculations. In general, appraisers are responsible for analyzing market conditions and maintaining an awareness of the absorption rates for all types of appraisal values.

Most appraisers include this data metric in the neighborhood section of the appraisal forms. The current valuation of a home would be reduced during periods of decreased absorption rates and increased when absorption rates are high.

Lenders and banking institutions will also consider market conditions when evaluating loan and credit terms. During periods of low absorption, banks may feel tempted to entice clients to borrow money with more favorable loan terms. Alternatively, lenders can be more selective during high absorption periods as they are more likely to have a broader portfolio of prospective borrowers.

Example of the Absorption Rate

Suppose a city has 1,000 homes currently on the market to be sold. If buyers purchase 100 homes per month, the absorption rate is 10% (100 homes sold per month divided by 1,000 homes available for sale). This also indicates that the supply of homes will be exhausted in 10 months (1,000 homes divided by 100 homes sold/month).

Want to know if it’s time to sell your home? Look up the number of homes sold in your area from the MLS website and use the formula above to determine how long it will take to sell your property.

Absorption Rate in Accounting

Absorption rate is also used in an entirely different manner in accounting.

In accounting, absorption rate (or the rate of absorption) is the rate at which companies calculate and allocate their overhead expenses. These are the costs associated with providing goods and services to their customers, though these expenses aren’t directly traceable to end products. As such, it’s also often called an overhead absorption rate.

Companies often have to use estimates to determine their overhead costs. That’s because they don’t know what the actual costs are until they come in. In order to determine their overhead, companies divide the total budgeted overhead costs divided by the total budgeted production base. This requires an adjustment at the end of the accounting period to make up for any difference between the predicted and actual costs.

Alternatively, a company may know its actual overhead costs but not know how to trace those costs to final products or services. To overcome this hurdle, companies use estimated cost drivers to guess what non-financial measures cause changes in financial measures.

This can be problematic, especially when companies use very conservative estimates to predict their costs. Doing so may throw off their balance sheets because the actual costs may be higher at the end of the reporting period or if costs fluctuate. However, this practice has the benefit of making sure all costs including estimated amounts and estimated allocations are included when evaluating their products.

What Does Absorption Rate Mean?

Absorption rate is most often associated with real estate and the rate at which houses are being bought. Absorption rate (and absorption costing) are also used in cost accounting to assign overhead costs.

What Does a High Absorption Rate Mean?

A high absorption rate means a higher proportion of houses are being purchased. Otherwise, a low absorption rate means a lower proportion of houses are being purchased. This information is used by relators, financial institutions, and appraisers as the rate at which houses are being bought drives a home’s value and price.

What Is the Formula for Absorption Rate in Real Estate?

To find out the absorption rate in real estate, divide the total number of homes sold in a specific period of time by the total number of homes available in that market.

What Is a 6-Month Absorption Rate?

Absorption rates indicate how long it takes to sell homes in a given market. A six-month absorption rate indicates a balanced market, so buyers and sellers equally benefit during this environment.

How Do You Calculate a Monthly Absorption Rate?

In order to determine a monthly absorption rate, take the total number of homes sold in the market and divide that by 12. Then, divide this monthly average number of homes sold by the total number of homes available for sale.

The Bottom Line

The absorption rate is a very important metric used in the real estate and accounting.

Realtors use it to determine how many homes are sold in a particular area at any given time. These professionals can also use the rate to determine the kind of market they are facing, whether that’s a buyer’s, seller’s, or a balanced market. This rate is also important for the construction industry, as it indicates when developers should start buying.

Equally important, absorption rate is used in the accounting field—notably for companies to estimate their overhead. Absorption costing entails estimating overhead costs, determining overhead cost drivers, and having products absorb these untraceable costs.

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