This article aims to educate the reader on the 5 fundamentals of professional property investing specifically focused on the city of Hull in the East Riding of Yorkshire
The topics covered
Return on Investment
When investing in property you can benefit by borrowing from the bank using the power of leverage. Typically, a buy to let mortgage requires you to put a 25% deposit down and the bank will provide the remaining 75% of the purchase price of the property. Where else can you get them to do that? Banks will lend you money to buy property. They are less likely to lend you money to grow your business and they definitely will not lend you money to buy stocks and shares. They understand that property is still a safe secure asset despite what the media says. To show you the power of leverage lets show you an illustration. You have 100,000 to spend on an investment property. The following scenarios show how you can spend that money
Scenario 1 – Buying 1 property worth 100K with all your cash
Buying 1 house without a mortgage. Put down 100K and buy the property outright. The following year inflation raises the price of that property by 5%. The property is now worth 105K. You now have a property worth 105K and an equity of 5K in that property.
Scenario 2 – Buying 4 properties each worth 100K with a mortgage on each
You put a 25K deposit down on each property and a mortgage for the remaining 75K, spending all your 100K across 4 properties not just 1 property this time. The following year inflation raises the prices of that property by 5%, the same as scenario 1. Each property is now worth 105K. However, now you have 4 of them so benefit from the 5K equity in each one. So you now have 20K equity instead of the 5K in scenario 1. You have still spent the same amount of money but have benefited from leverage of money from the Bank.
2-3 bedroom properties in Hull can be bought for between 40-100K. They offer a superb opportunity to leverage your cash
Return on Investment
The return on investment is defined below
Return on investment = Gain of Investment – Cost of Investment / Cost of Investment
In basic terms, how hard is your money working for you. You can choose to invest in a new business venture, shares on the stock market or property. Each wealth creation channel has its own return on investment together with its associated risk. As a professional investor you have to weigh up your appetite for risk and potential return on your investment. Lets revisit the 2 leverage scenarios and examine the return on investment
Scenario 1 – Buying 1 property worth 100K with all your cash
Return on investment (ROI) is 5% e.g. 5K/100K
Scenario 2 – Buying 4 properties each worth 100K with a mortgage
Return on investment (ROI) is 20% e.g. 20K/100K Hull is a great place to start your professional property investing career because of the great return on investment. The reason is that property prices in Hull are among some of the cheapest in the UK. So, the cost of your investment is lower. This means not only can your money go further ie. you could buy more properties but each of those properties will go up in price and if you’ve leveraged your investments with mortgages your return on investment will be even greater.
Hull gives a better return on investment than more expensive cities in the UK because property prices are lower
Of course, an investment property only becomes an asset if you are able to rent it out. If you can’t, that asset very quickly becomes a liability. A quick reminder on the definition of an asset and liability
Asset = Puts money in your pocket
Liability = Takes money out of your pocket
So, to ensure your investment property remains an asset you need to be confident that it is in an area of high rental demand. Hull is a hidden gem of a city. It is the gateway to Europe via ABP ports and P&O Ferries and therefore has a thriving export/import industry. Siemens are going to locate a large wind turbine manufacturing plant there cementing it’s status as a centre of excellence for Renewable energy technology. It is well connected by the M62 and has a broad manufacturing base. The Deep, the UKs only submarium has established itself as a tourist destination too. The University of Hull continues to grow and has a healthy student population around 25,000. However, due to the relatively low salaries in the region, affordability to buy a house is low. This consequently has led to a high demand for rental property.
The following post codes in Hull are great rental areas. HU5 is close to the University for students. HU7 and HU9 are great for families.
If your aim is to own 10, 20 or 30 properties and supply the deposits for each one you would soon run out of your own cash so how do the Professionals do it? Well, the answer is Other Peoples Money (OPM). They buy their properties at the right price. Money in property is made when you buy the property NOT when you sell it. Buying at the right price i.e. below market value or BMV as it’s called enables you to refinance with the mortgage lender at the Open Market Value and pull out most of your deposit cash. This enables you to recycle your pot of cash to purchase another property. However, in this market, the Council of Mortgage Lenders have imposed a 6 month rule that prevents you remortgaging unless the property has been held for at least 6 months. If you can demonstrate added value then you have a better chance of achieving the valuation you desire. On average Property Prices double every 11 years. This means a 100K property is worth 200K in 11 years time. When you sell this property you pay off the original 100K mortgage and then have approximately 100K profit. This means if you bought 2 properties you can sell one and pay off the mortgage on the other and still have 1 cash flowing property with no mortgage on it. Using this principle it can be scaled up to any number of properties you wish to buy. Getting a mortgage can be difficult in this current economic climate but not impossible. The money hasn’t disappeared. It is just in different places. The trick is to find the people with the cash.
Buy for cash
Some properties in need of refurbishment in Hull can be bought for as little as 20K. This means you need to buy them with cash as mortgage providers generally do not lend below 40K. It also means you can move quickly and not have to involve Mortgage Lenders and Valuers in the purchase. Once you have refurbished the property you can then get a surveyor to value the property with a view to placing a mortgage on it and get most if not all of your cash returned.
You can help people with cash earn more than they are getting in the bank by offering them a higher interest rate for borrowing their money to fund a deposit. You can then return their money after refinancing.
If you can’t get a mortgage then find someone else who can and offer to share the cash flow from a property. Get a lawyer to draw up an agreement between you and the host. Because property prices are relatively low in Hull, there is more chance of finding investors who are willing to lend you 10-15K for a deposit. Risks are reduced as the amounts on loan are less. Once you’ve done 1 deal with an investor and made them more money they will be happy to do another deal with you.
Hull property prices are low which leads to lower risk for Cash Investors when funding a deal.
With any of your investments we advise stress testing your investments at higher interest rates. Whilst we enjoy historically low interest rates it’s tempting to buy lots of property deals. However, interest rates have only 1 way to go and that is up. Test that your investment still produces cash flows at higher interest rates so it remains an asset and not a liability.
Test your investments at higher interest rates. Hull investment properties still positively cash flow at 8-9% interest rates at current rental values.
With any investment it is vital you know your exit strategies. With an aeroplane knowing where the exits are is vital in case of an emergency. Similarly, with investing you need to know where your exits are for getting out of the investment deal in an emergency.
Selling your investment
If for any reason you need to come out of an investment you can sell a property. The properties that will be easiest to sell will be the most popular type in that area. If you own an expensive, executive detached house in a desirable area the number of buyers is reduced and constrained to residential buyers. However, if you have a cheaper, investment property you can sell to both investors or residential buyers. This is important when considering your investment.
For most married couples, the cornerstone of estate planning is the transfer of their biggest asset: their home. So it’s important that couples be aware of the many roads this process can take.
Married couples who own real property together have many options when deciding how to share the asset. Traditional approaches include joint tenancy, tenancy in common, tenancy by the entirety and community property. All have advantages and disadvantages.
Joint tenancy is a form of concurrent ownership where each owner has an equal interest in the property. It is available to unmarried couples as well, though I will focus on married couples in this article.
Arguably, the most useful feature of a joint tenancy arrangement is the “right of survivorship.” When the first spouse dies, his or her stake in the property passes directly to the surviving spouse, without the need for probate administration. During probate, a court determines the validity of the decedent’s estate documents and helps to settle any claims against the estate before the property is distributed to the heirs. Avoiding this process can save the beneficiary of an estate substantial costs and time. By foregoing probate, the surviving spouse also gains additional privacy, since the probate process is a matter of public record.
Tenancy in common usually does not have the right of survivorship. However, it allows other customizations, and offers greater flexibility. As in joint tenancy, tenants in common do not have to be married; unlike in joint tenancy, tenants in common may hold unequal interests in the property. Tenancy in common is not dissolved when one of the tenants dies, either. If John and Jane are tenants in common, each with a 50 percent interest in their property, John can bequeath his 50 percent to their son John Jr., and Jane’s interest will remain unaffected.
Tenancy by the entirety is available only to married couples, though Hawaii and Vermont offer options for domestic partners and those in civil unions, respectively. For legal purposes, it is as if the property is owned by a single entity (the couple) instead of two parties. Neither party can dissolve the tenancy without the other’s consent, except in cases of divorce or annulment. Like joint tenancy, tenancy by the entirety offers a right of survivorship, allowing the surviving spouse to avoid probate. It can also shield the property from creditors of one spouse only, though not from creditors to whom the couple is jointly in debt. Not all U.S. jurisdictions recognize tenancy by the entirety.
Community property laws exist in only nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, couples may enter into community property arrangements, but must do so by signing agreements or forming a trust. The validity of such arrangements is still untried on a federal level, though, and it is not clear whether the Internal Revenue Service will honor them for federal tax purposes.
Although the specifics of community property laws vary from state to state, the basic idea is the same. Like tenancy by the entirety, community property is an option only for married couples. Generally, any property acquired by either spouse during the marriage becomes community property, unless it is a gift or an inheritance. Property owned prior to the marriage is also excluded. Spouses may enter into agreements, such as prenuptial or postnuptial arrangements, that preclude otherwise eligible property from being subject to community property laws, or which convert separate property to community property.
Community property has no right of survivorship. Each owner can dispose of his or her interest individually. As a result, without additional estate planning, most transfers will be subject to probate, even if one spouse simply leaves the entirety of their interest to the other. Creditors can also generally reach the deceased spouse’s interest through normal estate administration rules. Community property offers the advantage of allowing a full step-up in basis upon the death of either spouse, which typically allows the survivor to pay taxes on a smaller capital gain should the property be sold.
This is illustrated in the example below, contrasting joint tenancy with community property:
John and Jane purchased a home for $1 million, and it is now worth $2.5 million. Jane has died and John inherited the home. If they owned the property as joint tenants with right of survivorship, John’s basis in the property is $1.75 million. This is because only Jane’s half of the interest is stepped up to the current market value ($1.25 million). The cost basis of John’s half of the interest continues to be based on the $1 million purchase price ($500,000). In contrast, both John’s and Jane’s interests would be stepped up to the current market value of the home if they had owned it as community property, and John would inherit the home with a cost basis of $2.5 million. This could mean a significant reduction in taxable capital gains if John were to sell the property after Jane’s death, even allowing for a potential reduction due to the home-sale exclusion rule. This would also be the case for other property, such as investment assets, owned by the couple.
All of these arrangements offer benefits and drawbacks, which may weigh differently depending on a couple’s situation. Joint tenancy and tenancy by the entirety allow the surviving spouse to avoid probate, but do not offer community property’s generous terms for a full step-up in basis in the property. Community property risks giving creditors access to the decedent’s portion of the property, but also allows more flexibility in the way that property is distributed. Tenancy in common offers the option of unequal interests in the property, but does not have a right of survivorship.
In certain states, couples have yet another option that is relatively new: community property with right of survivorship. In several states, the law has been on the books for less than 15 years. California – the state that has arguably received the most attention on the topic – first implemented these ownership rights in 2001. Of the nine community property states, Arizona, California, Idaho, Nevada, Texas and Wisconsin currently offer the right of survivorship option. Laws also vary by state regarding which property is eligible to be titled as community property with right of survivorship. For example, only real property may be titled this way in Idaho.
The states that offer community property with right of survivorship seek to make it easier for couples that have relatively simple estates to transfer property to a surviving spouse. Before the advent of community property with right of survivorship, married couples had to draft special agreements or use trusts to convert joint property into community property. Community property with right of survivorship allows married couples to take advantage of the full step-up in basis while avoiding probate administration, all without the need for more complex estate planning.
Like any estate planning method, community property with right of survivorship is not a cure-all. For example, should bankruptcy be a concern, joint tenancy or (in some cases) tenancy by the entirety would leave the non-debtor’s property out of the bankruptcy proceedings, while property held as community property, with or without the right of survivorship, would move entirely to the bankruptcy trustee’s control until proceedings were complete. Couples should carefully examine their situations before deciding which arrangement is likely to carry the most benefits.
Though this option is not prevalent nationwide, financial advisors should be aware of both its benefits and its potential drawbacks. Even if a couple does not currently live in a community property state, they may have once lived in such a state, or they may move to one in the future. If a client lived and purchased real estate in a state that offered community property with right of survivorship, the property may continue to be characterized that way, even if the owners have since moved elsewhere.
When considering a commercial property investment it is wise to set some standard rules for the review so that you can compare opportunities that the various properties bring you.
Investment properties typically exist in the retail, office, and industrial property markets. We will not go into the other property types of tourism and leisure here in this article as they themselves take more comment and lengthy review.
Here is a useful list to consider with investment property.
Some Key Property Concerns
Rent: The levels of the existing rent are important to the investor or landlord but more important are the levels of rent in the future. It is a matter of what rent escalation the lease allows for and in what time frame. A good lease with a good rent review profile in a sound and well managed property will always attract property investors.
Outgoings: These are the property running costs. Importantly they should be in balance and in comparison to other properties of similar types in the same region. If the outgoings are out of balance to similar properties then you need to know why as any astute property buyer will ask about the outgoings. They know what are the averages of outgoings in the area and will not want to pay above the average unless there is a solid and sound reason to do so.
Supply and Demand: How much other property is coming into the market in the next few years? Will that property affect the property that you are looking at? Could this impact on the tenant profile or interest in your property? This equation or consideration is called supply and demand. It will impact on buyer and tenant interest in the region in which your property is located.
Location: Does the property give good exposure to passing traffic or customers and does it have good access for people and motor vehicles? Add to this the consideration and availability of car parking.
Design: Is the property user friendly and attractive? A good property investment usually looks good and is well maintained. This is to maintain interest in the property from the tenant and the customer perspective. If these people feel good about the property when they visit it or use it, then you are well on the way to good property performance. As part of this process you can conduct interviews with people as they use the property to see and identify any latent concerns. In the case of retail property this is highly recommended as retail property is strongly geared to the sentiment of customers.
Amenities: Are you providing everything that a modern business, tenant, or customer needs? Amenities are many things and it really depends on what the property is doing or serving. Most people that use the property expect ease of use and access to the amenities including toilets, car parks, common areas, etc. Retail property has a higher level of consideration in this category.
Services: Are your property services modern and performing well? This would include water, gas, roads, electricity, lighting, telephones etc.
Parking: Are customers and tenants well served with respect to the parking of vehicles? Ease of access to the property is critical and at a premium today. Motor vehicles are part of business and life for all people. If parking is not well catered for on the property then the interaction of the property with public transport is critical.
Tenant Covenants: This relates strongly to the leases and documents of occupation on the property. The word covenant relates to the clauses or lease terms. Every lease can be different so it pays to read all occupancy papers or leases. Are the leases and tenant profiles strong and attractive to future occupancy?
Tenancy Mix: Perhaps this is more critical in a retail property however it can have impact in an office property. Some landlords must be very careful as to the tenants that they select for a building. It is quite possible that a low profile and poorly selected tenant will detract from the customers that visit the building. Other tenants will also then become concerned and potentially have little interest in ongoing occupancy. This then says that not all tenants are good tenants for the property. Add to this another question of proximity and placement of tenants to each other. Are the tenancies well balanced to satisfy the customer demands? Can tenants that are located near to each other affect each others business through impact of customers, product, service, hours of trade, or staff?
Management: The strength and processes of a property management team will make or break a property. The property management processes will impact on so many things including rent, operating costs, tenant sentiment, and lease stability. For this reason ask the tenants about the property management experiences that they have seen over recent time. Any negative comments should be explored for hidden problems.
Lease Agreements: Are they landlord favorable and do they provide long term attractive and stable occupancy? What is the length of tenure or terms of all the leases and do they expire at the same time? Does this present an issue to the landlord as to property stability and exposure?
Transport Routes: All modes of transport to the property should be looked at. Make your assessment as to whether they are convenient and modern. Do they serve the tenants and the customers to the property and how is that done?
Source raw materials: In the case of industrial property the access to raw materials can be an issue for the tenant. What raw materials are needed by the business or tenant and can they get to them easily?
Power Supply: Industrial property will usually need a serious amount of power for machinery on the property. Access to that power is a decision factor for the tenant that occupies the premises. Ask the local power authority if 3 phase or high tension power is nearby or available.
Labor Availability: Business tenants need a labor source as part of their operation. This labor supply needs to be stable and convenient. This is why businesses are located near to transport corridors on the radial road points to a city or town. Is the labor market nearby and active? Can that labor supply reach the property easily? Public transport will enhance this situation.
Goods end market: If your tenant is to manufacture anything, they will need to move it to their customers. How close is the product buying market for that tenant and how will they get to it? Is the market for the tenants goods or services growing and strong?
Rent and Vacancies: These are always a concern in investment property and need monitoring. Shifts in population and zoning regulations regards property can quickly shift the attractiveness to occupy a property.
Pre-lease market: These are the newer properties that are coming on the market soon. They are usually keenly priced or rented and will impact on other existing property in the area. The property investor or developer in the newer property has one goal only and that is to fully lease the finished property as quickly as possible. Expect them to chase the tenants in your building.
Owner Occupiers: Investment property moves in cycles between renting and ownership. Many businesses will do either depending on what is moreattractive to them in the economic conditions prevailing.
Investors demand: The balance between the property market and the share market is interesting to monitor. Investors move into property when they need longer term investment stability. If the share market is volatile and unpredictable, then property investment moves to the front of the line and becomes the investment of choice. The only problem investors can have is in getting the finance from the banks when they need it. This movement between investment types says that you should monitor levels of return that are possible between shares and property.
Corporate Businesses: Major businesses like to off-load capital from balance sheets. This means a potential sale and lease back of property from time to time. This is also usually done when the property is in the last stages of use or need for the tenant. They may sell the property and take a lease for a term of years whilst they create the next level of property strategy. Always look for tenants and businesses that are in the stages of change or flux. Mergers, acquisitions, expansions, contractions, etc. all create pressures on the property that the tenant may occupy.
Separately owned property does not automatically become marital upon marriage, even when it is placed into joint names. If one party invested separate funds into a marital asset, if they can trace out or prove that investment, they may be entitled to a return of the asset or the amount invested plus appreciation. This is a substantial issue in many cases.
The goal of the tracing process is to link every asset to its primary source, which is either separate property or marital property. Harris v. Harris, 2004 Va. App. LEXIS 138 (2004). See also Mann v Mann, 22 VA. App 459; 470S.E. 2d 605, 1996, holding that the interest passively earned on the husband’s premarital assets are separate.
The Code of Virginia, §20-107.3(A)(1)(iv) defines “separate property” as “that part of any property classified as separate pursuant to subdivision A.3. Code of Virginia, §20-107.3(A)(3)(e) provides that “when marital property and separate property are commingled into newly acquired property resulting in the loss of identity of the contributing properties, the commingled property shall be deemed transmuted to marital property. However, to the extent the contributed property is retraceable by a preponderance of the evidence and was not a gift, the contributed property shall retain its original classification.” (emphasis added). Code of Virginia, §20-107.3(A)(3)(g) provides that section (e) of this section shall apply to jointly owned property. No presumption of gift shall arise under this section where (ii) newly acquired property is conveyed into joint ownership.
The increase in value of separate property during the marriage is separate property, unless marital property or the personal efforts of either party have contributed to such increases and then only to the extent of the increases in value attributable to such contributions. The personal efforts of either party must be significant and result in substantial appreciation of the separate property if any increase in value attributable thereto is to be considered marital property. See Code of Virginia, §20-107.3(A)(3)(a). All of the increases of the real estate in this case are attributable to market fluctuations.
Tracing involves a two-prong, burden shifting test. First, a party has to prove he invested separate property into the real estate, which he did. It is undisputed that all of the money used to purchase the real estate was his traceable separate property. Then the burden shifts to the Complainant to prove, by clear and convincing evidence, that the transmutation was a gift. (See Va. Code Ann. § 20-107.3(A)(3)(g)) and Turonis v Turonis, 2003 Va. App. LEXIS 130, (2003)). There is no presumption of a gift that arises from the fact that one party put the real estate in the parties’ joint names. There is no evidence of a gift in this case. (See also von Raab, 26 Va. App. at 248, 494 S.E.2d at 160 and Utsch v. Utsch, 38 Va. App. 450, 458, 565 S.E.2d 345, 349 (2002) (quoting Theismann, 22 Va. App. at 566, 471 S.E.2d at 813).If the party claiming a separate interest proves retraceability and the other party fails to prove transmutation of the property by gift, “the Code states that the contributed separate property ‘shall retain its original classification.'” (emphasis added) Hart v Hart, 27 Va. App. 46, 68, 497 S.E. 2d 496, 506 (1998). (quoting Code § 20-107.3(A)(3)(d), (e)) West v West, 2003 Va. App. LEXIS 512 (2030).
The second issue is the passive appreciation in the value of the jointly titled real estate. Pursuant both to Virginia Code Va. 20-107.3(A), and using the Brandenburg formula, which has never been held erroneous by the Virginia appellate courts, (See Turonis, Supra) All of the passive appreciation on a party’s separate investment in real estate is also separate property. ” This issue was addressed in Kelley v. Kelley, No. 0896-99-2, 2000 Va. App. LEXIS 576 (Ct. of Appeals Aug. 1, 2000) holding that the trial court erred in failing to recognize that passive appreciation on the husband’s separate investment to the real estate was also the husband’s separate property. (emphasis added0. This issue was also addressed in the case of Stark v. Rankins, 2001 Va. App. LEXIS 375 (2001), holding that “in pertinent part, Code § 20-107.3(A)(1) provides that “the increase in value of separate property during the marriage is separate property, unless marital property or the personal efforts of either party have contributed to such increases and then only to the extent of the increases in value attributable to such contributions.” Read as a whole, subsection (A) of the statute contains a “presumption that the increase in value of the separate property is separate.” (emphasis added) Martin v. Martin, 27 Va. App. 745, 753, 501 S.E.2d 450, 454 (1998). Moreover, we have held that the trial judge has a duty “to determine the extent to which [a spouse’s] separate property interest in the home increased in value during the… marriage.” Id. at 752, 501 S.E.2d at 453. There is a statutory presumption that the increase in value of the separate property is separate. Id.
By contrast, although the customary care, maintenance, and upkeep of a residential home may preserve the value of the property, it generally does not add value to the home or alter its character. Martin, Supra. The Court held that the Wife’s evidence that at some time during the twelve years of marriage she personally painted, wallpapered, and carpeted parts of the house does not prove a “significant” personal effort.” These activities constitute part of the customary maintenance and upkeep that homeowners typically perform in order to preserve the home’s value; they do not by their nature impart value to the home. (See also Biviano v. Kenny, 2002 Va. App. LEXIS 157 (2002)). The Code of Virginia, Section 20-107.3(A)(3)a) places the burden on the non-owning spouse to prove that “(i) contributions of marital property or personal effort were made and (ii) the separate property increased in value.” Hoffman v. Hoffman, 2004 Va. App. LEXIS 216 2004). In pertinent part, Code § 20-107.3(A)(1) provides that “the increase in value of separate property during the marriage is separate property, unless marital property or the personal efforts of either party have contributed to such increases and then only to the extent of the increases in value attributable to such contributions.” Read as a whole, subsection (A) of the statute contains a “presumption that the increase in value of the separate property is separate.”
Martin v Martin, 27 Va. App., 745, 753, 501 S.E. 2d 450, 454 (1998). Moreover, we have held that the trial judge has a duty “to determine the extent to which [a spouse’s] separate property interest in the home increased in value during the… marriage.” Id. at 752, 501 S.E.2d at 453. Stark v. Rankins, 2001 Va. App. LEXIS 375 (2001).
In the case of Hargrave v. Wienckowski, 2000 Va. Cir. LEXIS 208, the Court states that “traceable separate property that is commingled with marital property, whether to acquire new property or otherwise, is subject to being restored to the contributing party.” The Court analyzes the issue and finds that “parties are under no requirement to contribute their separate property, whether acquired before or during the marriage, to the marriage. If a party does so, he or she does so voluntarily and should be reimbursed for it unless the party intended to make a gift of such property to his or her spouse.” This holding is consistent with the purpose of the Virginia legislature in enacting the equitable distribution law which was to give courts power to compensate a spouse for his or her contribution to the acquisition of property obtained during the marriage. See Sawyer v. Sawyer, 1 Va. App. 75, 335 S.E.2d 277 (1985). For example, in Beck v. Beck, 2000 Va. App. LEXIS 658 (2000), the Court held that since the wife contributed 71.3% from her separate funds to acquire the property, she was entitled to 71.3% of the equity in the real estate.
Holden v Holden, 31 VA. App 24; 520 S.E. 2d 842, 1999 involved the same issue. The husband sold comic books for $17,000 to raise the down payment on real estate acquired during the marriage. He deposited the money into a joint account. The Court held that the $17,000 was his separate money. “Separate property does not become untraceable merely because it is mixed with marital property in the same asset. As long as the respective marital and separate contribution to the new asset can be identified, the court can compute the ratio and trace both interests. The Husband is not required to segregate the $17,000 from all other marital funds in order to claim a separate interest. (Citing Rahbaran, 26 Va. App. At 207, 494 S.E. 2d at 141). See Whitehead v Whitehead, 2001 Va. App. LEXIS 381, 2001, holding that the husband’s withdrawals from the parties’ joint account should have been viewed as his reclamation of separate property, to the extent of his contribution, rather than withdrawal of marital funds. The Husband had $9,100.00 in separate funds in the account. The Court held that to the extent the withdrawals equaled $9,100.00, they should have been viewed by the court as his reclamation of his separate property.
If tracing separate property is an issue in a case, records proving the separate ownership are very important. Records include bank accounts, HUDs, deeds, mortgage and payments. Property acquired during the marriage or jointly titled is presumed to be marital without proof of a separate investment or ownership. Of course, the easiest way to resolve this issue is a prenuptial agreement.
For several years now, people have been trying to call me to ask if it is still a good idea to invest in property in the United States? I have been buying properties in the United States for more than 20 years already.
Buying a real estate in the United States started in the late 80s, when I got myself involved in the loan debacle and savings. This was when the banking system in the southern states was failing and we even had to make transactions of the property buying and selling without any banking system, since there were virtually no banks around.
Now it’s as if there are bank crisis every 20 years in America. Prices significantly dropped, sometimes 95 cents on the dollar, when I was buying properties. We can even buy properties 5 cents on the dollar! There were even home units that we could buy for as low as $600 and a couple of thousand dollars per house.
The fact that the Americans are currently going through a major bank crisis, a lot of Australians are apprehensive to take advantage of the US market. Perhaps you don’t have to worry about this issue if you are not going to live in the United States.
In the late 80s, I did spend a lot of time with some Australians who were trying to save what’s left from their capital, the capital that they have invested in the U.S. And after 20 years, I’m doing it again – helping Australians who lost a lot of money, to get out of the United States and will still be able to keep the remaining capital that they have invested.
The American and Australian Culture Differences
Why do you think this happened? Why do some Australians invest in the United States and end up being disappointed? Even if we read about 15% returns – 25% returns. I will examine that fact for you in a little while. But before that, I’d like to go back to analyzing the differences between the way Australians do business from the way the Americans do business. Most of this is outlined in the book, written in the 1970’s called, “American and Australian Cultural Differences”.
In the book that Donald Trump wrote, “The Art of the Deal”, he simply mentioned there is no such thing as a win-win in business. It has always been ‘I win and you lose’. Here’s the first major difference, in Australia, people come first, then the money comes second. While in the United States, it is the other way around, big business and the big bucks comes first before the people. This doesn’t mean that Americans are bad and we are good, we simply have a different culture. Also, our governing laws lean that way.
Our Australian culture and mentality is reflected in our legal system, a system that is shared with both legal and equitable law. Once a judge sees a contract that he doesn’t like, he can overturn the contract since under the equitable law, which means fair play law. Unfortunately, this is not how it works in the American playing field. The real deal is always on the piece of paper.
On the lighter side of playing in the US market is, we both can sit down and talk work out a contract. I can even trade a portion of a property in the US for only $7. As long as we both sign a one page General Warranty Deed or Warranty Deed, that property is bought for $7. And it costs that much because that is what cost me to record this at the local court house and make the purchase. That is the deal whether we had a creative lease option or an installment contract. Unfortunately, if you get into some bad terms, you have no government body to come in and looks after you. The deal is, the dollar comes first.
So, if ever you are in a country where the real estate has an “I win and you lose” kind of rule, be careful. They do have different set of rules.
Here are some interesting stories of what actually happened over the years. Perhaps by the end of this article, some people can instill in their heads that the US may not be the best place to invest, unless, you already live there.
US Property Management A lot of Australians assume that the US Property Management is handled the same way as it is in Australia. Here, when you buy or sell a piece of real estate, it is managed by the real estate agent. In the US, the people who sold the property to you have nothing to do with the management. Here, it is difficult to find someone who shares the same moral code as in Australia. And if ever you find one, it is expensive, and it can drain you financially.
Here’s an example. Strangely, the American management companies can never bring your money to you in Australia. They seem to have a poor mail service since they lose a lot of cheques. What they do know is, your cheque sinks because Australia could be Atlantis. Bottom line is, it is about taking your money and not let you make a profit.
If you choose to go for a good management company, a light bulb may only cost 25 cents, but if you get it installed, it may cost you $88. This is because good management company in the US, only use licensed people, and licensed people are expensive. Since everybody is afraid of being sued in the US, the property manager doesn’t use anybody who doesn’t have a license, whether it is a plumbing license, or electrical license.
Although a light bulb in the US may last for 15 months, and it is indeed cheap to buy. However, since I have been an absent landlord, I have been charged several $88 to have my light bulb put in the house. And sadly, no Americans can change their own light bulbs.
In Australia, we do a lot of stuff using our hands. Americans have been used to being gifted to for so long that they do nothing. When I rent my properties
I noticed that my rented property in the US becomes un-rentable when: • the carpet is more than 2 years old, and • your property has been painted less than a year ago.
In Australia, even if my place has a 10, 20 or even 30 year old carpet, I can still have it rented, even if it hasn’t been painted in the last 5 years. This is the reason why vacancy in the US is much higher than in Australia.
How does this affect the management? We now know that a rented unit, apartment or a house in the US can’t be rented out unless it is in perfect condition, practically a new condition. This fact costs money. My apartment buildings in Dallas, Texas used to be vacant. I also had a building very close to SMU campus and the students had to move out at midnight. So, I had a crew go in to re-carpet and repaint. The next morning, I had new people coming in, at around 10 a.m. This is clearly an expense that you have, as a landlord.
You also have management companies who make sure that they take money out of your pocket. Being constantly charged for various systems like, hot water, heating, and air conditioning which was never in your property.
The Systems That Drains Your Pocket How about air conditioning? Most (if not all) of the properties in the US have air-conditioning. And air-conditioning is simply expensive. It would be great if the US tenants clean the filters. Unfortunately, they don’t. If that happens, your air conditioning systems get burn out. It would take another $300-$400 to have your air conditioning coils cleaned and have new compressors put in. This obviously drives you nuts! Another situation is the ice maker. American houses have an ice maker and every time you replace it, it costs $130 plus another $150 for the service call. That’s almost $300. Ice makers will last for 24 months.
If you have 2 to 3 tenants who constantly change the temperature of the air conditioned properties, this can fry your air conditioning unit. You adjust the air conditioning system since you have tenants and unfortunately, they don’t respect your equipment. You will end up spending a fortune just for your air conditioning and heating systems. What may be standard in the US is not the standard in Australia.
The management normally gets 10% of the gross income. A lot of American management companies get their kickbacks from the service tradesmen who are constantly sent out to the properties. Obviously, the landlord is not the priority of the US property management company, the tenants are. Whatever these tenants want, they get. No matter how careless these tenants are when using your equipments, no matter how constantly they burn up your cash flow or profits. These are just some of the things that never happens in Australia. Here in Australia, we serve people to live in is bottom of the range, Americans can’t be served this way.
Most Americans don’t pay their rent. Those tenants who do pay rents in the US have a lower percentage compared to the Australians who do pay their rent. They even have a book that’s called “500 Ways to Rip Off Your Landlord and Never Pay Rent”. This book costs $19.95. You are simply in the area of big business, I make money and you don’t. A lot of these Americans don’t pay their rent. That’s how the business is – Americans do not pay their rent!
A lot of Australians ran into these US properties with cash intending to refinance later and only to get their cash returned by creating more debt. The properties were cheap when bought because you can’t get financed. You will need to put all your cash in there and eventually bring out your cash out.
If ever the management has left you any money, they will get it back from you by charging you all sorts of jobs that were never even done, like a house that has never been painted. That’s how landlords are eaten alive.
Also, here’s something worth knowing, the American roof only lasts for 12 years. Ever wonder why the suburbs blow over in the storm? That’s because American houses do not have any steel nor cement in them, which are important. American houses are made of wood and bricks on the outside. The bricks aren’t even thick enough to hold up the house. They are only slate style brick which is an inch wide. Unlike Australian household brick, around 3-4 inches wide. This can actually hold up the house.
For the American houses, the wood behind the brick face holds up the house. So the brick is just a fascia plate. What happens when a big hurricane comes? It wipes out the entire suburbs of this American house, simply because there are no bricks and no cement.
What about the bathrooms? Here’s a revelation. They do not have any water nor sink hole for the water to go all the way down. The American bathroom floors are just made of plywood, standard of five ply. I change the bathroom floors every 4 years since it only costs $ 300 – $400…if you do it yourself. Yes, it is necessary to change the bathroom floors every four years, in case you didn’t know. As mentioned earlier, the American bathrooms do not have any drainage hole. So the water sits on the floor which is often carpeted. Eventually, it rots, that’s why it is a must to change your bathroom floors every four years.
Another thing you should know is that American sewer pipes are 2 inches, not 4 inches. Expect to be fixing blocked toilets every so often. In order to have it fixed, you would need to call the Rotor Router guy and pay $90. It is the standard way of fixing blocked toilets.
Your tenants will be blacks, whites or Hispanics. A lot of Australians do not realize that when they buy a cheap property, they do not understand where they are buying these properties. What kind of neighborhood it has and such. The Hispanics are great. They actually pay their rent even before they feed their children. But did you know that there is this expression called, ‘they’re hard on the machinery’, the Hispanics are really hard on a property. Perfect example is, they use lard when cooking. Lard is fat. They pour this lard down your sink, which causes the sink to get clogged. Which means, that you will need to call a Rotor Router guy every three to four months. Or perhaps, your managing agent will be the one to do this work for you. Making you spend more because they had to unplug all your pipes.
I knew this one gentlemen who lived in the Sydney suburb of Roseville. He bought 52 cheap units. What he didn’t understand was that it was 52 units of Hispanic residents. This man ended up financially crippled because of the operating expenses of the Hispanics.
The Hispanics, like to sit in the back of their pick up trucks and shoot their guns on a Friday or Saturday night, which is fine. They like to drink a lot, and in many of the States, there is no drunk driving laws. So I would often dig a pick up truck out of my swimming pool full of these drunk Hispanics who drove their pick up through my fence and straight into the swimming pool. What makes it harder is, majority of these Hispanics don’t speak English at all. And it is expensive to get tow trucks at 3 in the morning.
The sad thing is, when Australians buy a property in America, they think that it has the same system and set of standards as it is in Australia. You have to remember that America is a totally different market. They think, do and act things differently. The carpets do not last long, the paint does not last long either. Although it is cheap to paint and you only need to spray the paint using spray gun. Nobody uses brush anymore because spray gun is a lot easier to use and you need to repaint after 2 years.
Currently, I am assisting a lady who has a property in New York. Her agent put the property for $1.3 million on the market. Even to this day, I do not think that her property is worth anywhere more than $900,000 in the present market condition of the US. This agent has produced a back pocket buyer who don’t really exist. He would actually report someone trying to buy the property, and then not buying the property. There would be reports that this house does not have tenants when in fact there has been tenants in there for 9 months already. The agent collects the money and puts it in their back pockets telling the owner, “I’m sorry, we can’t get any tenants”.
When you do find out that you actually have tenants in your properties, your management people will keep telling you there isn’t and they’ll just draw off the money and you’ll keep paying the cost.
The main idea here, intentionally or unintentionally, is to make you financially bleed. Until such time that you decide to sell the property back. Surprisingly the management company has a back seat buyer who will take pennies on the dollar. I have witnessed this incident so many times.
What about your lawns? What happens if they don’t get mowed? Your the management company does not take care of this. They do not organize anybody to mow lawns since the city is going to come in and mow the lawns for you. Simply because they have city codes and ordinances that you need to make your house look clean and tidy. If you do not make your house look clean, the city will come in and make it look clean and tidy, then you get charged for $400 for having them do that for you.
You are not allowed to park your car on the street, that’s the rule for most parts of America, because if you do, you will be charged any towing costs. And you now have a lien to the city. If you are in Australia, you may not find out about this because the notice is probably sent to your American mailbox or even to your American property manager, which is the usual case. Your American property manager does not pay it. He goes out of business or simply destroys it. Since you don’t know what’s going on, the city sells your property from under you. The city wants its money back for its $400 lien, and will take your property to foreclosure and even sell you out.
This is what you hear or watch on late night television, the city tax lien sales. This is where the city owed money on properties. Next thing you know, they will just sell your property up and you will just find out that they either sold your property or they have condemned it.
Your property has a burst pipe flooding problem which is why the city will condemn it. We had the same issue in Dallas, Texas. That is a hot State and it simply means that you will have to constantly run those taps. So during the winter, if I don’t get all my piping blown out, there’s a huge risk that my pipes will burst during the winter months. Then I have major flood damage. Another term used for having the pipes blown out is winterizing. This leaves me two options, to have it winterized and cost me, or make sure that my taps are dripping and make sure that the house is above 68 degrees- which will also cost me on air conditioning and heating system running 24/7.
Oftentimes, you get it wrong. Your pipes will burst while you are not around to fix and sort things out. So the city comes by, and condemns your property. They will condemn it by putting a huge tape across the front door. Worse is, the homeless people will move in and will destroy whatever’s left of it. They can even sue the city if they hurt themselves in a city condemned property which may lead to having to remove your house from the lot. They will leave you with what is called a PAD. This has happened a lot in the United States in the early 90’s. You will have nothing there but a cement pad. If you look at the bright side, the cement pad is clean and smooth for you to rebuild another house.
These are just some of the things we don’t do in Australia. Many Australians get lost and confused by this. They sell their properties for $19,000 without understanding that they have black tenants who sometimes do guns and drugs and don’t pay the rent. So, if I was an American and I wanted to sell you some properties in Australia, I will put phantom tenants in the properties, create a bunch of leases that will show how much they’re supposed to pay and for 2 or 3 months. I will also make sure that the money goes through the books to encourage some Aussie sucker to buy properties.
Aussies come in and their tenants don’t pay rent. All of these guys carry guns, unless you want to start learning how to use a.44 hand gun in order to collect rent, then you’ve to start getting these guys, who are doing drugs, out of your house. American properties can be bought for as low as $8,000 simply because nobody goes there. This neighborhood is the gang areas, the drug houses and the house of prostitutes. Australians are not used to this. There are a number of gun carrying States in America. People either strung out on drugs or get shot and these are the cheap properties that Aussies start buying.
The issue here is not because the Aussies are buying cheap properties. The point is, they do not understand why it is cheap. They need to know that the Americans won’t touch it for many reasons. Most of the US mortgage companies do not lend money less than $50,000 and because of this, you cannot get your cash out. So even if there’s a buyer for your $40,000 or $45,000 property, an American cannot get this because of the loan size. Although it used to be $35,000, now they’ve increased it to $50,000-which is the minimum loan size.
If that’s the case, most of these Hispanics, blacks and the people who live in this neighborhood cannot buy it since they do not have the 50 grand to spend for this property. They cannot borrow it because the loans don’t exist. Only thing left for them to do is to cash out.
The investor will cash out the money, not the black person, nor the Hispanic person. This investor will take you out at $20,000 initially. Then he will walk in and string you out. He will do this because he’s the only one with the cash and you will find out that you are going to get about $20,000.
Whenever people talk about these gross yields in America, what they say is, this property is gross yielding 26%. But it is important to remember that is before an amount of your money is taken out from repairs, maintenance, vacancy and other unforeseen expenses. My property, where I used to live, is 17.4 % of every dollar in up keep. It is indeed cheap to get parts for US houses. If you are in the US doing everything yourself, it would have been great. But if you actually live abroad, and you have properties in the US, that’s when it’s a killer. What will drain you financially is the cost labor of having someone to do the job while you are not around.
Another burden foreign landlords need to keep in mind is the airfares, of flying back and forth to the US, not to mention the overseas phone calls and the time difference, when you have to get up at 5:00 am in Australia just to speak to somebody in the management office. Unfortunately, you don’t get to speak to anyone, because everybody has voice mail. The fact that you cannot speak to a live person drives you nuts. You will also notice that your cheques won’t arrive. That American banks won’t wire money to Australian banks unless you have filled out different legal documents.
You have a whole bunch of extra paperwork from the new Patriots Act that Bush brought in. This whole stack of paperwork will stress you out to the point that you would simply want to pull your money out of the US back to Australia.
Up to now, I do not know any Australian who made a profit from buying and holding a property in the US. But people still call me, people who bought properties in the US looking forward to getting a big profit. Fact is, that day may or may never come.
Here is another story for you. I bought a 22 home units property from the US government and I owned it for 2 years. Well, it took me 2 years to fix things in order to buy it from the government. My cash flow should have been $11,000 after all my expenses. I have hanged on for 2 years and I never got a check above $1,500. Like their system, it goes, and disappears.
You need to understand their structures, the LLCs, S Corps, companies, everything. You will need to do all these tax treaties and corporations with the US government. An average Aussie accountant will not be able to do your taxes any more. You’ll end up going to Coopers and Lybrand, the biggest companies in Australia to do your taxations, and because they understand the structure in the US. The LLCs, S Corps, C Corps, all these things that you have set up in the US.
For Starters, these guys will charge $300 per hour. Here, you will discover that your tax bill will come from $1,000 up to $15,000 a year just to acquire an Australian and US tax return done. That would surely kill you. This is what you call, the on cost of doing business.
However, if you do live in the United States, you will absolutely profit from it. You will earn a lot from buying and trading properties in the US, simply because Americans forget about equity. For them, real estate is not an investment vehicle but a consumer item, that as soon as they are finished with it, they can leave and move on. If you are in the US, you’ll witness this yourself. The Americans will know that Aussies have not left for Atlantis to live there, they will realize that you can show up the next day with a double barrel shotgun, demanding to get back your money, so you can make profits – BUT, that is only if you are physically there.
We can take advantage of a lot of situations when we are there in the US. I made a lot of money when I was buying, selling, trading properties. But we have to understand how real estate trading works in the US. My objective of writing about this today is to recognize two essential things. We may speak the same language as the American, but our philosophy about business is totally different-which is, ‘they win and I lose’. Majority of Australians who invested in properties in the US do not go through this without legal battles.
In the US, people sue each other. This isn’t about just winning, it’s about making the other guy bleed and dry. Whoever gives up first will comply to what the opposite party wants. This is the painful reality of real estate business in the US. I’ve seen a lot of Australians go into that industry in the US market, and will eventually come back broke, drained and stressed. They do not get anything near their returns at all. And yes, your cheques will mysteriously get lost in the mail.
My ultimate message is, spare yourself from this painful experience. If you want to earn money, you can earn it here, in your own backyard, without having to buy any airline ticket, dealing with US corporations, learning and understanding a different country’s system and way of doing business-the hard way. Yes, we do speak the same language as them, but they do not do business the way we do. It may sound appealing and sexy to say that I’m off to see my house in Florida, but there are more negatives than positives in this experience. Find the same opportunities here in Australia.
Industrial property is the entry point for many property investors to the commercial property industry. As a property type, industrial property is relatively straightforward with little complexity. The property owner just needs to target and strategise the following issues when looking for a property to buy:
Good property location
Industrial property precinct
Growth of the local community and business sector
Vibrant industrial community supplying services, products, and raw materials
Access to transport links, ports, airports, and railheads
So now let’s look at the industrial property needed today by tenants.
What do Industrial Tenants Need?
Traditional warehouses will include quality height, size, loading and unloading facilities, quality office space to support industrial operations, ample car parking for staff and customers, hardstand areas for operational flexibility, and high levels of security to protect the tenant’s goods and their operation.
Industrial tenants today are far more sophisticated and demanding when it comes to selecting a property to lease or buy. The investor should therefore select a property that has all the elements of property usage that tenants expect in the local market. Tenants know that the property will impact operational costs and eventually the bottom line of their business. Tenants will choose their property well as a consequence.
Taking the First Step to Investment in Industrial Property
Industrial warehouses are simple to construct and have a long economic life hence the investor sees it as an entry-level investment vehicle and popular. Providing they select a sound and strong tenant, and apply a good lease, the stable future of the property for investors is normally achievable.
There is very little management required on industrial property, and as direct result many private investors will manage industrial property themselves. Unfortunately this does have negative connotations, in that the first time investor sometimes has little awareness of the specialist terms and operational conditions that is supported by lease documentation on their property.
These first time investors can then overlook critical matters and make mistakes. To the experienced commercial property specialist and commercial real estate agent, it is easy to see these ‘first time’ landlord managed properties as you drive through a town or city. The errors of ownership are visually obvious. These errors can even reflect in the ultimate levels of rent and price on the property.
Invariably and importantly this self management problem will surface at final sale or rent review time when the investor has overlooked something or transacted it incorrectly. The buyers of property today will conduct a due diligence period and investigation of any property prior to settlement.
Those property owners that manage their own investments should only do so only when and if they completely understand the complexity of the task at hand. If the investors have only a basic understanding of property performance and function, then they should not self manage the property. The matter is plain and simple.
Critical property knowledge will involve key functional elements such as:
Types of rental
The lease clauses and provisions
Property maintenance strategies
Property operational costs
Vacancy resolution and strategy
Incentive use and strategy
Tenant negotiation skills
A good property solicitor is invaluable when it comes to Investment Property. The same should be said for a property experienced accountant. Even the most basic industrial property needs carefully prepared lease documentation and financial guidance. It is interesting to note that many first time property investors will sometimes choose cheaper lease documentation that is ‘generic’ and available off the shelf. Cheap is not a good option when it comes to documentation in investment property. You get what you pay for and so why would you take this risk?
Given that you are endeavouring to protect and stabilize cash flow, a few dollars saved on lease documentation preparation at the start of any occupancy can eventually lead to property instability or downfall, loss of tenant, higher property operational costs, and uncertainty when it comes to exercising the critical terms and conditions of the document of lease.
A good property solicitor will understand the occupancy needs of the particular property and reflect that into the document used by the landlord to protect occupancy and cash flow. The same solicitor can create a standard lease document and strategy that targets the landlord’s cash flow plans and investment targets. You will not get this advantage from ‘generic’ leases.
Industrial Properties Outgoings Advantage
Many Investors seek to purchase and to lease industrial property to major industrial businesses under long term net leases. In long term net leases, these larger tenants would normally control and pay the property outgoings direct.
The property outgoings in an industrial property are normally simple although there is an essential checking process needed here to see that the tenant is correctly paying the outgoings in a timely fashion. In many circumstances and in this market, we have seen some tenants avoid the payment of outgoings without the full awareness of the landlord. This then creates unnecessary fines and legal disputes for outstanding outgoings accounts. The landlord must not assume that the tenant has discharged or paid the outgoings; the landlord can later find that the matter is still outstanding and about to go to court for non-payment. Rates and taxes (statutory charges) are usually a charge on the land and will ultimately fall on the landlord for payment.
So whilst this process of tenant paying outgoings direct is convenient and simple for the landlord, such leases have little substantial increase in rental return which may not necessarily support the investor’s growth plans. Investors of this ‘basic’ nature typically hold a number of properties of this type over the long term to allow them to achieve portfolio growth.
With industrial property it pays to recognise that the property may be uniquely and specially suited to a particular tenant. This means that the vacancy threat in industrial property must be carefully monitored as any lease reaches the end of term. It is not unusual for industrial property to remain vacant for a lengthy period in the current market.
Mortgage Lenders and Industrial Property
Mortgage lenders for fully leased warehouses occupied on the long leases see them as being good collateral for loans. Long-term financing is typically available for industrial investors at competitive interest rates. The investors of industrial probably find it easy to refinance an expanding portfolio on the back of their established industrial and well leased property.
The secret to success in industrial property investment is to have:
Good vacancy awareness and minimisation strategies
Sound recovery of property operational costs
Good maintenance controls
Good insurance strategies
Minimal exposure to risk from the property
Well established permitted use and compliances
Good income and expenditure budgets
Industrial property is the market segment that is normally suffering early in an economic downturn. That is due to the close integration between the industrial business community and the consumer. Fortunately, it is the industrial property market that responds quickly when the economy moves towards growth and stability. Landlords should respect this fact and monitor their way through the downtimes as they will always come and go.
Internet access for organizations today is no longer about connectivity for email and web browsing. A stable Internet connection is a vital component in the chain of IT systems required to conduct business. Typically, in the past, the focus around Internet connectivity has been on cost, with vendors providing solutions allowing organizations to spread their traffic across consumer and enterprise products. This approach is all good and well and can provide significant cost savings, especially when employee traffic is directed over low-cost consumer products such as ADSL, however, when you are conducting B2B business through front end servers hosted in your DMZ, resilience becomes a major concern. In this scenario, a dead Internet link can mean a loss of revenue and even, potentially more serious, brand damage. In this paper, we discuss a number of methods that can be used to improve the resilience of an Internet link. While this sounds like it should be a simple case of connecting to multiple Internet Service Providers, the devil, as they say, is in the detail.
Mission critical Internet
Business networks have been mission critical for some time now and the focus on resilience and business continuity has always been top of any CIO’s mind, however, the general areas of interest for this focus were restricted to internal networks and systems. With more and more business being conducted either directly via the web or via B2B over Internet links to systems hosted in DMZ’s, it is simply no longer permissible for an Internet link to be down. Loss of access to the Internet can have a direct impact on revenue generation, especially today as the business operating models begin shifting towards off-site cloud computing and software as a service.
A solution to the problem
Multihoming is essentially a method whereby a company can connect to more than one ISP at the same time. The concept was born out of the need to protect Internet access in the event of either an ISP link failure or an ISP internal failure. In the earlier days of Internet access, most traffic was outbound with the exception of email. An Internet link failure left internal users with no browsing capability and with email backing up on inbound ISP mail gateways. Once the link was restored so was browsing and email delivery. The direct impact to the business was relatively small and mostly not revenue affecting. Early solutions to this problem were to connect multiple links to the same ISP, but while this offered some level of link resilience, it could provide no safeguards against an internal ISP failure.
Today, however, most organizations deploy a myriad of on-site Internet access services such as VPN’s, voice services, webmail and secure internal system access while also making use of business critical off-site services such as software as a service (SaaS) and other cloud-based solutions. Furthermore, while corporate front-end websites are traditionally hosted offsite with web hosting firms, the real-time information on the corporate websites and B2B sites is provided by back-end systems based in the corporate data center or DMZ. Without a good quality Internet connection, these vital links would be severed.
Varied requirements and complexity
That said, the requirement for multihoming are varied and could range from the simple need for geographic link diversity (single ISP) to full link and ISP resilience where separate links are run from separate data centers to different ISPs. While the complexity varies for each option, the latter forms the most complex deployment option, but affords the highest availability, with the former providing some degree of protection, but does require a higher grade of ISP.
A major component of the complexity comes in around IP addressing. The way the Internet IP addressing system works is that each ISP applies for a range of addresses from the central Internet registrar in their region. They would then allocate a range of IP addresses, called an address space, to their customers from this pool. It goes without saying that no two ISP’s can issue the same address space to a customer.
Why would this be a problem? Simply put, it’s all about routing. Routing is the process whereby the Internet finds out how to get traffic to your particular server. It’s a bit like the Google map for the Internet. For somebody to find your server, a “route” or path needs to exist to the IP address of your server. Since you are getting your Internet service, and hence your IP address space, from your ISP, they are responsible for publishing the route to your server across the entire Internet. They are effectively the source of your route and nobody else can do that for your particular address space. You can see how things can go wrong if the ISP suffers some form of internal failure. If your particular route disappeared, your server would simply vanish from the Internet, even if your Internet link was up and running. This is precisely the kind of issue multihoming tries to solve, but for completeness, we will start at the more simple options and work our way up.
Single Link, Single ISP, Multiple address spaces
While not a multihoming solution in the strictest sense of the term, the single link, multiple address option can be useful for small sites. In this scenario, the publicly accessible host is assigned two IP addresses from two different address spaces. You would, of course, need two address spaces from your ISP for this to work. Thus, theoretically, if a routing issue occurs that impacts one of the address spaces the other may still be available. The single physical ISP link is, of course, a single point of failure and this option would seem to offer little in the form of real resilience.
Multiple links, Single ISP, Single address spaces per link
This scenario, generally called multi-attached, is a variation on the above where the site now connects through multiple links each with a different IP address space, but still via single ISP. If one of the links fails, its IP addresses would become unreachable, however, the other IP address on the remaining link will still be available and your server would still be reachable. Internet Service Providers use a control protocol to manage their IP routes called Border Gateway Protocol or BGP. This protocol is used to manage the traffic re-routing over the live link. BGP can be complex and demands at lot from the equipment it runs on. Of course, with complexity comes cost, however, the BGP deployment for this scenario is not as onerous as with a fully multihomed site and should not attract too much attention from the CFO. While the deployment is a simpler version of full multihoming, it does restrict the corporate to a single ISP, which may not be part of the strategic intent of the business.
Multiple Links, Multiple ISP, Single address space
This scenario is what is generally meant when discussing multihoming. The BGP protocol is used to manage the visibility of the single address space across the multiple links and ISP’s and, thus, maintain the routes. The BGP protocol communicates between the corporate routers and those of the two ISP’s with the protocol being able to detect link failure and divert traffic to the functioning link even if this is via a different ISP network.
What’s the catch?
There is always a catch, and in this case, there is actually a number of them. To run true dual ISP multihoming and BGP as a corporate you would need your own Provider Independent (PI) IP address space and you would need to apply for a unique BGP Autonomous System Number (ASN). The AS Number is used to identify your site as a valid Internet location in the eyes of BGP. While applying for an ASN is not an onerous undertaking, it does place some significant responsibility squarely with you instead of the ISP. Deploying BGP effectively brings your organization one step closer to the Internet by making you responsible for advertising your own public IP address spaces and, thus, your routes. It also means that any operational mistakes you make will ripple through the entire Internet in spectacular fashion.
Address space considerations
Most large organizations that operate true multihoming already have their own Provider Independent address space. This is an address space that they requested directly from the local Internet registrar themselves some time ago before IP version 4 (IPv4) addresses started running out. Today it is virtually impossible to be allocated a PI address space from the IPv4 pool. It is possible to run a multihomed scenario by using ISP provided IP address spaces, but the network configurations become considerably more complex and at some point start defeating the end goal of increasing resilience. In the real world, increased complexity seldom equates to improved resilience.
A true BGP enabled multihoming deployment (often known as running defaults) will require hardware that is capable of storing IP routing tables of Internet scale. This is desirable as it protects the organization from an internal ISP failure, however, requires the routers on-site to be of a “carrier grade”, in other words, big and beefy. The Internet routing tables are the massive and vast amount of processing power and memory will be required to run defaults. It is possible to run in a reduced route mode where only local prefixes are stored on the routers, but given the effort and expense of deploying a full multihomed solution, compromise should not really be part of the conversation.
While there are definite advantages to full multihoming, there are also some significant caveats. Complexity and Scaling aside the real reasons and costs for considering multihoming should be carefully considered.
The use of internet nowadays has really upstaged all the habits in the world that we used to know. In fact, it already became a part of the daily routine for most people to the point that their day is incomplete without even checking their emails, updating Facebook status, browsing for the latest news and trends, or even playing a single online game. Indeed, it has greatly influenced today’s lifestyles.
It is for this reason that internet users are looking for ways to have an advanced connection. Perhaps you have longed for it too. Actually, you can find out more about local internet options in your area. At any rate, just like any other things for that matter, the internet has great effects in the lifestyles of many people.
The world has become smaller
With the advent of the local internet, the world has indeed become smaller every day. Whatever you do, it seems that almost everything is done so fast. Life has never been this simpler and more manageable. In just a split of a second you can shop online, make business transactions through e-mail, research on a variety of topics, have a virtual conversation with someone as if face to face, play with anybody else around the world, and a whole lot more.
The internet has absolutely defied time and space so much so that all the events worldwide are flashed ahead of the conventional media. This revolutionary technological advancement has made world continents seem closer. It is very amazing to note that a local internet will serve as the bridge between your current location and to that of the other parts of the world. Somehow this gives an impression that will either encourage you to pursue life and career somewhere else or to stay where you are currently residing.
A source of relevant information
Prior to this rising popularity of the local internet, we are having a hard time of looking for more information with regard to our interests. Most of the time, perhaps your previous endeavors include relying on books, journals, newspapers, and other reading materials, radio and television to satisfy your quest for relevant information. To make it easier, sometimes you may just go to the library and spend hours reading there not minding the boring ambiance.
But now, we are given the best option, thanks to the internet we can now have access to any information we want. In fact, we are bombarded with so much information that we tend to become already dependent on the internet. A piece of advice though, you need to be precautious all the time because not all information that you have stumbled upon on the internet are factual. Sometimes you may encounter questionable information. Nevertheless, the internet is truly a great source of information.
Easier and faster communication
Long before this local internet was introduced to the general public, we used to communicate with people from other places through letters and telephone calls. Then we benefited with the arrival of mobile phones which made communication easier, with an option to text or call. But all of these modes of communication were rolled into one through the internet. It is a very effective communication tool that somehow made some people addicted to it especially with the emergence of the popular social networking sites.
Through the internet, long lost friends and relatives are reconnected instantly. By simply taking full advantage of Yahoo Messenger or Skype through chat or video call, you will be connected with those people whom you’ve missed for such a long time. All of these are made possible because of these innovative technological developments. Social networking sites play a vital role in this aspect.
More convenient transactions
With the help of the local internet, transactions have become more convenient, be it business related or have something to do with personal matters. The internet has really made possible government transactions faster and more convenient. With just a click away, processing legal documents need no more wasting of time and energy. Though it costs more than the usual procedures it’s all worth it as you have all the comfort at your home while waiting for the outcome.
Business-related transactions, on the other hand, have also occupied space on the internet. If you just know how to play the game, you will really reap the rewards in the end. Using all the social media marketing techniques available, your business will surely go places. There’s no need for you to literally go to other places to personally market your products or services without certainty. This may be done online. At this point in time, you will only act if there’s an assurance for you to do so.
To some, it may not have that much effect but to other people it means something. The local internet is considered to be life enriching and therefore they keep on patronizing it. Through the internet, the intellectual capacity and analytical ability of an individual will be enhanced. The internet has greatly contributed to the improvement of the lives of some people and their professions. To date, millions of people worldwide have experienced the life changing effects of the internet in one way or another.
Some people have established a niche in a certain industry with the help of internet and have greatly benefited from it as far as their financial status is concerned. To some, the internet paved the way for them to be recognized globally for their pure talent. Take for example Charice Pempengco from the Philippines, a genuine discovery several years ago through YouTube whose excellent singing prowess captured the attention of millions of music lovers worldwide that even Oprah, Ellen Degeneres, David Foster and other renowned celebrities became instant supporters of her.
What is wireless and how does it work? Wireless can be described as the transfer of information between two or more points that are physically not connected. Distances can be as short as a few meters as in television remote control or long, ranging from thousands to millions of kilometers for deep-space radio communications.
Probably the best example of wireless technology is the cell phone. The world’s first wireless telephone conversation happened in 1880, when Alexander Graham Bell and Charles Sumner Tainter invented and patented the photophone, a telephone that conducted audio conversations wirelessly over controlled light beams (electromagnetic waves). Then in 1915 American Telephone and Telegraph thought about creating a wireless phone but they were afraid that this great technology would undermine its monopoly on wired services in the United States. They were right. Over 85 years later this extraordinary little unwired device has revolutionized the telephone industry and put wired phone carriers out of business by offering free long distance, free nights and weekends, free sing up offers, and the convenience of having a mobile phone virtually anywhere on the go.
Common everyday wireless devices also include, garage door openers, cordless phones, two-way radios, satellite television, satellite Internet, GPS, and Wi-Fi.
As the personal computer became popular in the early 1970s, the idea of a portable personal computer came about. In 1981 Adam Osborne produced the first personal portable computer (now called laptop), Osborne 1. It weighed 24 lbs, had a 5 inch screen and cost $1795 ($4,552 today). The demand for the laptop skyrocketed. Consumers desired portability. When the Internet boom hit in the 1990’s an idea to connect to the Internet with a portable laptop without a wire came about. Unlike the hard lined personal desktop computer Internet connection this would be wireless and required a faster connection. In 1999 the word Wi-Fi and its yin-yang style logo were created by the Wi-Fi Alliance as a catchier term for IEEE 802.11. Today over 700 million people use Wi-Fi worldwide and there are over 4 million hotspots (places with Wi-Fi Internet connectivity).
How does it work? If you’ve been in an airport, coffee shop, library or hotel recently, chances are you’ve been right in the middle of a wireless network. A wireless network uses radio waves, just like cell phones, televisions, and radios do. In fact, communication across a wireless network is a lot like two-way radio communication.
Here’s what happens:
Your laptop computer translates data into a radio signal and transmits it using an internal antenna.
A wireless router receives the signal and decodes it. The router sends the information to the Internet using a physical, wired Ethernet connection.
Do you remember when you rode a bicycle with no hands for the first time? “Look Mom! No hands!” Ahhh..free as a bird. Good old days, right? Computer users can relate to that same experience when using wireless for the first time and every time. Sitting at that same “glued” position at that same home desktop computer at that same spot only to get up to find your spine in a gridlock. Did you know the sitting position is the worst possible position for your back and applies the most stress on your spine? No more back pain inflammation flaring up by having to remain in that fixed position in that same old 3-legged hard little wooden chair that has lived up to way more than its life expectancy. Moving from one place to another without having to worry about tripping over wires is made easy. Get comfy and lay down on the couch and watch TV while fiddling around on the Internet with your laptop, browsing news headlines or checking email.
Wireless or Wi-Fi enables the Internet user to roam freely anywhere in their house, business, or other wireless network (up to about 150 feet indoors and 300 feet outdoors) with one or multiple computers.
People that live in urban centralized areas benefit from readily available wireless high speed Internet options and hotspots virtually everywhere. Wireless Internet providers are not as prevalent in rural areas and options for rural Internet are scarce. People in rural areas, areas out in the country, or in areas just past the “cut-off” of conventional high speed Internet service enjoy the same high speed wireless Internet benefits such as connecting wirelessly in the family room, the kitchen, the bedroom, on the porch, or connecting with more than one computer. The increased demand for rural Internet has started to make it more attractive for rural broadband Internet providers to service these remote areas of the country. Rural areas where cable Internet and DSL Internet have limited or no availability can have access to high speed rural broadband Internet service through satellite Internet. HughesNet and Wild Blue, the two largest satellite Internet providers in North America, provide rural Internet without the restrictions and limited availability of hard lined cable or DSL. They provide the solution for high speed rural wireless satellite Internet service in rural areas.
This demand for high speed rural wireless Internet and along with competitors fighting for the next rural customer has driven monthly prices down to an affordable level and free equipment and installation are now becoming the norm. This has been a relief for consumers that are on fixed income or can only afford to get service if the price is under a certain level which the can afford on a monthly basis.
A recent rural Internet survey states that only 24 percent of rural residents have Internet access at home. This small number is a result of many factors, but one of the major reasons is that many cable and DSL Internet service providers do not provide rural broadband Internet services.
Of course, many people living in rural areas access the Internet through dial-up phone lines – sometimes a frustrating and slow experience. With a dial-up Internet connection it can take almost a minute (sometimes longer) for a Web page to load on the screen. Sometimes images and documents cannot be accessed at all because of a slow dial-up connection. Also, using dial-up as a rural Internet provider can tie up phone lines and is not fast enough for a wireless connection.
There is a solution for rural Internet – satellite Internet. Wireless rural broadband Internet is possible through higher speed satellite Internet. With rural wireless high speed satellite Internet, slow or no Internet access is a thing of the past. Now, no matter where you live in the contiguous United States you can have wireless high speed Internet access like you’ve never had before. And you’ll finally be able to surf the Internet without tying up your phone lines and connect wirelessly at high speed with rural wireless Internet.
What does wireless broadband mean? Simply put, wireless broadband means high speed wireless Internet access. To understand it more specifically, you have to think in terms of data transmission or the amount of time it takes to send messages from your computer to another computer. In other words, how long does it take for you to download information from a Website?
A dial-up Internet connection transfers data at a rate of up to 56 kilobits per second (56K). Average dial-up Internet users typically connect around 20 to 30 kilobits per second (20-30K) or sometimes even slower. This is a slow data transfer rate. A wireless broadband satellite Internet connection provides a data transfer rate of 50-100 times that much.
With download speeds from 1000 kilobits per second to 5000 kilobits per second, a high speed wireless rural satellite Internet connection provides faster download times of images and documents, and the capability of viewing more online information at one time without frustration or interruptions in service. And rural broadband Internet through satellite is only going to get faster. In January 2012 HughesNet, the largest provider of rural high speed satellite Internet service in North America, will be launching a new satellite named “Jupiter” and will be capable of reaching speeds of over 100 gigabytes per second to further fuel HughesNet’s rapidly growing high demand for high speed rural Internet.
With this high rate of data transmission, rural broadband satellite Internet users can reach higher connection speeds and are capable of having a wireless connection. Receiving information and posting information online are all done at higher speeds. Download photos, email, bank and shop online, research, web browse, even go to school online or own and operate a home based business. All of this can be done with increased Internet speeds with a rural wireless satellite Internet connection as your rural Internet provider.
Businesses and consumers both benefit from high speed rural satellite Internet as their rural broadband Internet provider because it has a proven track record of reliability. High speed rural wireless satellite Internet provides an ‘always on’ Internet connection, meaning you never have to wait for your modem to dial in to the internet. No phone line is required so there is no hassle for logging off to wait for a phone call or to make a phone call.
When you order rural wireless high speed satellite Internet for your rural Internet access, a certified installer will come to your home and install the Internet service. Installation includes installing a satellite dish outside your home in a south-facing direction and connecting your computer to a satellite modem. This will give you broadband satellite Internet access. The technician is required to show you how to connect to the Internet and confirm your signal and connection speed.
The Internet has become an invaluable resource in the workplace, the world’s biggest reference library, social media center, and pornography outlet is now only a click away. This availability presents a significant risk factor for employer liability and costs employers thousands of hours in productivity each day. Monitoring employee internet use is one way to reduce employer liability, and whether or not you agree with the principles behind internet monitoring, many employers agree that it is a necessary evil.
Internet abusers range from upper management employees in private offices viewing hardcore pornography, to the department assistant in a cubicle that spends 3 hours a day doing online shopping, making travel arrangements, and paying bills through the company Internet. Internet abuse is endemic in the workplace and organizations are being forced to face the problem head on, or suffer the consequences.
Among the many consequences of internet abuse is a loss of productivity and scores of litigation issues such as sexual harassment, hostile work environment and discrimination. Monitoring Employee Internet access is one way that an organization can limit its liability.
Defining Internet Abuse
Defining Internet abuse is the first challenge, and creating an organization wide acceptable use policy (AUP) is the first step in the definition. An AUP defines what constitutes internet abuse in your organization. What was acceptable internet behavior in one organization may be unacceptable in another, so the AUP is a highly customized policy, based on the organizational mission. The organization determines what lines will be drawn when it comes to internet abuse.
The key to a successful AUP implementation in most organizations is similar to other policy development issues in the workplace. There must be “buy-in” from the “top-down”, in other words, the leaders of the organization must agree to the principles of the AUP and endeavor to push that policy down to the directors, managers and supervisors within the organization. The most critical stage of AUP development is dependent on upper management “buy-in” and their willingness to demonstrate the importance of this policy to the rest of the organization.
Holding a series of Internet workshops with the employees of your organization is one way to introduce your new acceptable use policy. As an educational session, an internet workshop can address the sensitive issues surrounding internet abuse in an open forum where employees can ask questions and provide input in a non-confrontational setting.
During the internet workshop, the organization can begin to educate the employees about Internet abuse and give them a chance to re-evaluate their internet habits at work. It is important to be as open as possible with your employees regarding your chosen methodology for enforcing the AUP.
For example, if the organization has decided to employ internet blocking technologies, the AUP should define the specific types of websites that will be blocked, for example, many organizations block pornography, “gross depictions” and “hate” websites. Discussing the types of websites the organization has decided to block and answering questions regarding the reasons for blocking will reinforce the organizational mission, and demonstrate the types of websites that are inappropriate within your organization.
If your organization is going to monitor and report on employee internet access, the workshop will give you a chance to show the employees what the internet reports look like, and discuss the circumstances in which they will be used. Taking the mystery out of what the organization is planning in regards to internet monitoring and blocking will reduce employee speculation and set new expectations throughout the organization.
Problems with Internet Monitoring
The technical aspects of blocking website access and monitoring employee internet access are not without problems. The software for blocking websites has advanced tremendously over the past 5 years; however, there are still problems with blocking “all” inappropriate websites and blocking websites that you did not intend to block. No system is perfect and you will need assistance from your selected software/hardware vendor in addition to your information systems department.
If possible, it is always better to meet, in person, with the vendor representatives prior to the purchase of any internet monitoring software. Voice your concerns with the vendor and secure “after sale” support with the vendor help desk. If you have an information systems department, make sure they are involved from the start of the project to help address any technical problems that the new system could bring.
Monitoring Employee Internet Access- the People Side
Outside of the technical issues that will occur, the people side of internet monitoring can be the most problematic of all. Even with the dissemination of information given at the internet workshop and taking great care during your policy development, some employees will, inevitably feel that internet monitoring is unfair. Given this fact, it is of the utmost importance that the internet reports are accurate, beyond question. Even if they are correct, there are still issues to consider. The scenarios listed below are examples of how employees could react if they are confronted with the accusation of internet abuse. Moreover, the excuses below may be completely accurate and good explanation by the accused.
“It wasn’t me!”
It’s always possible that some other person was on the accused employee’s computer surfing the Internet. Once a user steps away from the computer anything can happen. Another person sits down and starts using the computer logged in as the accused, everything they do on the Internet is recorded under somebody else’s name. One suggestion is to have the user lock their computer before leaving for an extended period of time; this will reduce the chances of misidentification of the internet abuser.
“They have my password”
This is a similar situation to the one mentioned above, if I have a user’s password, I could log-in as the user and all of my internet access would be attributed to them. How they got the password is another issue entirely, however the user makes a good point and has a potentially valid excuse for an internet report that shows abuse.
“The Internet Report is Wrong”
This can occur if the monitoring software is setup incorrectly or if there are network issues causing identification problems. This is another reason why you want your information systems department involved from the start and technical support from the vendor who sold you the internet monitoring solution. Defending an internet report that shows abuse is a difficult when you don’t understand how the technical aspects of internet monitoring work.
The Bottom Line
Internet reporting is not an exact science, the reports could be wrong, and the person accused of Internet abuse may be completely innocent. The key is to research the potential offender and look into their history. People who abuse the internet usually have a history of doing so, so look into their past Internet use first and then look at the internet records on their computer. In short, do a “reality check”. Too often we take technology for its word and fail to look on the human side for the insight that may confirm or make us question our suspicions. This practice will help reduce the number of errors that could be made during the investigation of internet abuse, and help the employer maintain their credibility.
Internet abuse is a fact of life in most large organizations today. Monitoring employee internet use and employing blocking technologies can be helpful in reducing employer liability and improving employee productivity. Developing an acceptable use policy to outline acceptable internet behavior in your organization is the first step in the process. To implement this policy successfully, the policy must be supported by upper, mid, and line level managers. The organization should endeavor, with enthusiasm, to educate the employees of the organization about internet abuse and share the organizations plans to monitoring use and block inappropriate websites.
Prior to purchasing a software or hardware solution for internet monitoring / blocking, a vendor should be selected and invited into the organization to explain the technical problems that can occur with internet monitoring and blocking technologies. During this vendor selection process it is very important to include your information systems department and other technical staff. Arranging after-sale support with your vendor of choice is highly recommended.
Finally, there is the people side of the problem. Internet monitoring and blocking are only as good as the software and hardware solutions that are developed. There are many ways that these solutions can fail, so doing a thorough investigation prior to accusing an employee of internet abuse is also highly recommended.