Looking for a good investment opportunity? How about investment properties?
With local Money Market account rates averaging .5% and local 5 year CD Rates at 1.88%, it's time to look at other options.
1) Stock market - lately, this has been like riding the Tremors roller coaster at Silverwood.
2) Precious metals - gold is trading around $1200 per ounce! Buy low, sell high doesn't factor real well right now with precious metals
3) Investment properties - with the turbulence of the equity markets, the high prices of precious metals, the low bank rates, investment properties are worth looking at.
HOW TO FIND GOOD INVESTMENT PROPERTY
Just like any kind of investment, first thing you need to determine is how long do you plan on holding your investment. This will help determine your return. A lot of investors plan on owning for short term (5 years) which will minimize the costs for maintenance, repairs and investments. On the other hand, smaller investors prefer longer term ownership (20 years) but certain costs must be factored into the investment such as updating appliances, new roof, etc. Longer term investments do have a stronger possibility of price appreciation and the ability to ride out market swings which helps with the overall return on the investment.
First, do your home work on the markets. Look at the current vacancy rates, average rents, interest rates, banks required down payments and inventories. A great resource to check out is the statistics at the WASHINGTON CENTER FOR REAL ESTATE RESEARCH.
Behind the numbers
Two ways to determine the investment value and performance. For simplicity sake let's use a $200,000 property, monthly rental income of $2000, an estimated vacancy of 5% and operating expenses of 5%.
1) Gross Rent Multiplier (GRM)
Gross Rent Multiplier = Investment Value divided by Annual Potential Rental Income
$200,000 / $24,000 = 8.3 (which means the purchase price is 8.3 times the first year's rental income. This technique is very simple but is limited with its reliability because the GRM does not consider vacancy, operating expenses, financing and tax impact (plus it is only looking at one year).
2) Direct Capitalization
Cap Rate = Net Operating Income divided by Investment Value
This calculation factors in vacancy and operating expense. The NOI equals $24,000 subtract $2400 (vacancy and operating expenses) equals $21,600. $21,600 / $200,000 = 11%.
This method of determining the worthiness of the potential investment is more scientific and when compared to investor's acquisition cap rate requirement one can determine quickly whether it makes sense to invest.
Projecting the future sale of the property is also important. Obviously, no crystal ball exists but this is where a savvy investment property Realtor can assist with the market trends and market activity.
Currently, in the Whitman County market, cap rates for investment properties are running around 10%.
Remember this is a numbers game and not emotions. Investment inventory is high, mortgage rates are low and sellers are anxious to move their product. There are some amazing investment opportunities out there.
With investment properties you can eliminate the roller coaster ride that we are now experiencing with the stock market.
For more information call or email me. I love the numbers part of this and can guide you through this investment option.
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