Real Estate Investing

By
Real Estate Agent with Keller Williams Realty

Making money with Real Estate

 Investing in real estate is a great way to grow your wealth if done responsibly, with conservative financing, and with an understanding of the tax implications. You also need to decide if you are going to buy and flip or buy and rent.

For many people, real estate investment seems to be the easiest to understand because it is simple, straight-forward and involves a fair exchange between a property owner (the landlord) and the property user (the renter).  As long as the hot water keeps flowing and the rent arrives on time, everyone is happy and benefits are many.

  Well sorry to say, investing in real estate is much more complex than this. There are several different types of real estate investments including residential, commercial, and industrial, as well as real estate that trades on stock exchanges, which are called REITs. 

I hope to help guide you, and avoid some of the mistakes I have seen many make.

Real estate investing basics

  1. Get a team of experts together

You will want to have in place or available to you, an Accountants, Real Estate Agent, Attorney, & a repair man for when you cant do it yourself or just don't want to.

2. Are going to buy rental property?

 If you're considering investing in real estate rental property, there is a lot of research to do. You should also be sure that you're suited to being a landlord, and that you have the time to manage properties.

This cant be stressed enough. For every property you own is a job in its self.

 However, all that aside for now, what we want to do here is to examine the way that a property generates cash flow from rental operations.

For our example, we'll use a fourplex, with all four units being destined for full-time rental. This is a simple cash flow calculation to illustrate the potential of real estate as an investment. Critical to this, as with most investments, is an intelligent and well-researched purchase on the front end. We'll assume for our example that this buyer did their research and made a good buy on our fourplex. Here are the purchase and rental particulars:

1. Purchase price of the fourplex is $325,000.
2. Buyer places 20% down, or $65,000, financing $260,000.
3. 30 year loan is at 6.5%, with Principle/Interest payment of $ 1643 per month.
4. Taxes and insurance at purchase are $3600/year, for total payment of $1943 per month.

Estimating cash-flow entails plotting out the major expected cash outflows (taxes, principal, interest, expenses, vacancies, fees, repairs) and comparing it with the income that the property produces. You can do this either via a spreadsheet or using a real estate evaluation software package

Cash-flow, in turn, will allow you to calculate the property's expected rate of return (ROR). Rate of return is a measure of profitability; it measures the cash that a project will generate vs. the cash that you have to put into the project. You'll need a spreadsheet or a real estate evaluation software to calculate this ratio. 

Next you will want to figure your Rate of Return

 The buyer did their research and sees a steady rental demand for these units, all of which stay occupied most of the time. However, to be prudent in their calculations, a 6% vacancy and non-payment risk will be calculated to anticipate real cash flow. The units are all identical and rent for $900 per month each. Let's see how our calculation breaks down:

1. Gross rental income is $900 X 4 X 12 months, or $43,200 per year.
2. Payments are $1943 X 12 = $23,316 per year.
3. Previous owner's repair expense has averaged $1700 per year.
4. Vacancy and credit loss is estimated at 6% of rents or $2592 per year.
5. Owner spends about $400 each year in miscellaneous and advertising costs, and manages the property on their own.

Those are the basic operational items that go into our cash flow calculation. Let's take our calculation to the profits:

  • Rent income - Vacancy Loss - Payments - Expenses = Cash Flow
  • $43,200 - $2592 - $23,316 - $2100 = $15,192 / 12 = $1266 per month in positive cash flow.
  •  

    Analyzing your return as "cash on cash invested", you would divide your actual cash investment of $65,000 down into the annual return of cash, or $15,192. This is a yield of 23% on your cash invested! There are few investments out there that yield this kind of return. Check out the rest of this rental property investment series to see the other ways in which this example property provides tax and other incentives and returns.

    Do you want to get into Buying and Flipping?

    Buy, Fix and Sell - Do your research... There is a wealth of information out there DO YOUR HOMEWORK!

    Buying a fixer upper home can be a nightmare, punctuated by a series of unexpected disasters, or it can be a profitable whopper of a deal. The secrets lie in choosing the right fixer upper home to buy and getting the fixer checked out by a host of specialized inspectors.

     

    One of the nice aspects about buying a fixer upper is that the purchase is not contingent on the temperature of the real estate market -- whether hot, cold, or nuetral  -- any time is a good time to buy a fixer. Especially if you buy the fixer for less than everything else around it. The advantages are obvious:

    • Lower sales price
    •  Less competition (not everybody wants a fixer upper)
    •  Potential for resale profit
    •  Gain repair knowledge, which will help you to properly maintain the home
    •  Personal satisfaction when the projects are completed

     Remember, if you make a purchase offer at the right price, you make money the day you close. Because the time to think about selling is the day that you buy, even if you have no immediate plans to sell. It will help you to avoid many home selling mistakes on the back end if you avoid home buying mistakes on the front end.

     The Ideal Fixer Upper Home

    The perfect fixer upper is the home that everybody wants when fixed up but few can see past its imperfections to buy. The peeling paint, sagging ceiling or worn carpet are correctable features that turn off many home buyers. They can't see past the disarray. Most first-time home buyers want to buy a home in pristine condition, one that is turnkey and ready to occupy.

    What to Look For in a Fixer Upper Home

    1.     Location, Location, Location

    You've heard it a million times but it's true -- location drives saleability. Don't buy a fixer upper that is located on a busy street, next to a school or across the street from a power plant. Look at fixers in desirable neighborhoods. That doesn't mean you can't make money on a ghetto fixer, but given the choice, wouldn't you prefer a sought-after neighborhood?

    Examine the surrounding homes and pay attention to how the homes are maintained. Are the lawns manicured? Do you notice deferred maintenance on the neighboring exteriors? Does the neighborhood appear conforming with mostly owner-occupied housing?

    2.     Configuration.

    The best type of fixer upper to buy is one that will appeal to the largest pool of buyers, which is a 3 bedroom with more than one bath. That's not to say a two bedroom isn't profitable, especially in a neighborhood of primarily two bedrooms, but three are better. If three bedrooms are better, four are better yet as some buyers who need a four bedroom will not consider a three bedroom, but a three-bedroom buyer will purchase a four bedroom.

    3.   Layout

    If the home is chopped up with a bad layout, realize that it can be expensive or impractical to move walls. The layout should flow. Bedrooms at opposite ends of the home will turnoff buyers with young children, as will a two-story with the master upstairs and the other bedrooms downstairs. Kitchens with more than one entrance are desirable. Some buyers do not like dining rooms serving as the central focal point of the home, from which every other room is accessed.

    4.    Condition

    What's a major rehab to one home buyer is a walk in the park for another. Consider your expertise and whether you want to tackle a home that requires a major renovation to make it habitable. Minor cosmetic improvements are typically less costly and easier on your budget.

    I hope you have found this information helpful

    Your Friend In Real Estate... Lisa Young...Veltri Realtors nj

     

    Comments (1)

    Don Wixom
    RE/MAX Executives Nampa, ID - Nampa, ID
    "Looking out for your next move..."tm

    Wow, Lisa, that is a lot of valuable information in one setting for any prospective real estate investor! Great post & great examples of how you can put real estate to work for you!

    Jan 21, 2011 01:44 PM