Sunday, 9 November 2014

Real Estate Investing 101: What Are Your Financial Goals? | Real Estate Investing

<b>Real Estate Investing</b> 101: What Are Your Financial Goals? | Real Estate Investing

<b>Real Estate Investing</b> 101: What Are Your Financial Goals?

Posted: 04 Nov 2014 06:29 AM PST

Real Estate Investing 101: What Are Your Financial Goals?

It seems like everyone in Chicago wants to be a real estate investor and judging by the number of 2 – 4 flats in the city it seems like plenty of people have realized their dream. I'm not sure what it is about real estate investing that appeals to so many. It might be the late night calls from angry tenants, or the collection nightmares, or the onerous eviction process, or dealing with vacancies, or the unexpected repairs, or the arcane rules around security deposits. Who knows? I suspect it's actually the promise of some kind of vague financial reward. They might become the next Donald Trump.

The problem lies in the vague part. If you're not sure what you are hoping to get out of a real estate investment then how will you know what to buy? So whenever a new investor client comes along the first thing I ask is what are their financial goals? Here are some typical responses.

Cash Flow Positive

This is probably one of the most popular financial objectives and it's easy to understand. They don't want to have to sink cash into the property every single month after collecting the rent and paying off the expenses, including the mortgage payment. They should, but they don't always, factor in the tax benefits of the depreciation in determining the net cash flow.

This seems like a reasonable, basic criteria for an investment property. It's producing some cash and, over time, the rent should go up so the cash flow should go up as well. In addition, as you pay off the mortgage you are building equity in the property. Of course you are also building equity by virtue of the fact that the value of the property is going up as the rents rise.

The only problem is that if you just look at the cash flow you don't know if you're getting a good return on your investment. Maybe you would be better off investing in a Chinchilla organic kale farm. More on this in the cap rate section below.

Cost Per Unit

This has always been a real head scratcher for me since it totally ignores everything that matters – like rent and operating expenses. It seems like $100,000 per rental unit is a popular metric. So I get calls from people looking for buildings with $100,000 units. It doesn't matter what the rent is or where the property is located or what kind of condition the building is in or how nice the units are as long as they don't pay more than $100,000 per unit.

Well, if you really know a neighborhood and you understand its economics and all the buildings are pretty similar then maybe you can sorta use this as a really rough initial screen. But that's it.

Cap Rate

This metric enables an investor to start to do a bit more sophisticated evaluation of investment opportunities. Basically it's net income (rent – all operating expenses excluding interest)/ purchase price. Typical cap rates could be anywhere from 4% - 20%. So it not only takes into account the income the property will generate but also the total investment in the property. For those of you with a finance background it's essentially return on assets and the nice thing about it is that you can use it to compare various investment opportunities - real estate or not.

Of all the metrics this is one of the least bad. However, the problem with this metric is that it simplifies the net income equation (more on that another time) and it doesn't take into account the impact of financing, though it does tell you what the threshold should be for your interest rate – i.e. you don't want to be paying a higher interest rate than your cap rate. And it doesn't reflect the income tax impact.

The other thing that wannabe investors need to realize is that the cap rate is inversely related to the economic prosperity of a neighborhood. So cap rates are very low in Lincoln Park, very high in Englewood, and somewhere in between in West Town. That's because investors need a larger incentive to invest in more economically depressed areas. Vacancies and rent delinquencies are higher there and the prospects of future appreciation are lower – until they are not.

Gross Rent Multiplier

They don't want to pay more than X times the annual rent. (10 times is a popular multiplier.)

Well, it's simple to understand but it totally ignores the expense side of the equation. However, if you think that all the historic expenses are bogus anyway (the seller is lying, they haven't spent enough on maintenance, or they don't track their costs closely enough) and all buildings should basically cost you X% of rent to operate then this basically becomes a proxy for cap rate. For example, an expense ratio of 30% on a building purchased at a 10 X gross rent multiplier essentially has a cap rate of 7% (rent - .3 rent)/ 10 rent = .07.

Cash On Cash Return

The basic concept is to look at the net pre-tax cash flow relative to the cash invested in the property. This is similar to the cap rate except that it includes the mortgage payment as an expense and the denominator is just the cash invested by the buyer (down payment + closing costs + needed improvements). The complete formula would be (rent – operating expenses - mortgage payment)/ (down payment + closing costs + needed improvements).

This is getting closer to a useful measure in that it tries to get at the return on investment. However, it's still messed up in that it includes principal repayment as an expense and it doesn't reflect income tax impacts.

Return On Equity

This is a refined version of cash on cash return. If done correctly it would be based upon after tax numbers and would not include principal repayment as an expense. It basically tells you what kind of economic return on your investment you will get - and after all that should be what you are after.

Of all the simple metrics I probably like this one the most since it really tells you what you need to know - assuming of course you factor in everything that really matters. However, as I will point out in a later post this number - in fact all these numbers - vary over time.

Net Present Value

They taught us in business school that this is the only acceptable way to evaluate any investment and that's actually correct. However, almost no one looks at real estate investments this way because it's too complicated for the average bear. If you are interested you will find a good overview of this technique from Wikipedia: Net Present Value.

Other Techniques

In reality there are as many metrics as there are wannabe real estate investors. Some people are focused single mindedly on the appreciation and others just want the properties to produce some kind of income. I've had people tell me that they will use all the cash from the properties to pay down the loan and they want to own the building outright in X years. Or maybe their goal is to live in one unit and rent out the others to pay their expenses. I totally get financial goals like this but the problem is that it's difficult to compare opportunities on this basis and they really won't know whether or not real estate investing will be any better for them than investing in that organic kale farm.

In a follow up post I will cover a real estate investing model that I created that helps investors evaluate multiple metrics simultaneously and also tells them what they really need to know.

If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think I'm the next Kurt Vonnegut you can Subscribe to Getting Real by Email. Please be sure to verify your email address when you receive the verification notice.

Filed under: Real estate investing

Tags: Real estate investing

Getting Started in <b>Real Estate Investing</b> for Less Than $100 - Side <b>...</b>

Posted: 06 Nov 2014 02:00 AM PST

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j masseyNote: Click here to get J.'s top tips on starting a real estate side hustle.

J. Massey discovered real estate as a business out of necessity. He and his wife were both in poor health, and as he explains, had a 398 credit score and $75 to their name.

Then, introduced to real estate wholesaling, the picture began to turn around. This strategy allowed J. to develop some cash flow without risking his own limited assets, and he says he got started by dedicating just 2 hours a day, or 10 hours a week to this new side hustle.

I'm a little wary of people selling the whole "no money down / get rich with real estate" pitch, but J. seems like someone who's genuinely walked the walk, and spoke at length about the core of the business being about helping people.

And indeed that's the core of any business that wants to be around for the long-term.

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Learn:

  • How J. got started in the real estate business when he was at a very low point in his life, healthwise and financially.
  • Why 95% of the real estate market is "retail," but the other 5% is where the action is as an investor.
  • Why J. says the first step is not to find houses, but rather to find buyers.
  • The importance of relationships and networking, and positioning yourself as a problem solver (rather than a vulture).
  • Some acquisition strategies to find distressed properties. "Where there's chaos, there's cash flow."
  • J.'s #1 tip for Side Hustle Nation

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What do you think? Viable side hustle or no?

Have you ever tried to find these kinds of wholesaling deals in your neighborhood? I think the biggest appeal for me is they don't require the 20% down, so no matter how expensive your market is, that's not really a factor. In fact, like J. explained, there might even be more profit opportunity in expensive markets.

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New report: Dallas joins the ranks of world&#39;s top <b>real estate</b> <b>...</b>

Posted: 08 Oct 2014 08:21 AM PDT

Dallas ranked ninth among the world's top real estate investment venues. (DMN files)

A new report ranks Dallas among the world's top cities for real estate investment.

The Dallas-area placed ninth in the list with other markets including New York, London and Tokyo in Cushman & Wakefield's "growth cities" report.

Dallas recorded $14.1 billion in real estate investments for the 1-year period ending with second quarter of 2014 an increase of 32.5 percent from the previous year.

That pushed Houston out of the top 10 list and puts Big D right behind Chicago and Washington, D.C. in the comparison.

Cushman & Wakefield reported that global real estate investment for the period rise by 17.2 percent to $788 billion.

"Dallas continues to be a leader in domestic real estate investment and corporate migration, and those trends should continue for some time," Steve Everbach, who heads Cushman & Wakefield's Dallas office, said in a statement.

New York was the leading market in the survey with $55.4 billion in real estate investments.

Foreign real estate investment in markets across the globe is up by almost 40 percent, according to C&W.

Dallas, Atlanta, Houston,  Denver and Austin were also identified as markets where investors are likely to ramp up office purchases in 2015.

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<b>Real Estate Investing</b> 101 [Infographic] | Auction.com

Posted: 04 Nov 2014 09:49 AM PST

Real estate investing doesn't have to be complex. This infographic boils down the key points you need to know about the different ways to invest, how to secure financing, and how to determine your return on investment.

 Real Estate 101 InfographicEmbed This Infographic, copy and Paste the Code Below

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Author : Auction.com

Auction.com is the nation's leading online real estate marketplace. At Auction.com, we believe that bringing buyers and sellers together with an easy, transparent platform yields the true value of any real estate asset, whether it be a luxury home, a multi-story Class A office building, an entry-level foreclosed home, or a self-storage facility.

Japanese <b>Real Estate Investing</b> Scion Buys on Fifth Avenue for <b>...</b>

Posted: 30 Oct 2014 07:30 AM PDT

One part winter, two parts wistfulness.

One part winter, two parts wistfulness.

From the 11th-floor apartment at 912 Fifth Avenue that he and his wife just purchased for $7.775 million, Masahiro Honzawa will not be able to see the Nashville minor league baseball stadium where the Triple-A Oakland Athletics affiliate he co-owns—the Sounds—play. But he will be able to see Central Park. In fact, if the 30 feet of Park frontage described in the listing held by Ileen Schoenfeld and Ary Moran of Brown Harris Stevens are bonafide—and the wintry vista that accompanies it, too—Mr. Honzawa should have a dead-on view of the San Remo's iconic towers rising over the treetops from Central Park West.

But he need not be jealous. A Gross and Schwartz-designed 1925 cooperative in Italianate Renaissance style, 912 Fifth is no one's idea of a consolation prize. And besides, Mr. Honzawa is well accustomed to owning pricey property. Until 2008, together with his brother, he ran the New York arm of the Hiro Enterprise USA real estate company, whose portfolio included the Mobil Building on 42nd Street—sold for $900 million in April—and 650 Madison Avenue, the home of the Crate & Barrel store, which sold for $680 million six years ago. The American Surety Building, in the Financial District, and 655 Fifth Avenue also numbered among the firm's holdings.

Things ultimately didn't go so well for Hiro. The firm's parent company sold it off earlier this year, by which time Goldman Sachs owned a considerable share of it, and subsequently folded itself. Hiro currently owes the city and state some $17 million in unpaid taxes, though it's unclear how or from whom that money might be collected.

Now, about that pied-à-terre tax…

At any rate, the co-op, which belonged until recently to one Harriet Kittay, a sculptor, is a classic, if something of a dated one. It features a generous gallery opening on a 30-foot living room with beamed ceilings, a wood-burning fireplace and the aforementioned view. The floor plan, configured currently for three bedrooms, the listing notes, is "flexible," which means the new owners will probably want to renovate to "create the home of [their] dreams."

If you suggest that he build it, he will come, apparently.

<b>Real Estate</b> Plans That Are Worth <b>Investing</b> In With Your Self <b>...</b>

Posted: 03 Nov 2014 03:07 PM PST

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Having the ability to invest in real estate with your self-directed IRA means that you have important and powerful alternatives to simply investing in stocks, bonds and mutual funds, as you would be limited to with a traditional IRA custodian.

But even if you're interested in using your self-directed IRA to invest in real estate, you've still got choices to make in terms of the types of real estate to purchase. You can make this determination by asking yourself what are your investment goals and objectives.

If your primary investment objective is long-term growth, then there are a number of different types of real estate investments you can make. Some of the most common types of investment real estate, including single-family and multifamily residential properties, are certainly capable of generating healthy long-term returns.

As with any type of investment, though, you still need to do your research in order to be as confident as possible that you are choosing the right property. Real estate investments as a whole will increase in value over time, but that's not always the case. And just take a look at what's happened to real estate prices across the country over the last 20 or 30 years. Some local real estate markets have experienced growth rates significantly higher than others.

When your goal is long-term growth you can also find many opportunities in other types of investment real estate, including commercial and industrial properties, undeveloped land, and even farmland.

On the other hand, if you've already entered retirement then you're much more likely to be interested in how real estate investments can generate income to cover your retirement expenses, rather than long-term growth potential. One possible exception is if you have a significant estate that includes other retirement accounts, and you're looking to make use of a self-directed Roth IRA to help you achieve your estate planning goals.

A Retirement Home

Many self-directed IRA holders consider this type of investment, but fewer than you think actually follow through. Since many future retirees plan to move to a different part of the country once they stop working, it's possible to buy a retirement home with the funds in a self-directed IRA, and then use that during retirement.

One important factor to consider if you choose to go this route is that any use of that retirement home by you or any members of your family, at any point before you actually retire, is prohibited by the rules on IRAs. That's because such a use would be considered "self- dealing" (that is, using retirement funds or assets to benefit yourself before you actually take a distribution of those funds or assets), and this could trigger taxes and penalties if it occurs before retirement.

The best piece of investment real estate for your self-directed IRA is the one the best matches your investment goals and outlook.
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