Calculating Your Maximum Price Article Available

Those of you publishing a real estate newsletter might be interested in knowing that a real estate investing article I wrote several years ago has been modified and is now available on the ProAPOD® website at http://www.proapod.com/Articles/maximum-price.htm

The article explains a formula you can use when shopping for a rental property investment that shows the maximum price that can be paid for the property to at least get a break-even cash flow. The benefit of knowing the formula for real estate investors is that they can set price parameters before setting out to purchase that will in turn save them the time of looking at possible investment opportunities they can’t afford to buy without creating a negative cash flow.

The article, along with a range of other real estate investing articles, can also be accessed from our article center at http://www.proapod.com/real-estate-investing-articles.htm

Please feel free to use the article in your newsletter or on your website. The only requirement is that you include the author resource and links.

What’s it Really Worth? Getting Accurate Appraisals

To some understanding appraisals can be challenging. Let’s take a look at the process. Once we know how much it’ll cost to get the home repaired then we must find out what it’ll be worth after the repairs are made, if any. We’ll be getting what’s called an appraisal based on the after repaired value, sometimes called subject to improvements.

You want to find one that is familiar with investment property and one that’s fairly conservative. You don’t need a fluffed up value of your property only to get stuck in the property when your buyer’s lender orders their own appraisal and it comes in much lower than yours.

You’ll need a copy of a Brokers Price Opinion (BPO). This is a form that realtors use when contacted by banks to give them an estimate of the property value. By having this you’ll know what the brokers look for and you’ll be able to negotiate better deals when you find discrepancies in the information presented to the bank by the realtor.

Here’s a quick and easy method when looking at an appraisal to determine whether or not your lender or underwriter will have a problem with the appraisal. When you get an appraisal on a property, I want you to look at the pictures in it. Look at your property and the comparable sales. Pick out the house you’d LEAST want to live in. If there’s a noticeable difference and it’s YOUR house then the underwriter will definitely have a problem with the appraisal. The definition of a comp is a comparable sale with the least amount of adjustments.

Now you’ll have a jump on your competition. This is great to use when someone is trying to sell you a property and they already have an appraisal. Just take a quick look and determine if it’s a good appraisal or not. Remember this is just a quick method and is not a definite way to tell if you have a good appraisal. There are many things the underwriters look for such as the gross and net adjustments.

A checklist that we use to review every appraisal when it comes in. This appraisal quality control checklist will help you to see what every lender will also be looking at so you’ll know when you have a good appraisal or not.

A checklist that we use to review every appraisal when it comes in. This appraisal quality control checklist will help you to see what every lender will also be looking at so you’ll know when you have a good appraisal or not.

For more articles and a 10 part e-course on how to create your own Ultimate Buying and Selling Machine! plus over 50 training audios, simply go to www.LarryGoinsFreeOffer.com where you will gain instant access

Article Source: ArticleSpan

Modified Article on Cap Rate and GRM Available

I recently modified an article I wrote several years ago that defines cap rate and gross rent multiplier (GRM) in order to conclude which best determines rental property value and measures financial performance. The article has been posted on our ProAPOD website on our Articles page. Here’s are some excerpts:

“…cap rate and GRM are used by sellers to set a selling price for rental properties, and by buyers trying to determine what price to offer.

“So which is better? At the end of the day, which method of estimating a rental property’s value best measures the property’s financial performance and therein promotes a smarter investment decision?

“In this article, we’ll consider both, and then decide.”

Read the entire article…

Simple Guide to Real Estate Investment Property Evaluation

In this post, I am going to show the exact steps I take to evaluate a potential real estate investment property. The focus will be on single family residences, but this method can be applied to other types of property. Also, I am going to include the actual spreadsheet I use to input the obtained values, and work the numbers.

With the knowledge and tools that you will find here, you should be able to estimate your costs for a real estate property, and consequently, the profit you should expect to make from the deal. The only thing not included in this spreadsheet are any repair costs and holding costs associated with a potential real estate investment property, as this will be covered in a future post. Ok, let’s look at each of the steps carefully:

Real Estate Market Research

* Know the market value of the potential real estate investment property.

Have your trusty realtor run a CMA for the area over the last 6 months. If there is a lot of activity in the particular market you are in, have the realtor run the CMA for just the street where the subject property is located. The closer and more comparable the sold properties are to the subject property, the more reliable the information will be.

* Know the market rent for comparable investment properties.

Again, use your realtor for this one, or call other realtors in the area. Ask them what a comparable home might rent for in the neighborhood you are looking. Be specific; give them the square feet, number of bedrooms and bathrooms, garage capacity, and street where the real estate is located. Ask them if they have managed any properties in the area, and what they are getting in rent. Some realtors will provide rental listings online, or submit them to the local newspaper.

* Know the yearly tax amount of the potential real estate investment property.

Typically, this information can be found online. Check your appropriate county’s website for tax information. If you cannot find the website, give the county courthouse a call, as this is public information.

Run the Numbers

This is my favorite part. This is where the Potential Real Estate Investment Property Estimator comes into play, and you find out how low your offer must be for you to make the kind of money you want to make. Remember "The One Key to Real Estate Investing" – buy right.

1. On the left hand side. input the market value, market rent, and yearly tax amount for the potential real estate investment property that you have obtained into the appropriate cells of the spreadsheet. Hold off on inputting your offer amount for now.

2. The No of Units cell is reserved for when you are evaluating a duplex, fourplex or other multifamily dwelling. Leave this at 1 for single family residences.

3. The Closing Costs cell is a percentage that you would be willing to spend to sell the property (including realtor fees, doc fees, and any other fees to close the sale of the property). In general, I am not willing to pay more than 9% of the sales price for closing costs, although I am a realtor, so some of the expense will come back to me, 🙂

4. On the right hand side of the input area, input the necessary items per your lender. Be sure your lender gives you a good faith estimate so that you can count on the accuracy of the items.

5. Input your desired offer amount (I usually start around 20k less than the asking price, and work my way down from there). When the income/profit reaches the level you want in the automatic calculation area, PRESTO! You now have an offer you can feel good about.

Once you have your offer, I recommend submitting a slightly lower offer, just so that you have room to negotiate up if necessary. Be firm though, have a definite top price that you will not go over. Do not get emotional or you will lose.

Note: The default values provided in the Potential Real Estate Investment Property Estimator are estimates only.

Get more great finance and investing tips at Jeffry Evans’ personal finance blog. Get the spreadsheet on Simple Guide to Real Estate Investment Property Evaluation.

Article Source: ArticleSpan

How a Property’s Operating Expense Ratios Might Expose Possible Problems

A close examination of operating expense ratios can alert you to possible problems that exist with the rental property you consider purchasing, and in this article, I want to give you some examples.

Before we get started, however, let me briefly explain what operating expenses are and how operating expense ratios are computed.

Operating expenses are costs incurred by an owner to keep a property in service. These include such expenses as property tax, insurance, utilities, repairs and maintenance, property management, trash and so on. They do not, however, include the debt service which in turn is deducted from the net operating income (i.e., income less expenses) to compute cash flow as some who are new to real estate investing often mistake.

Operating expense ratio is the ratio of individual operating expenses to the gross operating income (GOI), or Operating Expense / Gross Operating Income. A rental property with $50,000 GOI and property taxes of $5,000, for example, would compute an expense ratio of 10.0% for property taxes ($5,000 / 50,000 = 10.0%).

In simple terms, the ratio tells you how big a bite each operating expense partially takes from the gross operating income. If you go a step further and divide the total expenses by the GOI, you can determine what portion of gross operating income is eaten up as a whole by operating expenses.

In our case, we’ll presume that you’re examining an annual property operating data (APOD) with the expense data for a subject rental property, and compiled some data on other similar rental properties in the area and formulated some norms. In other words, that you have enough information to have reasonable expectations of what specific operating expense ratios should be for your property of interest.

1) Property Taxes

When the property tax ratios are significantly different, it might be a clue that the subject property’s data or the county tax assessor’s data is faulty. Ask for the tax statements and maybe meet with the tax assessor so you are reasonably assured that nothing hidden or misconstrued might come back later and bite you.

2) Insurance Costs

A higher than norm insurance cost ratio could spell trouble, and should prompt you (if the difference is significant) to have someone from your insurance company do a field inspection and advise you whether there are violations or other issues with the property that might affect insurability.

3) Electricity

Dissimilarities in electricity ratios could indicate that one property is separately metered and the other is not, or simply a difference in lighting of common areas. In the former case, if the subject property were not separately metered, would a new owner be compelled by local codes or ordinances to install them? If electricity is non-existent in the subject property’s operating expenses, you would want to know why.

4) Heating

A higher heating ratio than you would expect might indicate a faulty heating system or some other issue. Is it possible for you to affordably correct the deficiencies and cut costs? In any case, always verify heating and other utility costs by contacting the utility providers directly, and always conduct a careful inspection of the property.

5) Repairs and Maintenance

Several occurrences could explain why repairs and maintenance ratios differ between properties, and you should make it your business to investigate. A higher-than-norm ratio could spell a troubled property or simply indicate some recent remodeling or updating. Likewise, a lower-than-norm ratio might mean the owner neglected caring for the property, perhaps shaved costs by doing the work himself, or maybe the property simply didn’t require much maintenance this year. Whatever the reason, as you approach repairs and maintenance costs, remember to ask yourself, “What will I pay when I own this property?”

We can continue, of course, but you get the idea. When you spot notable disparity in the operating expense ratios between the property you want to buy and what is reasonably expected they are cause to ask plenty of questions.

Finally, reconstruct the APOD using income and expense projections you feel reasonably confident in and then reexamine the results to see whether the subject rental property makes sense as an investment.

Here’s to your success.

Understanding the Basic Benefits of Owning Rental Property

In this article, I want to discuss briefly the four basic ways that real estate investors make money with on their investment with rental properties.

1. Cash Flow
2. Appreciation
3. Loan Amortization
4. Tax Shelter

In a word, cash flow is the amount of cash coming into a rental property less the cash that goes out; appreciation is the property’s growth in value over time; loan amortization is principal reduction of the mortgage over time; and tax shelter concerns deductions allowable by the tax code such as mortgage interest and depreciation.

These four benefits may not be present in equal measure with every rental property, but rental properties generally constitute some blend of the four benefits with some stronger and some lesser.

Whereas one rental property, for example, might give you a good annual cash flow it might offer you little appreciable value and return when you the sell the property. Another property might yield little annual cash flow due to continual updating and repairs but in the end give you a fantastic payday when you sell. And some rental properties might simply offer you a good tax write off, with neither the benefit of either cash flow or appreciation.

You get the idea. Whereas cash flow, appreciation, loan amortization, and tax shelter comprise the complete pool of potential benefits associated with owning real estate investment property, it is highly unlikely that real estate investors will obtain all four benefits in one rental property alone.

Okay, so which benefit is the most important? That depends on your investment goals, and what it is you hope to accomplish by investing in real estate. Just be sure to create a thorough real estate analysis on each rental property you are considering and make your investment decision based on the results you deem most important.

Here’s to your real estate investing success.