What Not to Neglect When You Start Real Estate Investing

Real estate investing provides no guarantees. Whereas in some cases real estate investing has made some investors very wealthy, it has also (not unlike any business venture) left many others disillusioned; primarily because it didn’t make them wealthy, and in some unfortunate cases, even lost them money.

In this article, I want to discuss some issues connected with the selection and acquisition of investment properties which, if neglected, can get real estate investors into trouble by serving the investor less-than-desirable cash flows and rates of return.

1) Do Not Neglect to Run the Numbers

Because a rental property’s financial performance determines investing success or failure, it just makes sense that you must be able to run the numbers adequately so you can measure a property’s vital signs and judge its health as an investment opportunity before you spend the money.

Whether you’re an experienced income property investor or beginner, you must develop proficiency for measuring such basics as rates of return, cash flows, and estimates of value. Otherwise you’re just guessing as to whether a specific property is profitable, meet your investment objectives, and at the end of the day will make you money.

Understand that the prudent investor always seeks a return on investment. It’s not an emotional matter (physical aspects of the rental property are secondary). Real estate investing concerns buying the property’s anticipated economic benefits called the income stream. Therefore you must be able to examine revenue streams along with expenses, net operating income, and cash flows carefully with some serious number crunching before you make a purchase.

2) Do Not Neglect the Price

It seems unnecessary to warn investors not to over pay for income property because it’s difficult to conceive that any reasonable person would pay more for real estate than fair market value—but they do, perhaps not knowingly, but by default.

Investors that buy income property based on emotion, for instance, or because they are told that it’s a good buy (without credible data to substantiate the claim), always run the risk of paying too much for rental property.

Before you invest, you must always research the fair market value in a given market area for the type of investment property you’re interested in beforehand and then base your offer accordingly. At the very least, do a comparable sold survey. You need to know the price per unit and capitalization rate comparable rental properties recently sold so you don’t get caught up in sentiment and sales hype.

3) Do Not Neglect a Tendency to Accept Unrealistic Expectations

A tendency to accept, or unwittingly fabricate, high and unrealistic expectations surrounding the potential benefits of a rental property commonly occurs in real estate investing when investors become more anxious to make an investment than they are to make a good investment.

When considering an income property with low rents, for example, don’t jump to the conclusion that you can raise the rents and still maintain an occupancy level able to produce the income stream you are counting on (at least not overnight). Furthermore, look for underlying reasons why the rents are low and only afterward, base your rent estimates on comparable income properties in the surrounding area.

Also, don’t count on a bump in property value based on what the local planning department tells you without thoroughly researching it. Rezoning a property, for instance, generally requires a favorable vote from agencies other than the planning department such as traffic control and the fire department.

Here’s the bottom line.

If you want to succeed at real estate investing, always do your homework. Bear in mind that that one-in-a-million investment opportunities to purchase a rental property guaranteed to make money is going to happen to the next real estate investor, not to you. So remain diligent.

Things to Consider in Real Estate Investing

Real estate investments may seem simple and easy at a glance, but the truth is it is a very complicated process where a move or two may lead you to fortune or sad bankruptcy. There are a lot of pitfalls which can be avoided if one plans ahead and does his home work.
These are some of the things that you should keep in mind when you are starting a real estate business.

Prevent your emotions from getting in the way of business:

There are instances wherein an investor gets emotionally attached to a property, especially if it is the kind of property you want for yourself.

To be a successful real estate investor one must be able to keep his heart at bay. When buying properties you shouldn’t act as a homeowner, but as a business owner. Never buy a property using your own preference as basis, be more business minded and think about the value it will have in the real estate market.

Meticulously examine the property:

When investing for a real estate property, always perform a thorough inspection. A property may look good, yet may have hidden flaws. Before buying the property, it is just right to examine it to the bones; every inch, every detail. This will save you from regrets and frustrations when you learn that what you paid for is not worth it.

Aside from the structure itself, you may want to research about the neighborhood, the amenities surrounding the property etc. This information can be utilized not only in appraising the cost of the property but in judging its selling price as well.

Consider Accessibility:

It would be a wise idea to invest in places near your area than buying properties in remote places. It would be more advantageous because you can regularly visit the property especially during emergencies. Another benefit of having your estate investment nearby is that you are familiar with the place and you will be able to monitor the happenings around your property.

Look for methods that work:

Check the systems of other real estate investors. See what is effective and what is not. Individuality and originality is good, but a little scouting and imitation wouldn’t hurt especially if it is tried and tested. Absorb what is good and dump what is bad, as time goes on you will eventually develop a more successful method.

Get Enough Insurance:

One of the most important things to consider in real estate investment is insurance. You can never get enough of it. Search for an insurance package that will suit your needs. There are packages that cover almost everything including fire accidents and other natural disaster.

Be advised that the costs of insurance vary depending on the structure, the geographical location, climate etc. Study the packages carefully and take the one you think is best for your investment.

To make the most out of your investments, you should plan ahead. Never rush so that you won’t overlook anything. Be patient and take one step at a time. Remember that when you avoid mistakes, you save yourself from money loss, wasted time and effort.

E. Linares is Chief Visionary Architect at Commercial Magnet:: the new face of the online lending marketplace where borrowers and lenders connect. CommercialMagnet.com is the entrepreneurial platform taking business owners from start to funding. Find out how a Venture Capital Loans or Commercial Loans can help fuel your business at http://www.commercialmagnet.com.

Article Source: ArticleSpan

The Top 5 Inspections You Must Address When You Sell Rental Property

If you’re a real estate agent about to start selling rental property and fortunate enough to enter an escrow either as the listing or selling broker, it might help you to know what physical inspections of the rental property are typically required during escrow plus some possible outcomes and things you must do to address them.

1) The Walk-thru Inspection

A “walk-thru” inspection is where the buyer gets to physically enter and examine all the units in the rental property with an eye on the over-all condition and quality of the carpets, appliances, fixtures, and tenants. This inspection regularly takes place during escrow because sellers are reluctant to disturb or alert tenants about a sale until they are satisfied with the buyer’s ability to make the purchase and have an accepted signed-around offer.

In this case, the buyer will either approve the inspection, choose to renegotiate their offer, or simply walk away altogether. Just be sure that as the selling real estate agent to include a clause something like “subject to a walk-thru and buyer satisfaction of all interior units” in your buyer’s offer to purchase because it’s not granted by default.

2) The Infrastructure Inspection

This is where the buyer typically hires licensed contractors to make inspections for such things as pest and dry rot, plumbing, electrical, roofing, and maybe even mold. Obviously these inspections will be a cost to the buyer so they shouldn’t be ordered until the walk-thru inspection is approved.

As before, the buyer will either approve the inspections, try to renegotiate their offer, or terminate the offer. As the selling real estate agent always include a clause something like “subject to the buyer’s approval of pest and dry rot, roof, and (other inspections the buyer requests)” in your buyer’s offer to purchase.

3) Inspection of the Repairs

In this case, when repairs are required then documentation from the contractor(s) who made the repairs stating they were made and all problems corrected satisfactorily must be obtained for the buyer’s approval and then later presented to the lender. In some situations, the buyer might even want to physically inspect and approve the repairs. Just be sure to include all of this as a contingency of sale in the buyer’s offer to purchase.

4) The Appraiser’s Inspection

Upon the buyer’s approval and satisfaction of the repairs (not before), the buyer will order (and pay for) a bank appraisal so an estimate of the income property’s fair market price and over-all condition can be submitted to the lender. The appraiser will conduct his own inspection of the exterior and interior of the property and might want entry into some units (if not all units).

As the selling agent, be sure to make your buyer’s offer to purchase contingent on the buyer’s approval of the appraisal.

5) Re-inspection of the Units

This last inspection of the units is not as common as the other inspections but it’s a good idea to include it in your buyer’s offer to purchase. One final walk-thru of the units maybe a week before closing just so the buyer can be sure that nothing has dramatically changed since the initial walk-thru inspection (perhaps weeks or months earlier).

The Facts about Net Present Value from A to Z

Net present value (NPV) is a measurement of the investment performance of a property that converts investment cash flows to a single amount to facilitate a real estate investor’s decision making for property analysis and comparison purposes. And this true whether the investor is concerned with maximizing wealth at a specific point in time or minimizing the cost of obtaining a particular benefit.

In this article, we define net present value, look at the components required to calculate it, and interpret the results.

Technically, NPV measures the sum of the present values of a property’s future cash flows and reversion netted against the initial investment. In other words, all the future cash flows (including future sales proceeds) you are expecting to receive over the course of owning the income property (the holding period) are discounted back with your designated “discount rate” (rate of return) to calculate the present value of those funds and then subsequently “added” to your initial investment.

Okay, that was a mouthful and perhaps fuzzy, but bear with me. It should become clearer once you understand the components that surround net present value.

  • Holding Period – This is specified time you expect to own the investment property i.e., five years, six years, and so on.
  • Initial Investment – This is the cost of the investment and typically is the property’s purchase price plus loan points (if any) less the total amount of the loan. For example, if you pay $100,000 for a property and are getting a loan for $80,000 at one loan point, then your initial investment would be $20,800 (price – loan + points).
  • Cash Flows – These are the funds projected periodically at the end of each year the property is held and are derived from rental and other income less operating expenses, debt service, and (in the case of cash flow after-tax) taxes.
  • Sale Proceeds – This is the amount you are expecting to receive from the sale of the property at the end of the forecast holding period. Sale proceeds are equal to sale price less brokerage commissions and other closing costs, outstanding loan balance(s), and (in the case of sale proceeds after taxes) taxes resulting from the sale.
  • Discount Rate – This is the minimum acceptable rate of return that you want to earn from owning the investment property. In other words, if you have the opportunity to make a seven percent return on an alternative investment of similar risk, size, and duration, then you would surely not want to accept a lower rate than seven percent as your discount rate to derive NPV for the property being analyzed.

Okay, let’s look at an example so you can see the procedure taken to calculate net present value. For our purposes we’ll assume just a four-year holding period, but bear in mind that it can encompass any holding period. It should also be stated that the NPV can be used with before or after-tax cash flows and sale proceeds, though most real estate investors would probably include the taxes.

For our example we’ll assume an initial investment of $10,000 and the following periodic cash flows: zero EOY 1, negative $1,000 EOY 2, $4,000 EOY 3, and $6,000 EOY 4 along with sale proceeds of $4,500. Our desired yield (discount rate) will be 7.0%. Here’s the structure:

Year0: (10,000) – initial investment must be shown as a negative
Year1: 0
Year2: (1,000)
Year3: 4,000
Year4: 10,500 – the cash flow plus sales proceeds

Now the calculation: discount each cash flow in Years 1-4 back to Year 0 at 7.0% and “add” that amount to the initial investment to determine NPV. Here’s the result: (10,000) + 10,402.15 = 402.15.

This means that the present value of cash flow benefits for this investment property exceeds our initial investment by $402.15. In other words, according to our net present value we can pay as much as $10,402.15 ($10,000 + $402.15) for this rental property and earn our required 7% rate of return. Likewise, a negative NPV in this case would have indicated that the future cash flows from this investment are not sufficient to yield the 7% rate of return required and the investor could pay no more than $9,597.85 ($10,000 – $402.15) in order to earn the required 7% rate of return.

Risks Faced By Real Estate Investors In A Buyers Market

From one end of the United States to the other real estate property values are falling. In some areas, like Arizona, Florida, Nevada, Michigan and California, they are in free fall.

Foreclosures are at an all time high, flooding the market with homes for sale. Many of these homes are currently worth less than what is owed on them. The only way these sellers can move their property is through a short sale.

A short sale means that the seller is asking the lender to accept less than what is owed on the property as payment in full. There are so many properties currently being submitted for short sales that lenders and service

Those properties that have been foreclosed and repossessed by the lenders are being placed for sale in the form of REO (real estate owned) properties. The number of properties in this category is increasing at a rapid rate and swelling already large inventories of homes.

The result of all this is the strongest buyer’s market we have ever seen in this country. The inventories of property for sale are at an all time high.

While this is dismal news for people that have to sell it is welcome news for those interested in purchasing homes. The opportunity to buy at very favorable price and terms has never been better. For a real estate investor it is the opportunity of a lifetime.

These opportunities are not without risks. The greatest risk in the current market is your ability to exit your investment. There is no doubt that you should be able to source a real estate property at a good price but what are you going to do with it once you have it. It is possible to buy 15 properties a year at great prices and still end up broke and in bankruptcy.

This is all part of building a solid business plan up front. Each property that you purchase needs to be evaluated on its own merits. You need to plan an exit strategy before you buy. This exit strategy needs to be carefully planned out and implemented.

In a buyer’s market this practice becomes a necessity.

There are numerous exit strategies available to a real estate investor. Some of these are buy and hold, rehabbing, flipping and wholesaling. All are viable options depending on the property and all have different associated risks and rewards.

The safest method is wholesaling. This is the practice of putting a property under contract and usually selling the contract for an assignment fee to an investor that will rehab, buy and hold or flip the property themselves. This low risk also results in low rewards. Margins in this type of investing are small and as a consequence if you wish to make good money you must do volume.

One of the results of the mortgage crisis is that with declining property values, equity in those properties has also declined. The lax financing requirements also allowed many people to refinance their homes and pull equity out. Because of these two situations it is often difficult to find good wholesale deals in many parts of the country.

Exit strategy number two is to rehab and sell the property. This is also becoming more difficult as access to new mortgages is becoming more difficult for homebuyers. Investors are discovering that it easy to purchase homes that require repairs but selling those homes is becoming very difficult. When purchasing a home that will require a rehab the investor must account for additional holding time in order to sell the property. This translates to a lower purchase price for the original seller.

Buying and holding property has always been a popular way to build wealth through real estate. This market will reward investors that use buy and hold as a main strategy with some terrific returns. The one caveat with buying and holding property is that you need to make sure that the cash flow is sufficient to maintain the property and your business. Many investors have gone to the poor house owning lots of real estate. Remember that you can’t eat equity.

The last exit strategy is flipping. This is what you see on TV. Well not quite what you see on TV. In the real world flipping is getting more difficult unless you are selling to a cash buyer. The banks are scrutinizing each deal much more carefully and most want some amount of seasoning. Usually 6 months but sometimes as much as 12 months are required. There are ways around this problem but it does create some barriers, especially with first time homebuyers.

A savvy investor can make serious money in this market by being prudent and observant. Various areas around the country are undergoing different levels of hardship. Some of the areas that did not undergo rapid appreciation have more stable real estate markets.

Investors are moving around the country like never before seeking good markets in which to invest. By being prudent they are able to make acquisitions that will reward them greatly over time. Newer investors need to be much more cautious in making their acquisitions. Seasoned investors will have a much better handle on such thing as repair costs and carrying costs.

Often, newer investors will underestimate these items and come to regret it later on when these costs eat into their profits. Newer investors should make sure that they are receiving good information from any courses that they are taking. Much of what worked two years ago is not working so well in today’s market.

If you are purchasing a property to resell you must purchase it at a price that will let you create the nicest and best home in its price range. If your property is priced well under market and shows better than others it will sell in any market. Just be aware of your completion and be prepared to make a deal with a buyer. In a buyers market the buyer is king and they call the shots.

If you want to get more information and stay current on real estate investing you can learn more at http://www.shortclosures.com

Richard Weiss has been actively engaged in the real estate business for over 30 years. He has a successful real estate investing company on the Treasure Coast of Florida. You can subscribe his Free Newsletter or check out his Blog. You can contact him at top5percent@bellsouth.net.

Article Source: ArticleSpan

What is Financial Management Rate of Return (FMMR)?

Financial management rate of return (or FMMR) is a return conceived (at least I think it was) by the Commercial Investment Real Estate Institute (CIREI) and is taught to those who seek the CCIM (Certified Commercial Investment Member) designation.

Having taken several courses at CIREI, I do know at least that they promote the FMMR return and teach how to calculate it. And given that I have never heard the term used elsewhere, I’ll simply give them the credit for the financial management rate of return with the reservation that I might be mistaken and that it might actually have originated elsewhere.

Fair enough.

Okay, so what exactly is a financial management rate of return, what does it signify exactly, and how do you compute it?

The idea behind the return is that investors often are confronted with selecting among alternate investments which IRR (internal rate of return) doesn’t adequately provide, therefore it became necessary to introduce this return so investors can make par basis comparisons between investments (i.e., apples-to-apples).

The basic components of FMMR (according to CIREI) are based upon the notion that real estate investors seek to maximize their long-term wealth and as a result must account for positive after-tax cash flows.

In other words, if an investor is collecting one thousand dollars a month from a particular rental property after financing and taxes are evaluated it can be assumed that those funds would not be buried under a mattress. That the investor would instead option to deposit a portion in the bank and collect what the institute calls a “safe rate”, and in turn reinvest certain minimum amounts in excess of those funds in some other “run of the mill” investment and collect after-tax yields in what they term as a “reinvestment rate”.

As a disclaimer, CIREI adds that the funds placed in a “safe rate” account are assumed to be highly liquid and can be withdrawn on a moments notice without loss of either principal or interest, and the funds yielding the “reinvestment rate” are those that would not be needed to meet other cash requirements of the property.

The computation for FMMR is highly complex. In fact, other than my own real estate investment software, I’ve never seen any other software solution tackle it. Here’s how it works in concept.

After-tax cash flows for any particular investment are projected out over some number of years on an annual EOY (end of year) basis. Any negative cash flows get discounted back at the safe rate until they are removed by prior positive cash flows (where possible) and positive cash flows (if any exist) are compounded forward at the reinvestment rate.

Let’s assume that we want to compute the financial management rate of return based upon the cash flows we expect starting EOY 0 (our initial investment) through EOY 6 (when we expect to sell the property).

If at the EOY 2 a positive cash flow of $50,000 is expected and a negative cash flow of $60,000 at the EOY 3, the negative would be discounted back at the safe rate to the EOY 2 and reduced by the positive. If a negative amount still remains (in this case it does) then it is discounted back to the EOY 1 and again reduced by a positive cash flow (if it exists). But we’ll say that the expected cash flow at the EOY 1 is also negative. Therefore, because EOY 1 and EOY 2 are both negative, they are each discounted back at the safe rate to EOY 0 and added to the initial investment (also considered a negative amount).

Likewise, if we assume that all other cash flows are positive then those amounts are each compounded forward at the “reinvestment rate” and added to the funds we expect to receive at the EOY 6 (i.e., that year’s cash flow plus sale proceeds), the sum total of which CIREI calls the “accumulation of wealth”.

Okay, now that we determined the amount for EOY 0 and EOY 6 and zeroed out all years in between we compute for IRR to arrive at the financial management rate of return (FMMR).