Real estate investing involves the purchase of real estate for profit. Profits are accumulated slowly by renting out properties in a cashflow method, or are generally improved and resold for a capital gain. In addition, real estate investors may wholesale properties as a means to make profits.
Advantages
There are many gurus out there that contend that real estate is a panacea where you cannot lose money. Although this is false, there are a number of advantages to investing in real estate. The biggest factor in marketability of an investment is supply and demand.
The first big advantage is that it is an extremely expensive product. Each sale you make generates more profit potential for this reason.
Leverage, or the ability to borrow based on the value of the property, is probably the second greatest advantage. It is much easier to finance real estate than any other product. While investing in most assets requires the purchaser to have the full purchase price available for the asset, in real estate investing, one only needs to have a fraction of the purchase price available (like 5%, 10% or 20%) as a down payment. Therefore, real estate, although incredibly expensive, is still easier to buy than say, a piece of industrial equipment of the same value.
Local advantage is rarely discussed but it stands to reason that you know your neighborhood better than a real estate investing expert would if they were in another part of the world. This creates an advantage the beginner can exploit in his market.
The bulk of the world's assets are in real estate.
One way a beginner can get started in real estate investing without taking on any personal risk is to 'bird dog', or hunt for good deals, for another more experienced investor. This allows the beginner to learn to find and recognize value.
Disadvantages
Real estate is an illiquid investment that needs maintenance and taxes to be paid. A balanced investment portfolio has some liquid assets that can be quickly converted to cash to sustain the real estate when its returns are not sufficient to pay its recurring costs.
During a real estate boom, speculators can be prone to make purchases without pre calculating the costs involved in the purchase and for the ongoing costs of a property. The real estate can then sometimes work against them instead of for them, realizing a loss at resale.
There is no guarantee that values will maintain themselves as society changes; megatrends can cause large scale changes.
Siddique is real estate investor for over 22 years and President of http://www.butterflylister.com . Download Free How to sell your Home for Full Price in any market.
Article Source: http://EzineArticles.com/?expert=M_Siddique
Tuesday, November 27, 2007
Tax Lien Sales - What Are Tax Lien Sales and How to Profit From Them
It's amazing how few investors know the goldmine of tax lien sales. Where else can you securely invest your money for guaranteed returns of 20-25%?
Tax lien sales offer something for everyone. From the beginning investor all the way up to people with hundreds of thousands or millions of dollars to invest. You obviously buy tax lien certificates. But how does it all work? Is your investment really safe, or is it just as shaky as everything else out there?
Here's how it works. You attend the tax lien sale. You pay other peoples' back property taxes for them. They have a certain amount of time to pay up (redeem) or they lose their property. In some cases, you can wind up with a $200,000 property for the cost of its back taxes. Although rare, it does happen. So, you bid on the liens at the sale that you've done the proper research on. You should aim to invest in as many good ones as you can afford at each auction you attend. This will maximize your investment potential.
Once you've acquired all the well researched them you can afford, all you need to do is wait. The property owner will usually pay off the tax lien along with the massive interest or penalty within several months to a year. You can repeat this process over and over again at sales, with each cycle becoming more leveraged and profitable.
If you're looking for a way to safely invest your money and receive extremely high returns, you should definitely include them in your portfolio. Become sharp as a tack with your knowledge of tax lien sales and how to get the most out of every auction you attend, and you will by very successful.
You're only seconds away from learning how to achieve consistent 20-300% returns on the money you invest with complete government certified safety. Visit http://taxliencertificateguide.com to start now.
Tax lien sales offer something for everyone. From the beginning investor all the way up to people with hundreds of thousands or millions of dollars to invest. You obviously buy tax lien certificates. But how does it all work? Is your investment really safe, or is it just as shaky as everything else out there?
Here's how it works. You attend the tax lien sale. You pay other peoples' back property taxes for them. They have a certain amount of time to pay up (redeem) or they lose their property. In some cases, you can wind up with a $200,000 property for the cost of its back taxes. Although rare, it does happen. So, you bid on the liens at the sale that you've done the proper research on. You should aim to invest in as many good ones as you can afford at each auction you attend. This will maximize your investment potential.
Once you've acquired all the well researched them you can afford, all you need to do is wait. The property owner will usually pay off the tax lien along with the massive interest or penalty within several months to a year. You can repeat this process over and over again at sales, with each cycle becoming more leveraged and profitable.
If you're looking for a way to safely invest your money and receive extremely high returns, you should definitely include them in your portfolio. Become sharp as a tack with your knowledge of tax lien sales and how to get the most out of every auction you attend, and you will by very successful.
You're only seconds away from learning how to achieve consistent 20-300% returns on the money you invest with complete government certified safety. Visit http://taxliencertificateguide.com to start now.
How to Invest in Real Estate Outside Your Area With Ease
Many people are going outside of their own market to purchase quality real estate investments at a fraction of the price. Did you know that for example a $400,000-$500,000 home in California is similar to an $80,000 home in Dallas, Little Rock, or Memphis? Did you know that the rent on a home that price can be as high as $1000 per month or more?
Your peers are buying properties in these other markets, getting a lot of cash flow for their money and are racking up a diverse portfolio of assets quickly. Are they geniuses? Are they better real estate investors? The answer is no. Many of these people stepped outside their comfort zone, took very little risk, and now are reaping the rewards. How are they doing this? Let's take a look.
1. Taking advantage of Markets - First, real estate investors in markets that had a large run up in prices in many cases are hurting now that the appreciation is gone. The savvy investors from these markets are looking outside and they are looking for positive cash flow. Many markets in the interior of the US, especially the South, are not only growing markets but have had depressed prices for quite some time. This is a better angle to look at then for example a rust belt city in the Midwest with a declining population and factories closing up. Look where the economic growth is and the prices have been low. Example: Memphis, Dallas, Little Rock, Atlanta, Birmingham, Montgomery, and others.
2. Do your homework - Look online and find local Real Estate Investing Associations. Try www.nationalreia.com and look for associations in your target market. See if you can access the forums section of their websites. Who are the movers and shakers? Who is buying and selling a lot of property? Then look at other sites such as Craigslist in the same market. Do you see any correlation? You should see some repeat names, similar deals, etc. Use this information to start evaluating homes. Next, use Google, Yahoo, MSN, others. For example: if you Google the following, what companies surface: sample city, real estate investing, or sample city discount properties. Look for reputable companies that are selling properties. If they don't have an established website, stay away. Typically people that are one man shows don't have a good support staff.
3. Interview to build a real estate investing team - After searching on line and finding out who is buying and selling a lot of property, make a list and interview them. Find out who their support staff is. Does this buyer and seller work specifically with rehab crews? How about management companies? Closing Attorneys or Escrow Agents? You should interview 3 of each of these or more. Be brutally honest. If you can tap the wisdom of a team, the process of owning property outside your area can be easy. Make sure the management companies are willing to work with the real estate investment contractors, the sellers of your property, and so on. Ask about the reputations of each to the others.
4. Book a Flight - Make a trip to your new market to meet your team, go out into the streets, look at available property, and see everyone's office. This will often be the true test. It is easy to create a false online front, or a front over the phone, but very difficult to cover up after you show up at their doorstep. Spend 2-3 days in your market. Look at all the neighborhoods the wholesalers or agents work in. Make sure they aren't going to sell you war zones. Ask them about the rent ranges, rehab estimates, time to rent, etc. Verify these numbers with the management companies and contractors. If all checks out, proceed. The right team of people will come to light.
5. Buy and start slowly. Many people will try to push you to purchase several properties at one time. By a property or 2 within your risk threshold and see how it performs. If it performs well: wash, rinse, and repeat. You've uncovered a new real estate investing market! Hopefully you had a little fun and explored a new area too.
By using you too can profit from real estate trends taking place in undervalued markets all over the US.
To find out more about the author and investing in real estate to create passive income, visit Ryan L. Hinricher, Co-Founder of The Feol-Hinricher Companies at http://fhcompanies.com/ He and his partner Robert C. Feol have been investing in real estate and educating investors that are looking to profit from undervalued markets.
Your peers are buying properties in these other markets, getting a lot of cash flow for their money and are racking up a diverse portfolio of assets quickly. Are they geniuses? Are they better real estate investors? The answer is no. Many of these people stepped outside their comfort zone, took very little risk, and now are reaping the rewards. How are they doing this? Let's take a look.
1. Taking advantage of Markets - First, real estate investors in markets that had a large run up in prices in many cases are hurting now that the appreciation is gone. The savvy investors from these markets are looking outside and they are looking for positive cash flow. Many markets in the interior of the US, especially the South, are not only growing markets but have had depressed prices for quite some time. This is a better angle to look at then for example a rust belt city in the Midwest with a declining population and factories closing up. Look where the economic growth is and the prices have been low. Example: Memphis, Dallas, Little Rock, Atlanta, Birmingham, Montgomery, and others.
2. Do your homework - Look online and find local Real Estate Investing Associations. Try www.nationalreia.com and look for associations in your target market. See if you can access the forums section of their websites. Who are the movers and shakers? Who is buying and selling a lot of property? Then look at other sites such as Craigslist in the same market. Do you see any correlation? You should see some repeat names, similar deals, etc. Use this information to start evaluating homes. Next, use Google, Yahoo, MSN, others. For example: if you Google the following, what companies surface: sample city, real estate investing, or sample city discount properties. Look for reputable companies that are selling properties. If they don't have an established website, stay away. Typically people that are one man shows don't have a good support staff.
3. Interview to build a real estate investing team - After searching on line and finding out who is buying and selling a lot of property, make a list and interview them. Find out who their support staff is. Does this buyer and seller work specifically with rehab crews? How about management companies? Closing Attorneys or Escrow Agents? You should interview 3 of each of these or more. Be brutally honest. If you can tap the wisdom of a team, the process of owning property outside your area can be easy. Make sure the management companies are willing to work with the real estate investment contractors, the sellers of your property, and so on. Ask about the reputations of each to the others.
4. Book a Flight - Make a trip to your new market to meet your team, go out into the streets, look at available property, and see everyone's office. This will often be the true test. It is easy to create a false online front, or a front over the phone, but very difficult to cover up after you show up at their doorstep. Spend 2-3 days in your market. Look at all the neighborhoods the wholesalers or agents work in. Make sure they aren't going to sell you war zones. Ask them about the rent ranges, rehab estimates, time to rent, etc. Verify these numbers with the management companies and contractors. If all checks out, proceed. The right team of people will come to light.
5. Buy and start slowly. Many people will try to push you to purchase several properties at one time. By a property or 2 within your risk threshold and see how it performs. If it performs well: wash, rinse, and repeat. You've uncovered a new real estate investing market! Hopefully you had a little fun and explored a new area too.
By using you too can profit from real estate trends taking place in undervalued markets all over the US.
To find out more about the author and investing in real estate to create passive income, visit Ryan L. Hinricher, Co-Founder of The Feol-Hinricher Companies at http://fhcompanies.com/ He and his partner Robert C. Feol have been investing in real estate and educating investors that are looking to profit from undervalued markets.
The 3 Hottest Words In Real Estate Investing For The Next 2-3 Years!
Recently in the USA Today, there was a article about a Doctor who was putting 20% down on a home and had a 800 credit score.
2 Days before he was supposed to close, his funding disappeared.
A real estate broker contacts me about one of our homes available for "rent to own" and her story is almost the same except her credit score is in the 700 range.
A family man contacts me about one of or homes on a rent to own basis and tells me he has been a homeowner for years and always paid on time that is until his adjustable rate mortgage payment went from $1,600 to $3,200 and then to $3,800 3 months later.
The alarming thing is that he is not alone.
We have not even seen the majority of these ARM loans adjust yet.
But that caboose is coming down the track and nothing is going to stop it.
Foreclosures and short sales dominate the news.
Stories of mature older folks moving out and leaving the keys on the counter and calling the mortgage company and saying "come get the home the keys are on the counter" are becoming more and more commonplace.
Some investors have focused in on foreclosures and short sales and God knows there are a TON of them.
But it seems everyone is fishing out of that pond.
What most investors are missing is something that is so simple that most miss it.
No one is talking about the 3 Hottest Words in real estate investing...everybody it seems is talking about foreclosures and short sales.
What are the 3 hottest words in real estate investing at least for the next 2-3 years?
Creative Owner Financing.
The sub prime meltdown has already effected the good credit market and good luck getting a mortgage if you have bad credit
So what that means is that in the midst of a "Buyers Market" the pool of Good Credit Buyers has been reduced greatly for sellers.
Sellers are stuck and Buyers are stuck unless they learn how to bypass the "banker"
Creative Owner Financing does just that.
Those folks with marginal or bad credit who still want to own property, will have to look to creative owner financing to get the deal done.
So here is my Million Dollar Question.. Where are all of these folks that are being foreclosed on, losing their homes to short sales and ARMS... where are they supposed to live?
They are used to owning their own home and do not want to be renters yet they are shut out for sure because of their credit!
Those attempting to sell their home have seen their pool of potential buyers be decimanted by the Sub- Prime meltdown
These events have led to an unprecendented opportunity for the creative real estate investor who understands the 3 hottest words in real estate..Creative Owner Financing!
If you get the right specilized knowledge you can be the "Rain Man or Women and bring these 2 parties together and solve each of their problems and profit all because you have the right specilaized knowledge!
If you have not already, commit yourself to learning all of the methods of creative real estate investing ,especially "getting the deed" and "lease purchases" and wrap around mortgages.
"Creative Owner Financing" truly are the 3 hottest words in real estate investing today!
TC and Vickie Bradley are the authors of the #1 Best selling Real Estate Investing course "Buy with No Credit, How to Make Money this month in Real Estate!" They also do a FREE weekly webinar! http://www.buywithnocredit.com/
2 Days before he was supposed to close, his funding disappeared.
A real estate broker contacts me about one of our homes available for "rent to own" and her story is almost the same except her credit score is in the 700 range.
A family man contacts me about one of or homes on a rent to own basis and tells me he has been a homeowner for years and always paid on time that is until his adjustable rate mortgage payment went from $1,600 to $3,200 and then to $3,800 3 months later.
The alarming thing is that he is not alone.
We have not even seen the majority of these ARM loans adjust yet.
But that caboose is coming down the track and nothing is going to stop it.
Foreclosures and short sales dominate the news.
Stories of mature older folks moving out and leaving the keys on the counter and calling the mortgage company and saying "come get the home the keys are on the counter" are becoming more and more commonplace.
Some investors have focused in on foreclosures and short sales and God knows there are a TON of them.
But it seems everyone is fishing out of that pond.
What most investors are missing is something that is so simple that most miss it.
No one is talking about the 3 Hottest Words in real estate investing...everybody it seems is talking about foreclosures and short sales.
What are the 3 hottest words in real estate investing at least for the next 2-3 years?
Creative Owner Financing.
The sub prime meltdown has already effected the good credit market and good luck getting a mortgage if you have bad credit
So what that means is that in the midst of a "Buyers Market" the pool of Good Credit Buyers has been reduced greatly for sellers.
Sellers are stuck and Buyers are stuck unless they learn how to bypass the "banker"
Creative Owner Financing does just that.
Those folks with marginal or bad credit who still want to own property, will have to look to creative owner financing to get the deal done.
So here is my Million Dollar Question.. Where are all of these folks that are being foreclosed on, losing their homes to short sales and ARMS... where are they supposed to live?
They are used to owning their own home and do not want to be renters yet they are shut out for sure because of their credit!
Those attempting to sell their home have seen their pool of potential buyers be decimanted by the Sub- Prime meltdown
These events have led to an unprecendented opportunity for the creative real estate investor who understands the 3 hottest words in real estate..Creative Owner Financing!
If you get the right specilized knowledge you can be the "Rain Man or Women and bring these 2 parties together and solve each of their problems and profit all because you have the right specilaized knowledge!
If you have not already, commit yourself to learning all of the methods of creative real estate investing ,especially "getting the deed" and "lease purchases" and wrap around mortgages.
"Creative Owner Financing" truly are the 3 hottest words in real estate investing today!
TC and Vickie Bradley are the authors of the #1 Best selling Real Estate Investing course "Buy with No Credit, How to Make Money this month in Real Estate!" They also do a FREE weekly webinar! http://www.buywithnocredit.com/
Something to be thankful for: Affordable housing markets
In Greenwich, Conn., Boston and many parts of California, a four-bedroom house can easily set you back more than $1 million, while in parts of Texas and in the Midwest, a similar house can be had for just over $100,000.
But you knew that already. It's no secret that homes in ritzy Beverly Hills cost 10 times more than comparable houses in the military community of Killeen, Texas. The question is: How much do you really need to pay for the lifestyle you want? It might be less than you originally thought.
According to Coldwell Banker's 2007 Home Price Comparison Index (HPCI), Beverly Hills is the most expensive housing market in the nation for the second year in a row, with the average price of a home sold through July 2007 at $2.21 million. In Killeen -- the most affordable market in the U.S., according to the HPCI study -- a similar home sells for $136,725.
Killeen is a city of about 100,000 next to the Fort Hood Army base, with a military-dependent economy. You won't find anything akin to Rodeo Drive here -- but you will find community events such as fairs, concerts and high school football games; outdoor recreation such as fishing and hunting; and a pervasive sense of patriotism.
But you knew that already. It's no secret that homes in ritzy Beverly Hills cost 10 times more than comparable houses in the military community of Killeen, Texas. The question is: How much do you really need to pay for the lifestyle you want? It might be less than you originally thought.
According to Coldwell Banker's 2007 Home Price Comparison Index (HPCI), Beverly Hills is the most expensive housing market in the nation for the second year in a row, with the average price of a home sold through July 2007 at $2.21 million. In Killeen -- the most affordable market in the U.S., according to the HPCI study -- a similar home sells for $136,725.
Killeen is a city of about 100,000 next to the Fort Hood Army base, with a military-dependent economy. You won't find anything akin to Rodeo Drive here -- but you will find community events such as fairs, concerts and high school football games; outdoor recreation such as fishing and hunting; and a pervasive sense of patriotism.
Sunday, November 18, 2007
House Flipping Gone Bad Again! We Thought We Had It All Figured Out From Our Last Flip, Not Quite!
I have been investing in real estate for a few years on a part time basis. My wife joined me in the investing world at the beginning of 2007 and we have flipped 4 houses this year. Our goal was 7 but we fell a bit short due to a variety of problems. In 2008 we WILL flip at least 12 houses!
The Homedale house was supposed to be a slam dunk, in and out in about 3 weeks. Our start date was delayed because our other project ran over by a few weeks so we started out on the wrong foot! We also had a new contractor named Dan that we had very high hopes for. He did a very nice job on our previous product so we expected great things from him! Read on..
When we start a project we do two things first: put up a for sale sign and start working on the outside to draw attention to the house. Homedale was a big ranch that needed a lot of work on the outside. It needed new siding, a new rail built across the front porch, new lights, new paint on the shutters and doors, and some major landscaping in the back.
The landscaping consisted of a few things. The fence line along the back yard had trees and branches and bushes that all needed to come out. It also had a pool that had been filled in with dirt and had grass and weeds that hadn't been mowed in months! We had our landscapers take the grass and weeds out and fill the pool up with mulch, large rocks, bushes and a few small trees. It looked great when it was done!
The inside needed all new flooring, new bathrooms, new lights, and a lot of minor repairs. When Dan started on the siding outside he told us that it would take him a few days to finish that. Well, he was pretty much full of crap. He started on it and a week later still wasn't finished! We needed him on the inside to do some drywall work and other things on his list so that my wife and I could get in there and paint. We decided to move him inside to keep things "on schedule".
Dan was like a lot of contractors, he will tell you what you want to hear to get the job and then screw around. At least that's my opinion! He showed up daily at 9-10 am and would leave at 2-3pm. I tried yelling at him, threatening to fire him, and I can't even remember what else I did. Needless to say it was very frustrating! I decided to call his business partner, another guy named Dan, and threaten him with firing. It worked! Finally!
Dan got his stuff done, slowly but surely, and then it was time for us to move inside and him to move back out to work on the siding. Once we got in there we saw a ton of things Dan didn't do that was on his list to do. It was past the point of having him come back in because we were behind schedule. We went ahead and finished these things and kept pushing. He finaly got the siding done about 5 weeks after he started, about 3 weeks longer than he said he was going to be in there.
We have had problems with contractors in the past so we had a signed contract that stated finish date and an agreed upon price with a penalty for going over the finish date. Obviously Dan didn't get all the money he thought he was going to get. He even had the nerve to call me after the project was finished to tell me how excited he was to work together again. YEAH RIGHT!!!
On our next project I am going to cut up the jobs a bit. I am gonig to hire a friend of mine and we are going to go in and tear out carpet, cabinets, countertops, bathrooms, etc. Then our painter will come in and prep and paint walls. After that our contractor will come in and install tile in the kitchen and bathrooms. Then our contractor will install the kitchens and bathrooms as needed. Then our carpet goes in, then we sell the house and make a lot of money!
Sounds easy right? We'll see. House flipping is something that can be incredibly profitable and at the same time can be a huge pain in the butt! I'll write again when we finish our next house flipping project!! Until then, happy real estate investing!
Jared Christiansen has flipped 8 houses over the last 3 years. He worked full time and flipped houses part time until 2007 when he started flipping full time. His wife Amanda obtained her real estate license and joined him in the business. Together they own a real estate company and have started filming their flips to show new investors the realities of the this business. Their website is http://www.Daybydayflips.com and they can be reached at DaybyDay@daybydayflips.com Jared has actually started a new blog at: http://daybydayflips.wordpress.com/ Check it out!
The Homedale house was supposed to be a slam dunk, in and out in about 3 weeks. Our start date was delayed because our other project ran over by a few weeks so we started out on the wrong foot! We also had a new contractor named Dan that we had very high hopes for. He did a very nice job on our previous product so we expected great things from him! Read on..
When we start a project we do two things first: put up a for sale sign and start working on the outside to draw attention to the house. Homedale was a big ranch that needed a lot of work on the outside. It needed new siding, a new rail built across the front porch, new lights, new paint on the shutters and doors, and some major landscaping in the back.
The landscaping consisted of a few things. The fence line along the back yard had trees and branches and bushes that all needed to come out. It also had a pool that had been filled in with dirt and had grass and weeds that hadn't been mowed in months! We had our landscapers take the grass and weeds out and fill the pool up with mulch, large rocks, bushes and a few small trees. It looked great when it was done!
The inside needed all new flooring, new bathrooms, new lights, and a lot of minor repairs. When Dan started on the siding outside he told us that it would take him a few days to finish that. Well, he was pretty much full of crap. He started on it and a week later still wasn't finished! We needed him on the inside to do some drywall work and other things on his list so that my wife and I could get in there and paint. We decided to move him inside to keep things "on schedule".
Dan was like a lot of contractors, he will tell you what you want to hear to get the job and then screw around. At least that's my opinion! He showed up daily at 9-10 am and would leave at 2-3pm. I tried yelling at him, threatening to fire him, and I can't even remember what else I did. Needless to say it was very frustrating! I decided to call his business partner, another guy named Dan, and threaten him with firing. It worked! Finally!
Dan got his stuff done, slowly but surely, and then it was time for us to move inside and him to move back out to work on the siding. Once we got in there we saw a ton of things Dan didn't do that was on his list to do. It was past the point of having him come back in because we were behind schedule. We went ahead and finished these things and kept pushing. He finaly got the siding done about 5 weeks after he started, about 3 weeks longer than he said he was going to be in there.
We have had problems with contractors in the past so we had a signed contract that stated finish date and an agreed upon price with a penalty for going over the finish date. Obviously Dan didn't get all the money he thought he was going to get. He even had the nerve to call me after the project was finished to tell me how excited he was to work together again. YEAH RIGHT!!!
On our next project I am going to cut up the jobs a bit. I am gonig to hire a friend of mine and we are going to go in and tear out carpet, cabinets, countertops, bathrooms, etc. Then our painter will come in and prep and paint walls. After that our contractor will come in and install tile in the kitchen and bathrooms. Then our contractor will install the kitchens and bathrooms as needed. Then our carpet goes in, then we sell the house and make a lot of money!
Sounds easy right? We'll see. House flipping is something that can be incredibly profitable and at the same time can be a huge pain in the butt! I'll write again when we finish our next house flipping project!! Until then, happy real estate investing!
Jared Christiansen has flipped 8 houses over the last 3 years. He worked full time and flipped houses part time until 2007 when he started flipping full time. His wife Amanda obtained her real estate license and joined him in the business. Together they own a real estate company and have started filming their flips to show new investors the realities of the this business. Their website is http://www.Daybydayflips.com and they can be reached at DaybyDay@daybydayflips.com Jared has actually started a new blog at: http://daybydayflips.wordpress.com/ Check it out!
Speaking the Real Estate Language
There are three primary financial terms that affect how we determine the value of real estate. Without a working knowledge of these terms, investors and Realtors are at a disadvantage in the market place. These terms may sound difficult to grasp but are an integral part in understanding how we determine the value of real estate and are important for commercial and residential investors alike.
The first term, net operating income, refers to the income received from an investment prior to any mortgage debt being deducted from the equation. In general, net operating income, or NOI, is defined as the total possible rents minus a vacancy rate and any operating expenses.
NOI is used to help compare investments without the uncertainty of what mortgage product you'll be using. The vacancy rate is a general rule of thumb depending upon market conditions and the type of investment. It is expressed in a percentage of gross rents. Operating expenses are those normally recurring expenses such as property taxes, insurance, management fees, repairs, etc.
So, a simple example would be an investment with $13,000 in potential yearly rent, minus a 7 percent vacancy rate, and $2,000 in operating expenses, would give us a NOI of roughly $10,000 per year.
The second term, capitalization rate, is probably least understood of all. The cap rate, for short, is an easy way to compare investments by the amount of net cash flow and their subsequent value. A simplified definition for cap rate is the cash on cash return on your investment if you paid cash for the property. The formula for the capitalization rate is: cap rate = NOI / Value.
Let's look at an example. If the NOI from our previous example is $10,000 and you determine that the property is worth $100,000, then your cap rate would be 10 percent. So, if you paid $100,000 in cash for the property you would receive $10,000 in income; and hence, a 10 percent return. That 10 percent is also your cap rate. The cap rate, as well as the NOI, has nothing to do with financing of the property. It is merely a simplified equation to determine value of a property.
The third term, which is more encompassing than the previous two, is IRR, or Internal Rate of Return. Some refer to this as ROI, Return On Investment. IRR takes the best of the previous two terms and injects the mortgage debt into the picture. It also injects the amount of your initial investment into the equation.
A quick study of IRR will prove why investors use financing. Let's use our previous example of a property with $10,000 of NOI. With 20 percent down on this investment and a 30-year mortgage of 7 percent, the annual income would be reduced to $3,613, due to the mortgage debt. But, the IRR would increase to 18 percent. This increase would be achieved even with selling the property for what you paid for it and holding it for five years. This is a definitive example of how financing greatly enhances your return on the investment.
While you can invest in real estate and never understand these financial terms, having a working knowledge of them will provide greater clarity on your future real estate decisions.
Brian Patton, CCIM is a broker and frequent speaker at the Georgia Real Estate Investors Association, the largest real estate association in the nation. For free real estate calculators to help you with investment analysis on your next real estate purchase, visit his company's website: www.capitallistings.com
http://capitallistings.com/web-links/news-articles
The first term, net operating income, refers to the income received from an investment prior to any mortgage debt being deducted from the equation. In general, net operating income, or NOI, is defined as the total possible rents minus a vacancy rate and any operating expenses.
NOI is used to help compare investments without the uncertainty of what mortgage product you'll be using. The vacancy rate is a general rule of thumb depending upon market conditions and the type of investment. It is expressed in a percentage of gross rents. Operating expenses are those normally recurring expenses such as property taxes, insurance, management fees, repairs, etc.
So, a simple example would be an investment with $13,000 in potential yearly rent, minus a 7 percent vacancy rate, and $2,000 in operating expenses, would give us a NOI of roughly $10,000 per year.
The second term, capitalization rate, is probably least understood of all. The cap rate, for short, is an easy way to compare investments by the amount of net cash flow and their subsequent value. A simplified definition for cap rate is the cash on cash return on your investment if you paid cash for the property. The formula for the capitalization rate is: cap rate = NOI / Value.
Let's look at an example. If the NOI from our previous example is $10,000 and you determine that the property is worth $100,000, then your cap rate would be 10 percent. So, if you paid $100,000 in cash for the property you would receive $10,000 in income; and hence, a 10 percent return. That 10 percent is also your cap rate. The cap rate, as well as the NOI, has nothing to do with financing of the property. It is merely a simplified equation to determine value of a property.
The third term, which is more encompassing than the previous two, is IRR, or Internal Rate of Return. Some refer to this as ROI, Return On Investment. IRR takes the best of the previous two terms and injects the mortgage debt into the picture. It also injects the amount of your initial investment into the equation.
A quick study of IRR will prove why investors use financing. Let's use our previous example of a property with $10,000 of NOI. With 20 percent down on this investment and a 30-year mortgage of 7 percent, the annual income would be reduced to $3,613, due to the mortgage debt. But, the IRR would increase to 18 percent. This increase would be achieved even with selling the property for what you paid for it and holding it for five years. This is a definitive example of how financing greatly enhances your return on the investment.
While you can invest in real estate and never understand these financial terms, having a working knowledge of them will provide greater clarity on your future real estate decisions.
Brian Patton, CCIM is a broker and frequent speaker at the Georgia Real Estate Investors Association, the largest real estate association in the nation. For free real estate calculators to help you with investment analysis on your next real estate purchase, visit his company's website: www.capitallistings.com
http://capitallistings.com/web-links/news-articles
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