We have compiled some of the most FAQs we get about real estate investing in the United States. Knowing these vital components will help you to make your property investment successful.
“When is the best time to buy real estate”?
We are frequently asked “When is the best time to buy, or is now a good time to buy” Of course it is always a great time to buy Real Estate. The underlying question should be “Where today is the best location to buy”. (Location, Location, Location) Timing the market and location have always been the keys to real estate investing. Our standards are to identify these locations. Emerging markets always make up the best location.
What is an Emerging market?
Emerging markets are those markets poised for rapid growth. At any given time there are a number of emerging markets through-ought the country. It is our standards to search out these markets to ensure they have the following elements:
- Strong Demographic Growth
- Strong and Diverse Economy
- Growing Retirement Population
- Improvement in Infrastructure (Government wanting to grow)
- Undervalued Markets
- Strong Potential for Appreciation
- Tightening Vacancy Trends
When a market encompasses all these elements they are typically at the bottom of the cyclical real Estate Cycle and represent the best time to purchase real estate in any particular market. Our standards are to help you the investor identify these markets and invest at the bottom. We then monitor these markets and as the markets shift we help them to Sell High at the top of the market and use tax deferred strategies to re-invest at the bottom of the next emerging market.
Why New Construction investing?
Fewer surprises: New construction is low maintenance, in addition to having 10 yrs of warranty on the structure, the homes also comes with a 1 yr bumper to bumper warranty. This means low cost to you, the second third and fourth years are also low in maintenance as with everything being new, fewer things go wrong. Additionally new construction in new developments typically appreciates faster.
(Exit Strategies) Make your money going in!
This is often mis-understood, it is important to understand that cash is generated during the sale, but the profits a property may realize should be identified during the Purchasing of the property. When a property is purchased in the right location for the right price with an exit strategy in place at time of purchase, wealth may be created. The process of identifying these purchases that are right for you is made much easier with Our Investment property calculator. This calculator will help guide you in knowing “going in” what this investment may do for you.
Below are a couple of samples we have used on properties we have marketed.
| Exit Strategy #1 1 year rent and hold then resale 4% MTA Rate and Term refi program.Price $114,900 (25K in equity at purchase) Expenses: $383 Monthly mortgage Income Cash Flow Liquidation cost Return $24,635 Total return from $2,500 investment |
Exit Strategy #2 5 year rent and hold then resale 7% interest only Price $114,900 (25K in equity at purchase) Expenses: $656 Monthly mortgage Income Cash Flow Liquidation cost Return $50,446 Total return from $2,500 investment |
G.R.M.
“Gross Rent Multiplier” is a factor that relates the “Gross Rental Income” to the “Asking Price” for the property. It is the number of years it would take for the annual revenue from rents when fully occupied to equal the “Asking Price” for the property. The Typical GRMs will vary from one area to the next but a rule of thumb would be 4.0 to 9.0 with anything under 7.0 considered to be good, and the lower the better for the investor.
Example: property brings in $800 per month x12 for annual rents of $9,600 x10 (GRM) = $96,000 With a 10 GRM your offer should not exceed $96,000 As we are looking for GRM to be less than 10 we can quickly determine that anything of $96,000 or higher for asking price is to high. As it is easy to do a multiplier of 10 in our head we can use this strategy to quickly determine if a property is priced right or not.
GRM at “Asking Price” is a very rough way to quickly compare one property to others. It does not make a great indicator of value because it does not take into consideration either property operating expenses or cost of financing that is best used.
Cap Rate
Cap Rate” also known, as “Capitalization Rate” is the rate at which the purchase price would be recovered annually if the property were owned “Free and clear.” For example, if a property was purchased for $100,000 cash and after collecting rents and paying operating expenses for 1 year, the owner had $14,000 in profit, and then the “Cap Rate” would be 14%.
Formula (Net operating income divided by Price = cap rate)
Many investors to quickly judge the value of a property in relation to other properties by using cap Rates. It is considered to be more accurate than GRM because it does take into consideration either the actual or projected operating expenses. However, it is rough because it does not take into consideration the cost of principle and interest payments on a loan used to purchase the property. Usually it is a favored formula as it evaluates property for the return merits. Your financing decisions will still need to be considered.
Speculator vs. Investor:
Buying Real Estate and hoping the market will rise so we can sell at a profit is an ideology of hope and hope is not a strategy. Flipping for profit only gets two stars of our wealth building principles IDEAL™, (Income, Deductions, Equity, Appreciation and Leverage) and the appreciation is only assumed. These purchasers are not investors but instead are what we refer to as speculators. To move into the investor arena we need to approach an investment with a strategy where we can have a good analysis going into our property so we have an idea of where our investment will take us and also have an exit strategy for coming out of our property in the future. (Only when a property is bought at a discount can we include the third element of the Wealth building principles which is the E for Equity) should flipping be considered for an investment?
Short term holds:
This is a 4 star investment. These investments are best suited for creating cash. When buying at a discount (such as 20% Below ARP) we get Equity, Deductions Appreciation (as long as we hold it for a year or so) and of course Leverage.
Long term holds:
This is a great 5 star investment. When buying property in the right location at the right time we have all the elements of the wealth building principles.
I D E A L™ Income, Deductions, Equity, Appreciation and Leverage.
Income Approach:
Appraisals assess property value for single family homes from a comparative approach. Remember when purchasing investment property we are purchasing a little business. (Kind of like buying a CD or savings account on steroids) Our standards are to help you analyze (with the Investment property calculator) and deliver a product that is priced in a category that will produce income for the investment. You should never purchase a property without these analysis.
