The income from their investment properties allows some real estate investors to make a comfortable living. However, not every investment property pays out for the investor. Calculate the property’s value before entering into a purchase agreement so you can make an informed investment. An investor can use market value, replacement cost, capitalization rate, and cash on cash return data to assess the investment’s viability.

Determine the fair market value of the property

The Fair Market Value (FMV) is the amount that a well-informed buyer would pay for the property and that the seller would accept. Consult a real estate agent to get comparables from the area surrounding the property to assess its value. Homes sold in the same region in the last 12 months that are equivalent in size, style, age, and condition are referred to as comparables. If you don’t want to hire a real estate agent, you can get these documents through the tax assessor’s office.

Evaluate the property using the replacement cost method

“How much would it cost to re-build this exact building on this same piece of property?” you’re essentially asking. The cost of all materials and labor, plus the value of the land, minus any depreciation, is used to calculate replacement costs. This method is used to value one-of-a-kind properties or those with no recent comparables. It’s also compared to the market information you’ve gathered.

Calculate the amount of income the property is likely to produce

If the house is currently being used as an income property, simply inquire about the rent received by the existing owners. Otherwise, inquire about rent pricing in the region by contacting local rental managers.

Determine the Annual Net Operating Income

Take the rental income for a year and subtract any costs that need to be paid to keep the property in good condition for the year. Management fees, repairs, upkeep, insurance, and property taxes are all included in these charges.

You can figure out the Capitalization Rate by dividing the Annual net Operating Income from the previous step by the purchase price or the market price you paid. The capitalization rate for investment properties is usually between 5% and 8.5%, but it can be as high as 10%. Compare properties based on capitalization rates to figure out which one is the best deal.

Calculate cash on cash return if you need to factor in a mortgage payment

When you figure out the Annual Net Operating Income, you need to take the mortgage payment out of the property’s annual income. Then, divide the annual NOI by the sum of the down payment and repairs that are needed to rent the house. There might be $5,000 in repairs that need to be done, so add $20,000 to that.

Then, divide the net income by $25,000. If the NOI is $2,500, then the cash on cash return is $2,500 divided by $30,000, which is 10%, or $2,500 divided by $2,500. In this example, the investment property would make 10% on the money that was put in.

The bottom line

There are many ways to value real estate that are very similar to how you value stocks and bonds. In addition to the discounted NOI and gross income multiplier method, many people also use other ways. Some people in their field, for example, know a lot about how cities grow and change.

As a result, they can figure out which areas of the city are most likely to see the fastest rate of appreciation. How well a strategy is researched is the most important thing to look at, no matter what kind of method is used.

We’re here to help

Investing in the real estate market requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.

As a general rule, the earlier you start investing, the more opportunities you’ll have to build wealth. Whether you’re buying stocks, bonds, or real estate, this is true. However, if you’re wondering if there is an age limit for the latter, the good news is that there isn’t one. You can invest in real estate at any point in your life. If you’re older, however, your approach can be different.

Investing in real estate when you’re older

When it comes to real estate investing, there are a variety of options. You can do the following:

• Purchase an income property and rent it out on a monthly basis.
• Renovate a house and then resell it for a profit.
• Purchase property that will increase in value over time and then sell it (buy and hold).
• Invest in real estate investment trusts (REITs) (REITs).

Let’s take a look at each one because they’re all doable at any age. Let’s also assume you’re in your fifties or sixties, old enough to be retired.

Buying an income property

Becoming a landlord can be a full-time job, but if you no longer have a job, you might have the time to buy an income property, oversee it, deal with tenant issues, and collect rent. On the other hand, you might want to enjoy your retirement without putting in all that work, or you may not be in the right physical shape to do maintenance on an income property. And when you buy a rental property, you run the risk of vacancies or tenants who don’t pay, both of which could result in cash flow problems. Therefore, you’ll need to weigh the pros and cons before buying a home to rent out.

House flipping

Many people have success flipping houses, and even if you can’t do the work yourself, you can always outsource it if you’re able to snag a home at a low-enough price and still come out ahead. House flipping is risky because you could wind up over renovating and losing money. Similarly, the longer a flipped house sits on the market, the less likely you are to command top dollar for it — and the more time money you might need stays tied up. Once again, you’ll need to compare the pros and cons.

Buy and hold

Buy and hold is a common strategy used with stocks — buy up quality companies and let their stock values increase with time. It’s a good strategy in the real estate world — to a point. If you can afford to buy and maintain a home, there’s a good chance its value will naturally appreciate in time. The question is: Do you have that time? And would you be better off with an income property that puts rent money in your pocket along the way?

So you decided you want to buy an income property. What now?

To do this, you have to purchase a property that has a combined monthly mortgage payment, home insurance payment, and property tax payment lower than the rent the property commands. There are several ways to do this – from buying in an area with high rents, to putting a lot of money down so that your mortgage payment is low.

Residential vs Commercial properties

There is a lot of optimism about long-term growth in both the residential and commercial real estate markets. In terms of investing, people always wonder where to put their money, whether it’s for residential or commercial use.

Rental Return on Investment (ROI) for commercial space is still better and more long-term than residential space. Long-term leases and contracts ensure that the real estate investors get a steady stream of money.

What is the best course of action for you?

Real estate investing isn’t just for people of a particular age group. You can begin when you are young or when you are an adult. In either case, the goal is to weigh your options and choose which ones best match your risk tolerance and time commitment. But keep in mind that real estate can be a lucrative investment for retirees, and it’s never too late to get in on the action if you missed out during your working years.

We’re here to help

Investing in the real estate market requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.

The Federal Reserve is the United States’ central bank. Its decisions impact the US economy and, as a result, the rest of the world. As a result of this position, it is the most powerful player in the world economy. It isn’t a corporation or a government entity. Its leader is not a member of the government. Many individuals view it as exceedingly suspicious since it is not subject to either voters or shareholders.

Who owns reserve banks?

Although the Federal Reserve Banks are not part of the federal government, they exist as a result of a congressional statute. Its mission is to help the general population. So, is the Fed a private or public institution?

Both are correct. The Federal Reserve Banks are set up as private firms, while the Board of Governors is an independent government institution. Dividends are paid to member banks who own stock in the Federal Reserve Banks. Holders of this stock do not have the same level of control and financial interest as holders of common stock in for-profit companies. The shares cannot be sold or used as security for a loan. Six of the nine members of each Bank’s board of directors are also elected by member banks.

Member banks

The Federal Reserve’s 12 regional banks are structured similarly to private banks. They keep money, handle checks, and provide loans to the commercial banks they oversee in their jurisdiction. These financial institutions are also part of the Federal Reserve banking system. As a result, they must keep reserve requirements in place. In exchange, they can borrow at the fed funds rate from each other when they need money. They can also borrow at the discount rate via the Fed’s discount window as the last option.

Commercial banks must own stock in the 12 regional Federal Reserve banks in order to be members of the Federal Reserve System. However, owning stock in a Federal Reserve bank is not the same as owning stock in a private corporation. It cannot be traded and does not grant voting rights to the member banks. These send out 6 percent dividends, as required by law.

However, after paying expenditures, banks must return all earnings to the US Treasury.

Structure

The Federal Reserve System was established by Congress to be autonomous and immune to day-to-day political pressures. Members of the Board of Governors, for example, are appointed to 14-year terms that do not correspond to presidential terms. The following are essential elements of the Federal Reserve System:

• The Board of Governors is based in Washington, D.C., and its members are appointed by the President of the United States and confirmed by the United States Senate. Members of the board and the staff are government servants.
• The 12 regional Reserve Banks—The 12 Federal Reserve Banks are private organizations with offices across the country. Employees are not members of the civil service.
• The Federal Open Market Committee (FOMC) is in charge of monetary policy and is made up of Federal Reserve Governors and Federal Reserve Bank presidents.

The 12 Federal Reserve Banks function similarly to other businesses; each has its own board of directors, which picks the Reserve Bank president and first vice president with the Board of Governors’ approval. Each Reserve Bank branch has its own board of directors. The Branch’s Reserve Bank appoints the bulk of these directors, while the Board of Governors appoints the rest.

The Reserve Banks’ and its Branches’ boards of directors supply the Federal Reserve System with a plethora of information on economic situations around the country. The FOMC and the Board of Governors use this information, as well as other sources, to make monetary policy decisions.

Why the Fed must remain independent

When the Fed’s monetary policy is free of short-term political influences, it can do a better job. It needs to be able to set expectations freely, especially when it comes to inflation. It won’t be able to do so if its leaders are afraid of being fired by an elected person.

Fed Governors (as of January 2022)

•  Jerome H. Powell (Chair)
•  Seat Currently Empty (Vice Chair)—as of Jan. 14, 2022
•  Seat Currently Empty (Vice Chair for Supervision)—as of Dec. 31, 2022
•  Michelle W. Bowman
•  Lael Brainard
•  Christopher J. Waller
•  Seat Currently Empty

What does it mean that the Federal Reserve is a central bank?

A central bank is a financial entity in charge of overseeing a country’s monetary system and policy. A central bank controls the money supply and sets interest rates for a country. Monetary policy is also implemented by central banks. Central banks try to keep a country’s economy on a level keel by loosening or limiting the money supply and credit availability.

Conclusion

Conducting monetary policy, overseeing banks, and providing financial services are the Fed’s three core functions.

It becomes clear not just how vital the Fed is to the economy but also how effective the Fed’s structure is in achieving the Federal Reserve System’s goals. The Fed was founded in response to a financial crisis, and a financial crisis is exactly what the Fed is best positioned to handle. If a financial crisis occurs in any section of the country, a Reserve Bank is close by, equipped with the banking and payment system expertise as well as the emergency funds needed to respond fast.

We’re here to help

Investing in the real estate market requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.

You’ve probably seen the forces of inflation in work if you’ve recently bought, sold, invested, or otherwise participated in the economy.

But, in plain English, what does inflation entail, and how will it affect the already overcrowded housing market? Here are some things to think about to see if you’re doing everything you can to protect yourself against inflation:

What is inflation, and how does it happen?

Inflation is defined as a loss of money’s purchasing power, which is represented by an increase in the cost of goods and services in the economy. As a result, as inflation rises, every dollar you make loses value, affecting your ability to spend.

While there was already a shortage of housing and strong demand in the housing market before 2020, it is safe to conclude that the pandemic’s arrival worsened these trends. Many renters entered the property market in quest of their own house, while many homeowners looked for ways to trade up and expand their living space. As the demand for homes grew, many current homeowners chose to stay put, restricting the number of available properties.

The consequent housing market inflation is a simple case of supply and demand at work, adding fuel to the fire that was already roaring.

What effect does inflation have on the market?

For property owners

Inflation is really beneficial to property owners for a variety of reasons. The most obvious advantage is that your property’s value rises in tandem with inflation. With low supply and high demand, sellers can set their asking prices as high as they like and, in many circumstances, receive offers that are equal to or even more than their asking price. This makes it an excellent moment to sell, but a very difficult one to buy.

For investors

If you invest in a property as a leveraged asset, especially at today’s low financing rates, you’ll find yourself paying the same fixed rate even while the value of your home progressively grows. We are not yet seeing financing rates climb in lockstep with inflation in this inflationary environment, and as a result, your return on investment (ROI) can be predicted to skyrocket.

For would-be investors

In an inflationary market, potential investors face substantially different situations than existing owners, which is unsurprising. With that in mind, the most crucial consideration for this group is timing.

How long do you intend to keep the potential home? If you’re in it for the long run, you can expect to see the same value rises as current owners have. If you plan to invest for a shorter period of time, such as by flipping a property, “buyer beware” is a good phrase to remember.

The risk of being caught in a real estate bubble is one of the perils of short-term investing in an inflationary real estate market. Closing costs for new homes can be as high as 6% of the property price, and if you don’t have enough equity to cover those charges, you could lose money if the bubble bursts.

Housing prices have risen at an unprecedented rate in such a short period of time. While this isn’t always a cause for alarm, it does emphasize the need to know your expected investment time horizon and change your plans accordingly.

So, where do we go from here?

It’s reasonable that the ghosts of 2008’s housing bubble haunt buyers, sellers, and investors as we map out the market’s near- and long-term future. While predicting a market drop is tricky, it’s worth noting that there isn’t much evidence that one is on the way.

To begin with, the current asset market is nothing like what we saw in 2008, just before the Great Recession. Despite the labor shortage, the economy is expanding, unemployment is low, and optimism is strong as reopening efforts continue and greater possibilities emerge.

It’s critical to be wary of economic hazards while making any major financial choice. Thoughtful planning, time management, and getting financial guidance can all help you keep your money and yourself secure.

We’re here to help

Investing in the real estate market requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.

Debt yield is of high importance to lenders, as it helps them to understand how long it would take for them to recoup their investment in the event of having to take possession of a property after a loan default.

What is Debt Yield?

Debt yield is the lender’s underwritten net operating income (NOI) divided by the loan amount. For example, if the required minimum debt yield is 10 percent and the project NOI is $500,000, the maximum loan amount would be $5 million.

A low debt yield requirement results in higher leverage and implies increased risk, while a high debt yield limits proceeds and implies less risk for the lender. Debt yield requirements are typically higher for bridge and construction loans than for permanent loans on stabilized properties.

What borrowers need to know

Debt yield is a static ratio that doesn’t vary with variables such as interest rate, amortization period, or cap rate. Therefore debt yield provides an objective measure of loan risk. A borrower seeking a loan with an insufficient debt yield ratio will fail underwriting, even with acceptable loan-to-value (LTV) and debt service coverage ratio (DSCR) numbers. In effect, debt yield safeguards against loans on riskier properties.

Debt yield calculation

Debt yield is calculated by taking a property’s NOI and dividing it by the total loan amount. For instance, if a commercial property’s net operating income was $200,000 and the entire loan amount was $1,500,000, the debt yield would be:

$200,000/$1,500,000 = 0.133 or 13.33%

Many multifamily lenders now require a minimum debt yield in order to approve a loan, so it’s also possible to calculate the maximum loan amount, as long as you know the annual income of a property. For instance, if, in the example above, a lender had a minimum debt yield requirement of 12%, a borrower would be able to take a loan out of up to $1.66 million (as long as that amount was consistent with other factors, like LTV and DSCR).

$200,000/0.12 = $1,666,666

To extrapolate, a debt yield of 12% would mean that it would take a lender about 8.3 years to recoup their losses, assuming they did not sell the property beforehand, NOI did not increase, and the borrower defaulted immediately.

Assessing repayment risks

To be sure, commercial real estate loan underwriting involves a much deeper assessment than financial ratio analysis, which does not take into account the borrower’s financial strength, tenant credit quality, property location, or the impact of competing developments (to name a few considerations).

However, lenders are increasingly deploying the debt yield in their underwriting, and borrowers need to clearly understand how the lender uses it early in the loan underwriting process in order to avoid surprises later.

We’re here to help

Investing in multifamily conversions of offices and hotels requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.