With inflation, cash flow will increase over time, while the mortgage gets paid and the property value will increase over time. It’s possible that 10 years down the road you may double your cash flow.
Of course there is much more to buying rentals and cash flow will vary greatly with different properties and areas but many people need to see simple posts like this and it reminds us what stacking properties can do on the simplest of levels! If you add in all the other advantages it gets pretty crazy.
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.
Here are the Top 5 criteria investors need to know before making the decision to buy a rental property.
When you’re trying to pick a market to invest in, you want to make sure you have all the right pieces in place. Putting yourself in the best position to WIN at real estate investing, knowing HOW to invest the right way and understanding what key factors make up a solid and safe investment are crucial in setting yourself up for success.
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.
Using Debt also known as leverage is not always bad! Especially when using it for real estate investments.
Leverage is a very powerful tool that you can use as a real estate investor. Using leverage allows you to increase your buying power and maximize returns.
Leveraging simply means utilizing borrowed capital (debt) to make an investment.
As an investor, you want your profits from owning & operating the properties to be greater than the debt service & expenses.
If you buy right, you can cash flow on these properties after all expenses. You will only need to put down 20% down for single family investment homes & finance the remainder.
For example, if you had $100,000 cash and the property you were looking to buy cost $100,000, you could pay for it all cash & have no money left. All of your money would be tied up in this one deal.
However, by taking advantage of leverage, you can buy 5 – $100k homes with the same $100k by putting $20,000 (20%) down on 5 separate single family homes.
Who wouldn’t want to buy more with less money?
Of course, you will have mortgages to pay by using leverage, but if you buy right, you’ll still have cash flow and risk diversification in addition to the fact that your tenant’s will be paying down your mortgages.
You also experience 5x the gains in property price appreciation. If the 1 property goes up 20%, the asset value is $120k.
If the same occurs with the 5 properties, your asset value is $120k x 5 or $600k. As you see, by spending the same $100k capital, with leverage, you gain $100k in equity vs. only $20k by paying for the one house all cash.
Looking to start investing in the real estate market? We can help.
Using Debt also known as leverage is not always bad! Especially when using it for real estate investments.
Leverage is a very powerful tool that you can use as a real estate investor. Using leverage allows you to increase your buying power and maximize returns.
Leveraging simply means utilizing borrowed capital (debt) to make an investment.
As an investor, you want your profits from owning & operating the properties to be greater than the debt service & expenses.
If you buy right, you can cash flow on these properties after all expenses. You will only need to put down 20% down for single family investment homes & finance the remainder.
For example, if you had $100,000 cash and the property you were looking to buy cost $100,000, you could pay for it all cash & have no money left. All of your money would be tied up in this one deal.
However, by taking advantage of leverage, you can buy 5 – $100k homes with the same $100k by putting $20,000 (20%) down on 5 separate single family homes.
Who wouldn’t want to buy more with less money?
Of course, you will have mortgages to pay by using leverage, but if you buy right, you’ll still have cash flow and risk diversification in addition to the fact that your tenant’s will be paying down your mortgages.
You also experience 5x the gains in property price appreciation. If the 1 property goes up 20%, the asset value is $120k.
If the same occurs with the 5 properties, your asset value is $120k x 5 or $600k. As you see, by spending the same $100k capital, with leverage, you gain $100k in equity vs. only $20k by paying for the one house all cash.
Looking to start investing in the real estate market? We can help.
A lot has changed in the mortgage market since the start of last year. The average rate on 30-year owner-occupied home loans and while Asset Point does not provide loans for clients intending to occupy the property as their primary residence it does give a fairly good indication as to the demand of residential mortgage backed securities.
Unfortunately, that upward trend is only going to get worse as 2022 goes on, which is bad news. There are a lot of things going on, and it’s almost certain that the Fed will stop buying mortgage-backed securities and raise the federal funds rate. Goldman Sachs thinks there will be four rises in the federal funds rate this year.
How high will they rise? That’s not certain. The predictions of economists can be very different. Those who work for the Mortgage Bankers Association say that by the end of the year, the rate will be about 4%. 3.30 percent is what Fannie Mae thinks will happen. We’ve almost hit that number already.
In any case, it looks like this year will see a rise in interest rates for people who want to buy or sell a home, as well as for people who own homes and people who invest in real estate. These could be some of them:
There is less demand from buyers (and competition)
Last year was one of the hottest and most competitive housing markets in history, and low mortgage rates were a big part of it. This is what happened.
If you believe Freddie Mac’s records, 30-year mortgage rates were 2.65% at one point last year. That was the lowest rate ever recorded by the company since 1971.
There was a lot of money at stake because so many people had to compete for the same house last spring.
There will be less competition this year, and you can expect that to happen. There should be fewer bidding wars for the homes that are still on the market because interest rates are going up. There are a lot of risky things that buyers had to do last year, like skip inspections or put an appraisal contingency in their deals. This could help them avoid these things this time around.
The refinancing of properties has slowed.
People refinanced so much last year because the rates were so low. A lot of loans were refinanced in just the first half of 2021, which is 33% more than the same time last year. There were a lot of refinances, and homeowners across the country were able to save hundreds each month and thousands over the long term.
As interest rates go up, though, the reason to refinance fades, so it’s not worth it. The cost of refinancing a home can be very high, and even a small rise in interest rates can cut a homeowner’s savings in half. This makes the process, which comes with fees and costs, not worth it for many people.
The price of things will go down less quickly.
The price of homes has gone up a lot in the last few years. According to the Federal Housing Finance Agency, the national median home price rose by 19.2% between July 2020 and July 2021, just for that one year. Those cheap prices and a need for space also played a role (as did new scenery).
In 2022, it’s likely that price growth will slow down because both of those trends are over. Freddie Mac thinks home prices will rise just 2% for most of this year, and even less at the end. CoreLogic thinks prices will rise by about 6%. Both are a lot less expensive than the prices we’ve seen recently, which have gone up a lot.
No, prices aren’t going to go down at the drop of a hat. Demand is still high, but there aren’t many homes for sale. This is because millennials are now in their prime home-buying age. Until those come more into line, prices will keep going up, at least at some rate, for the time being.
What it means for your real estate goals
The real estate market has changed a lot over the last few years, so it’s important to think about that when you start to move.
For people who already own a home, that means acting quickly if a refinance is in the works, and for people who want to buy a home, that means preparing to make sacrifices along the way. People may have to buy a smaller, less expensive home in order to make a payment they can afford. If you can, you might want to save up for a bigger down payment or put money away to buy discount points.
There are two ways you can plan ahead: with an agent, with a lender, or on your own. Start now. We live in a fast-paced world. You might need to move quickly, too.
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 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.
Recent Comments