Categories
Real Estate Investing

A Basic Analysis Of Investment Properties

Spread the love

Before investors buy a property, they want to make sure that they’re making a good investment. That’s reasonable. 

To do this, investors need to determine the approximate value of the income-producing property they’re interested in acquiring. This involves crunching some numbers to get a better understanding of a property’s gross income and net operating income potential, as well as the property’s capitalization rate. Let’s take a look at how these numbers work together to present investors with a bigger picture. For instance, investors looking to determine approximate value of their income producing properties do this by calculating: 

Net operating income ÷ capitalization rate = approx. value 

It’s an indicator, not an appraisal. It can work in reverse as well, for investors looking to buy property: 

Value (purchase price) × cap rate = net operating income

Let’s take a look at how these numbers work together to present investors with a bigger picture.

Fixed and Operating Expenses

Let’s talk about operating expenses first. Why do we care how much it costs to hold, service, and maintain an investment property? Because we can count these expenses as deductions against our taxable income. All expenses relating to the operation of the investment property are deductible expenses. Some examples of operating expenses include:

  • Maintenance
  • Utilities 
  • Supplies
  • Advertising
  • Legal/accounting
  • Wages and salaries
  • Property management

In addition to the above, it’s also necessary to take into account fixed expenses such as property insurance, property taxes, and licenses and permits.

Gross Income

Gross income is the income received before the operating expenses are deducted. If investors were taxed on gross income, there would be a lot fewer investors. You should also understand the difference between potential gross income and effective gross income.

Potential gross income is income that a property could bring in if it were leased at full capacity. That rarely happens, so once losses from vacancies and credit losses (such as when tenants do not pay their rent and it becomes uncollectible) are deducted from potential gross income, you get effective gross income, or, more simply, gross income. 

For example:

Potential gross income – vacancy and collection loss + other income = effective gross income

So, for instance, if ACME Properties is fully leased, it generates $252,000 in potential gross income. Assuming a fully leased property and deducting for vacancy and losses of $10,895, and assuming there’s no additional income, ACME Properties’ effective gross income is $241,105.

Net Operating Income

Once you deduct operating expenses from effective gross income, you get net operating income. Are investors taxed on net operating income? No! Investors may also be able to apply allowable interest deductions from their mortgage payments. Mortgage principal and interest payments are called debt service. 

When you apply interest deductions to net operating income, you arrive at net taxable income. Depending on the property’s depreciation allowance, depreciation can sometimes effectively cancel net taxable income, resulting in no taxes owed. 

For example:

Effective gross income – operating expenses = net operating income 

So, for instance, if ACME Properties’ effective gross income is $241,105, and we subtract $11,560 in operating expenses, the net operating income is $229,545.

Capitalization Rates

Capitalization rate (or cap rate, for short) is determined by the market. It’s the return on investment that other investors in a given marketplace are receiving for a similar property. So, if the going cap rate is 7% (which is 0.07), then the capitalization formula would be to multiply 0.07 by the value (purchase price of the property) to get net operating income.

Value (purchase price) × cap rate = net operating income

$200,000 × 0.07 = $14,000 net operating income

If, instead of the cap rate, you know the annual income and value, you can determine the cap rate by dividing the income by the value:

Net operating income ÷ value = cap rate

$14,000 ÷ $200,000 = 0.07, or 7%

So, let’s say investor Jimmy is looking for an investment property in an up-and-coming area of town. He found one that meets all his requirements. The list price is $800,000, and similar properties in the area are returning a rate of 9%. To figure out his net operating income, Jimmy must multiple the value of the property with the cap rate. 

$800,000 x 9% = $72,000

Formula Factors

The factors in the formulas are generally referred to as “I” for income, “R” for rate or cap rate, and “V” for value.

To determine income: Multiply cap rate by value (R × V = I)

To determine value: Divide income by rate (I ÷ R = V)

To determine rate (cap rate): Divide income by value (I ÷ V = R) 

Cap Rate Example
– A property valued at $950,000 is returning a net annual income of $115,000.  
– $115,000 divided by $950,000 is 12.1%.
– The cap rate is 12.1%.

Spread the love
Categories
Real Estate Investing

Cash Flow Is King In Real Estate Investing

Spread the love

Real estate investors are generally looking for tax write-offs, long-term appreciation, or cash flow— and if you twist their arms, they’ll take all three. If they had to choose just one, well—as they say—cash is king. The advantage of positive cash flow (more money coming in than going out) is that the property is self-sustaining, and the investor can take the profits and reinvest in another property. 

Investors like to know everything there is to know about their cash. They want to know their cash flow, their before-tax cash flow, their after-tax cash flow, and how to shelter their cash from taxes.  

Before-Tax Cash Flow

The before-tax cash flow is calculated before income taxes are figured into the equation. So if an investment property is generating $20,000 in income, and expenses are $12,000, that’s a net return (cash flow) of $8,000.

Investors also like to know their cash-on-cash-return. Cash-on-cash return is the ratio of annual before-tax cash flow to the amount of cash they’ve invested, and it’s expressed as a percentage.

So if our investor had an annual before-tax cash flow of $9,000, and had put $350,000 down on the property, the cash on cash return would be 2.6%.

$9,000 ÷ $350,000 = 0.0257 (or 2.6%)

Note that this is cash invested, which has nothing to do with mortgage debt taken on. So it doesn’t matter if the investor paid $400,000 for the property or $1 million; the cash-on-cash return would be the same. The purpose of this formula is to give the investor an idea of how hard invested cash is working on the investor’s behalf.

Cash-on-cash return is all well and good—but what about those taxes? A 10% cash-on-cash return may sound great, but it can be whittled to nothing depending on the investor’s tax situation. Cash-on-cash also doesn’t account for appreciation of the property, or depreciation of the property. And because the percentage it yields is simple, it may not compare favorably to other investments with perhaps lower risk, and compound interest. 

After-Tax Cash Flow

Computing after-tax cash flow solves some of these issues. To determine after-tax cash flow, you simply take the profit yielded from the investment and subtract income taxes that apply to the property’s income.

What if, in doing so, you come up with a negative number? This means the investment is a losing investment in that year; the investor is putting in more money than is being returned by the investment. This paper loss can be used as a tax shelter, and is actually desirable by some investors for that purpose, because shelters can be used to offset other income.

Remember that depreciating an appreciating asset can be a wonderful thing! This paper loss is due in part or whole to the depreciation taken against the investment property. As such it may not “feel” like a loss in terms of cash flow or other purposes, and in fact can be used to reduce tax burden in other areas.


Spread the love
Categories
Real Estate Investing

Investing in Single Family Home Rentals

Spread the love

Updated June 26, 2021

Real estate investors have different preferences when it comes to investing in rental properties. Some only want single-family detached homes, others prefer duplexes or even multi-unit apartment buildings. 

Although for many real estate investors, a single-family detached home equals investing in rental properties. A single family property is also a good option as real estate investing for beginners.

investing in rental properties

It is not uncommon for an investor to look beyond the rental property scenario and envision bigger and better things, more on that later.

There are pros and cons to investing in rental properties, particularly single-family detached homes. But first, let’s fully define what exactly is a single family detached property.

Single Family Property Investing Benefits

Typically used for owner occupancy, single-family properties are also valuable investment vehicles to generate income. Increasingly lower mortgage rates and increasingly fast rising rental rates is very advantageous for investors, especially real estate investing for beginners.

The benefits of investing in single-family properties include:
→ More Affordable
The most obvious advantage to investing in single-family properties is the cost. Single family properties can often be substantially less than multifamily properties, especially when considering additional expenses such as the down payment and maintenance.

Additionally, it is not uncommon for single family property rental agreements to require the tenant is responsible for all or most of the utilities. These agreements may require the tenant to take responsibility for landscaping and basic maintenance, making long-term maintenance costs significantly cheaper.

→ Higher Appreciation
Single-family property investments tend to appreciate more than multifamily properties. Multifamily properties are valued based on the incoming rents and the condition of the property. However, single-family properties are valued based on the supply of owner-occupied buyers. If a property is well-maintained in a thriving neighborhood, no worries– there will always be a demand for buyers.

→ Easier To Finance
Typically, financing a single-family property is easier than financing a multifamily property. The benefits of financing a single family property include: lower interest rates and higher loan-to-value (LTV) ratio.

→ Easier To Manage
With only one tenant, managing a single unit has its appeal. Although, you also have the option of using a professional property management company that is required in most municipalities to be licensed by the state real estate commission.

A single family detached property is a housing structure maintained and used as a single dwelling unit. The property sits on a single individual lot and does not share any walls with another property.

Ok, now that we got that covered, let’s get back to investing in a single family detached home.

You may be surprised to know this, but it’s rare for a single family home to produce cash flow, at least initially.

By the time mortgage debt and maintenance costs are calculated, if rental income produces a break-even point, most investors would consider that a success. Once tax advantages and periodic rental increases are considered, a positive cash flow may come in a few short years. And where else can you depreciate an appreciating asset and have someone else pay your mortgage? (We’ll discuss cash flow, appreciation, and depreciation in detail in another post.)

3 Steps To Estimate Rental Property Expenses

1. Identify initial repairs and improvements.
Although there may be some ongoing or future repairs to be made down the line, determine what immediate repairs should be completed.

2. Identify fixed expenses.
Identify expenses that you can expect to occur regularly. Although the cost of these expenses may fluctuate, you can these expenses to be paid at regular intervals. This may include: property insurance, property taxes, and rental management fees.

3. Identify variable expenses.
There are some expenses that rental property investors can anticipate to occur at some point in the future. Variable expenses are no straight forward to estimate, but should not be ignored. Examples may include: vacancy costs, unexpected repairs, etc. Experienced investors save a percentage of the monthly rental income for variable expenditures.
investing in rental properties

Of course, not everyone is cut out to be a landlord. Imagine clogged toilet calls at 2 a.m. (Yikes!) That can get pretty annoying. And we can’t overlook… sometimes tenants don’t pay and it can be difficult to evict them. 

Vacancies can be costly, as well. For example, with a 10-unit apartment building, if one tenant moves out, that’s a 10% vacancy. With a single-family home, if that tenant moves out, that’s a 100% vacancy. And the lender is still going to want a 100% mortgage payment.

In addition, there’s no economy of scale with a single-family home. Fix a roof on a fourplex (a property that contains four separate apartments, also known as a quadplex or quadriplex), and you’ve re-roofed four units, so your costs are only 25% per unit. Fix a roof on a single-family home, and your costs are 100%.

Defining Residential Multi-Family Property Types

A residential multifamily property is any property that contains more than one self-contained unit.

Duplex –
Two individual residential self-contained units attached to each other, either next to each other or above each other like apartments. Duplexes have two separate entrances for each unit. This means each tenant would have their own entrance.

Fourplex or Quadriplex
Four individual residential self-contained units attached.

Triplex
Three individual residential self-contained units attached.

Investors in single-family detached homes aren’t always thinking about using the properties for rental income. There are many various invest opportunities. Consider the following:

1st – For those with rehabbing or handyman skills, purchasing a fixer-upper or older home may pay off lucratively. With a minimum outlay of cash, an increase in value can easily be realized, which will enable higher rent charges, resulting in immediate cash flow (and a nice profit at resale).
2nd – Rental income can be used to carry the cost of the investment.
3rd – Strategic investors will use the profit and increased equity from one investment to finance the purchase of another, possibly larger investment. 

Buy one rental property per year.

We will show you how.

This page is for: investing in rental properties, rental real estate advantages, advantages of rental real estate, benefits of rental property, buying single family rental property, rental property benefits, single family rental investment strategy, advantages of single family, investing in single family home rentals, investment property, how to invest in real estate, buy one rental property per year, real estate investing, buy rental property, rental property investment, invest in real estate, rental investment, investment properties, investment houses.


Spread the love
Categories
Real Estate Investing REIA

Find Your Local REIA

Spread the love

Real Estate Investor Associations – Love It or Hate It

Dana Ash-McGinty

This is a subject that I hear so many real estate investors discuss. Some love local REIA and others completely avoid them. Personally, I am not a big fan of the very large, corporate-like Real Estate Investor Associations. But, REIA’s can be very good for networking.

I’ve been to REIAs on the east coast that are two, three, four hundred members strong, where you go into a room that’s several thousand square feet, where each meeting is a large production.

I have also been to REIAs that were hosted at a small local restaurant with just a handful of and like-minded investors that shared ideas, contacts and truly invaluable information. You will have to choose the setting that’s most comfortable for you, but it is critically important that you surround yourself with people who think the way you do and share your investing goals. You will get a lot of value out of working together and that’s what the REIAs are designed to do.

I’ve started, managed and led a couple of REIA groups. Currently, I lead a 800+ person REIA Group in the Washington, DC Metro Area – DMV. Although, I will admit my time lately has been limited to curate events.

However for 2020, my goal is to maintain a forum where people can share ideas, concepts, strategies and techniques and really try to grow their business through the network.

It is critical for new investors to get involved with these types of organizations. It’s one thing to attend the meeting, it’s something quite different to actually participate and be involved.

I welcome you to come shake hands, introduce yourself, find out what other people are doing in real estate and make a point of staying in contact. You will get very little out of any REIA by simply being a wallflower in the corner.

You should start getting your name in front of other real estate investors and real estate professionals and networking. It is great to give our cards, but you really have to get actively involved.

There are well over 200+ REIAs and groups around the country. There probably will be one within a 30 minute drive of where you live. Go prepared to meet people and talk about what you are doing. You may even meet people there who are ready to do deals with you.

Just remember, the REIA is one of the most important things to have on your real estate investor to-do list.

If you’re frequently in the Washington DC Metro Area, I invite you to join us at the DC Real Estate Investors + Entrepreneurs Meetup.

See you there!


Spread the love
Categories
Real Estate Investing

My Fave Real Estate Investing Books

Spread the love

Here’s a snippet of my own personal real estate investing library.

Updated December 1, 2019

Your real estate investing success is highly dependent on the quality of the education you receive. Arm yourself with skills, tools & knowledge from these books I have found great value in!


Feel free to contact me with any questions. – Dana Ash-McGinty


Spread the love
Categories
Investing Real Estate Investing Tax Lien Investing

Investing in Tax Liens: The Rate of Return

Spread the love

Tax Lien Investing, An Underutilized Investment Tool

The goal of an investor is to seek new opportunities while evaluating risks vs. rewards. Many stock market investors are happy with a safe return of 10-15%. Investing in tax liens and tax certificates is a less familiar strategy. Although it’s less popular and not fully understood, tax liens can preform just as well or better than stock investments. Another advantage of tax lien investing is that you have a more pre-determined return without having to second guess the market. 

Investing in Real Estate Tax Liens

In many jurisdictions, real estate tax lien investors see returns between 10-25%. As with any other investment, the key to tax lien investing is to fully understand the strategy and know as much about the property as possible.

What is a Tax Lien? 

When a property fails to pay the real estate taxes, the city or county in which the property is located has the authority to place a lien on the property. A lien is a legal claim against the property for the amount of unpaid taxes.

When a lien is issued, a tax lien certificate is created by the municipality that reflects the amount owed on the property, plus any additional interest or penalties due. These certificates are then auctioned off to the highest bidding tax lien.

Tax liens are assigned by county. However, the guidelines regarding tax liens vary with each state. There can be some variance regarding the redemption period and the bidding process.

There are two ways to profit from tax lien investing. First, the most common way is profiting from interest payments and the 2nd is taking ownership of the property.

Rates of Return

Here’s an example of Rates of return.

StateSale TypeInterest RateRedemption
DelawareDeed (hybrid)15% penalty60 days
D.C.Lien18% per annum6 months*
FloridaLien18% per annum, 5% minimum2 years
GeorgiaDeed (hybrid)20% penalty1 year**
LousianaDeed (hybrid)12% per annum + 5% penalty3 years
MarylandLien6% to 24% (varies by county)After 6 months*
PennsylvaniaDeed (hybrid)10% per annum*Possibly 1 year*
South CarolinaLien8% or 12% per annum1 year

* varies
** not self-executing

Lien vs. Deed vs. Hybrid States

Each state has a process for enforcing payment of property taxes. About half of the states are tax “lien” states, while the other half are considered tax “deed” states.

In a deed state, the county is not selling a lien on the property for failing to pay property taxes. Instead, the the county is actually auctioning the property itself to pay the taxes.

A “hybrid” state is technically a deed state. However, it operates like and has much in common with a lien state. It has aspects of both systems. 

All states fall into one of these categories:

  • Lien states
  • Deed states 
  • Hybrid states

State by state:

LienDeedHybrid
AlabamaAlaskaConnecticut
ArizonaArkansasDelaware
ColoradoCaliforniaGeorgia
District of ColumbiaIdahoHawaii
FloridaKansasLouisiana
IllinoisMaineMassachusetts
IndianaMichiganPennsylvania***
IowaMinnesotaRhode Island
KentuckyNevadaTennessee
MarylandNew HampshireTexas
MississippiNew Mexico
MissouriNew York**
MontanaNorth Carolina
NebraskaOhio*
New JerseyOregon
North DakotaPennsylvania***
Ohio*Utah
OklahomaVirginia
South CarolinaWashington
South DakotaWisconsin
Vermont
West Virginia
Wyoming

* Ohio is historically a deed state however, counties with populations over 200,000 are also allowed to conduct tax lien sales.
** New York City is also allowed to conduct tax lien sales.
*** Pennsylvania counties may operate under the hybrid system where the property is improved and has been legally occupied 90 days prior to the sale.

Lien States

  • The investor only has a lien on the property and does not have any other rights in, or title to, the property.
  • The investor receive a statutory interest rate until the property tax is received.
  • The property owner has a statutory redemption period within which he or she must pay the tax bill.

Deed States

  • The investor actually requires title to the property.
  • No interest rate or redemption period is involved since the investor receive the property itself.

Hybrid States

  • The investor actually acquires title to the property, subject go the prior owner’s right to redeem and get the property back.
  • Should the prior owner redeem (ie; pay the tax bill plus interest, penalties, and costs), the investor will receive an interest or penalty payment on his or her investment. 
  • The prior owner has a specified redemption period (six months to 3 years) to redeem the property and reacquire title.

Who Should Invest In Tax Liens?

Property tax liens can be a viable investment option for investors familiar with the real estate market. Investors that fully research properties prior to buying liens can generate substantial profits. 


Spread the love
Categories
Real Estate Investing

Quick Tips for Investing in Rental Properties

Spread the love

If you compare the potential financial returns in real estate investments to other types of investments, the value of real estate properties typically create a higher of value over time. If you want to secure your future and perhaps build your very own retirement portfolio, you should consider real estate investing.

Here are smart tips for starting as a real estate investor in rental properties:

1. Find a mortgage broker. There are many mortgage brokers out there but, there is an advantage to working with a mortgage broker experienced in real estate investment lending. Compare several mortgage brokers in your area. Talk to them in detail about your investment plans and be sure to understand all the “numbers” before you start.

2. Do you have your own home? If you want to become a successful real estate investor, the best place to start is with your own home. By purchasing your very own property, you will learn about the purchase process. You will also become familiar with the local real estate market.

3. If you intend to start investing in rental properties, why not actually live there? Consider purchasing a multi-family property. By doing so, you can enjoy low-cost living and earning rental income at the same time.

4. Before you make your first real estate investment purchase, be sure to fully research the property and the area. For example, when purchasing a rental property, sustainability is a key factor. Will the property require minimal upkeep? How is the overall condition? Location is another key factor. Rental properties should be situated near retailers and public transportation. These are the types of things to research before the purchasing a rental property.

Consider the following tips and soon you can become a smart real estate investor. For a list of additional things to consider prior to your purchase, click here.

avatar

Dana Ash-McGinty

Principal Broker | Realtor® | “The Real Estate Maven”

Dana Ash-McGinty is the Principal Broker of ASH | MCGINTY, a Washington, DC Real Estate Brokerage. This real estate maven has 15+ years experience in residential, commercial and land sales in addition to multi-state residential renovation, re-zoning, and condo conversion projects. A sought after real estate authority, she has been featured on CNN and in various real estate and financial publications. Dana is married to the highly esteemed Dr. Dana W. McGinty, a Washington, DC based internal medicine physician. They are often referred to as “The Danas”.

Spread the love
Categories
Real Estate Investing

10 Questions To Ask Yourself Prior To Rental Real Estate Investing

Spread the love

Prior to taking any steps towards investing in real estate, there are a few things about yourself you should consider. These things include: what you want, what motivational forces you respond to, and whether or not you have the temperament to handle the rental real estate investing.

Here are some questions you might want to ask yourself:

Personal Inventory

1. Does the thought of owning rental property get me motivated enough to get started in real estate investing?

2. Can I foresee the financial rewards and benefits that real estate has to offer?

3. Are there any business-work conflicts that I can settle before I make my 1st investment?

4. Do I have the ability to regulate my time so that I can manage the property successfully and still remain secure with my current work and business obligations?

5. Do I have the temperament to handle problems, complaints, and service calls in a positive, sensible manner?

6. Can I make quick decisions?

Financial Inventory

In addition to your personal inventory, you want to know if you can handle the financial aspect of investment property. With that in mind, there are some personal financial questions you should ask yourself:

7. Do I have the financial backing it takes to buy investment property?

8. If there are vacancies, would I have sufficient income to pay the expenses until I have new tenants?

9. Can I afford to make any repairs in case there isn’t enough reserve funds?

10. Do I have a good credit rating?


Spread the love
Categories
Buyer Tips Real Estate Investing

New To Real Estate Investing?

Spread the love

4 Simple Real Estate Investment Tips For Newbies

real estate how to invest

1) Have a Reason For Your Investment
There are tons of reasons why a person decides to invest in real estate. Whatever the reason may be, be sure that you have a strategy. Knowing why you want to invest will encourage you to reach your goal.

2) Do Your Homework
There are tons of people in real estate that will tell you numerous wonderful things about real estate investing. You have to do your own homework. Be sure you understand your investment numbers. Learn as much as you can before you move forward with any property.

3) Keep an Open Mind
One of the most common mistakes a novice makes is being pessimistic or closed minded even before things start. There may be a learning curve in the beginning and you may need to make certain mind adjustments. For example, the approach to purchasing a home to live in can be very different than the approached used to purchase an investment property. Nevertheless, keeping an open mind will allow you to see opportunities that may not have been immediately apparent.

4) Have an Exit Strategy
Before purchasing any investment property it is important to have a future exit strategy. What is your goal for the investment. Will the property be a long term investment? Or would you prefer to make repairs and immediately re-sell. Always start with the end in mind.

avatar

Dana Ash-McGinty

Principal Broker | Realtor® | “The Real Estate Maven”

Dana Ash-McGinty is the Principal Broker of ASH | MCGINTY, a Washington, DC Real Estate Brokerage. This real estate maven has 15+ years experience in residential, commercial and land sales in addition to multi-state residential renovation, re-zoning, and condo conversion projects. A sought after real estate authority, she has been featured on CNN and in various real estate and financial publications. Dana is married to the highly esteemed Dr. Dana W. McGinty, a Washington, DC based internal medicine physician. They are often referred to as “The Danas”.

Spread the love