Posts tagged: best real estate websites

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It’s interesting how rental real estate gets treated as an investment. Like Rodney Dangerfield, it gets no respect. While conventional investments like stocks and bonds get the Financial Post and the Wall Street Journal, do a search on “how to purchase real estate” and you’ll discover all kinds of no-money down schemes that seem designed to sell books and tapes instead of investment real estate. On TV there is Report on Business TV, but for real estate you’ll see flipping shows or infomercials. It strikes me as pitiful that such a solid investment vehicle gets such a bad reputation.

It is possible to buy with no money down, but it involves arranging a high ratio mortgage, and for rental property you only do that if you have equity in other properties. In other words, if you’ve got one property free and clear its relatively easy to arrange a line of credit at prime. A $100,000 property would cost about $400 per month, plus taxes and maintenance of about $200. In short, it would carry itself and give you income to pay the financing costs.

A more common method to buy income real estate is with a deposit. Usually is you can make investment property itself with less than 40% down its probably a good deal. These kinds of properties are easier to come across in stable markets.

There are lots of reasons to own investment real estate.

Reason #1 to own income real estate is because your renters buy it for you. Even if the other benefits didn’t accrue, that on it’s own justifies the investment. But the fact is, there are more benefits to buying rental property

Reason #2 is leverage. The most effective description of how leverage works comes from the book Buy, Rent, Sell, by Lionel Needleman (Needleman is not a fast talker; in fact, he’s an accomplished author and professor with many published books and articles on housing in Great Britain and Canada. His assumptions and math is a bit simplistic, and need to be tweaked for your local market, but the book is worth looking at).

He explains leverage in the following manner: John and Mary each buy a property $100,000. After a year both houses have increased 10% in value. Both buyers sell the properties and compare the profits.

John began with $100,000, and now has $110,000, which means he has earned a 10% return on his investment. Mary, on the other hand, put $10,000 down on her property, and mortgaged the balance for$90,000. When she sells she clears off the mortgage and totals everything. She also received a $10,000 profit, but since she only invested $10,000 in the income property, she’s made a 100% return on her down payment. As you may suspect, the real kicker is that while John invested in one house, kept it for a year and then sold it with a $10,000 profit, Mary acquired 10 houses, kept them one year, and then sold them for a $100,000 profit. Both started out with $100,000, but after a year John has only got $110,000 while Mary $90,000 more. The numbers are simplified in this example, but they decisively demonstrate the magic of leverage.

Reason #3 is taxes. In most tax zones costs incurred on investment real estate is comes off income. And, you can generally incur depreciation expense on the structure that in effect are paper losses that reduce the tax burden. Depreciation works like this: we know that the value of a durable item, like a structure, decreases with the years. Even if the property is maintained perfectly, an old house is not worth the same amount of money as a new house. This loss is depreciation, and you can use that depreciation loss to decrease the total tax payable.

Of course, when we invest in income property we expect that it will go up in price, and over the long run it often does. What occurs with the depreciation in that case? The tax collector was told the property fell in price through depreciation, but at the end of the process we sold at a profit. The taxman usually says that you’ve “re-captured” the depreciation and levy tax.

Re-capture is no fun. It’s like discovering that you’ve already spent the money that you intended on spending in the future.

There is a great solution. When you buy the investment you cut up the original investment between the building value and the property value. Without cheating you set the value of the land as low as possible and the structure as high as reasonable (do the math and you’ll see it pays to be reasonable on your splits). When the property goes up in price and you liquidate, you tell the taxman that you didn’t recapture any depreciation since the structure did depreciate, while the land increased in value. This profit is capital gain, and capital gain is usually taxed at lower rates than income like…rent. You depreciate the money you make when you earn it as rent, and pay tax on it when it comes from capital gain.

Owning income producing property also enables you to write off the costs of things that you might have bought anyway, from office supplies to a trip to see the property.

Reason #4 is capital gain. Capital gain doesn’t always happen, but it often does. As we’ve seen with leverage, the capital gain can be leveraged. Even better, the capital gain can, sometimes, be greater than what some folks earn in a year of work.

Reason #5 puts everything together by combining cash flow, leverage, and tax planning. Rental real estate generate cash flow. Initially the cash flow could be neutral or even negative, but after some time it will often becomes positive. When it does you need to pay income tax on the excess rent. The solution for that is to re-mortgage and incur additional interest cost, reducing your taxes. You also re-leverage your initial property. The next step is to take that money and buy another income property. You pay no income tax, incur more depreciation, and still earn a capital gain. Better yet, with two properties you spread the risk, and when the time comes to sell you can stretch out the timeline and sell the properties in different years to minimize tax.

It can’t be repeated enough that you need to buy income property wisely. You need to know the location and the potential tenant. Properties that are desirable and are in a desirable area stay rented. “Desirable” doesn’t have to be “mansion”, but warm, clean, dry and well priced are critical. Whether you buy a 1 bedroom apartment or a three bedroom house with a suite isn’t important.

Metrics are critical. The first is price-to-rent ratio. What that means is that you take the price, say $100,000, and divide the rent, say $1000/month, into that. In this case the result would be 100. Numbers between 75 and 175 are great, but never forget that projected capital gains and interest rates impact what numbers you go with. Low interest rates permit higher numbers, and solid capital gain projections will demand higher numbers. Over 200 is no good in almost every location unless all you need is dependable income, aren’t concerned about capital gain or don’t ever plan to sell.

Another excellent metric is the break even rate. This is the percentage of the price need for a down payment to allow the realistic rent to carry the property. The rent has to be a) market rent, not “hoped for” rent, and b) net rent, not gross rent. If the investment will carry at less than 45% down its worth looking at. Clearly, if interest rates are low the net rent will carry more, meaning the break even rate can be high. Remember that low rates don’t last forever, so unless you can lock in very long term you have to assume that the break even rate to be low in low interest rate environments, and can be higher in higher interest rate environments.

If you discover a piece of property that has a desirable price to rent ratio and a desirable break even rate (and is in a good area and isn’t a bad idea), its worth throwing the numbers onto a spreadsheet and determining the internal rate of return (a real estate investment metric that combines various income streams) and projected cash on sale. There are spreadsheets and programs that can calculate this for you, but the key is “GIGO” – garbage in, garbage out. Use correct taxes, the correct interest rates, your projections of income tax rate, and realistic estimates of capital gain and maintenance. Properties in bustling urban areas generally go up in value more than properties in rural or depressed locales. They also often have what seem to be inferior metrics – a downtown city condo could have a much worse price to rent and break even point than small house in a mill town. However, capital appreciation in a rural area is likely much riskier. Measuring mortgage pay down and tax benefits on a detailed spreadsheet let’s you fairly evaluate exactly how competing investments compare.

It would be foolish to ignore the issue of a property bubble, or crash. Buying on metrics both helps and hinders. It helps because if you are hard-nosed with break even rates and rent multipliers you wouldn’t purchase overpriced investment property (underpriced income property doesn’t really turn up in a bubble, and it doesn’t crash in value). It hinders because you can’t buy on metrics in a bubble, no matter how much you want to, because metric compliant properties don’t exist.

The other side of this is that when a market crashes there are lots of metric compliant properties, but often little mortgage financing and plenty of scared buyers and stressed sellers.

All in all, a balanced market is the optimum for purchasers, although buyers who acquire on metrics and exit the market near the peak often feel like they’ve hit the jackpot.

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Source by Rob Chipman

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In many areas/ regions of this country, a homeowner, has many choices, in terms of selecting, the right, real estate agent, to serve his best interests, etc. Obviously, since for most of us, our house represents our single – largest financial asset, and this decision, may have a strong impact, on the potential results, one should take this process, extremely seriously, and take the time, and effort, to ensure, selecting the best representation, for your purposes. While, it might be possible, to effectively, train, and develop, agents, so they learn the necessary skills, etc, and, a motivated individual, via a combination of skills, and developed judgment/ wisdom, one’s basic quality of character, must be strongly considered, because while anyone might be able to handle the other needed actions, etc, only the rare person, will maintain absolute integrity, especially when an easier path, might be available. This must also include, that individually, seriously commit, to their legal and ethical responsibility, and duty, to honor, and protect, his client’s fiduciary privacy, etc. With that in mind, this article will attempt to briefly, consider, review, and discuss, some of what, this encompasses.

1. What are some of an agent’s fiduciary responsibilities?: Real estate agents, are, legally and ethically, bound, to honor and protect, his client’s financial information, and anything, which might affect, and impact, their potential results! For example, while the homeowner, might have personal reasons, which might direct him, towards needing to sell his house, such as financial reversals, etc, letting potential home buyers, know these, might result in these individuals, seeking better terms, including lower offers, etc. In addition, for example, if, your client, has already committed to purchasing a new home, and selling the existing one, is needed, for completing that transaction, disclosing this confidential information, potentially, might be detrimental to your client. Since real estate agents, get paid on a commission – basis, and only are compensated, after a successful transaction, some might be tempted to take some short – cuts, and might disclose certain information, believing it may, create offers. Understand, doing so, is neither legal or ethical, but, the reality is, it is sometimes, done, anyway!

2. Integrity and disclosure: One must balance their allegiance to their client, with their legal obligation, to disclose any material issues/ faults, which might affect any potential buyer! No one should proceed, with anything less than absolute integrity, while balancing this, with the duties and responsibilities, he owes, to his client.

Carefully select the real estate agent, you will hire, based on many factors, but, listen carefully, and closely examine, the individual’s essential quality of character! You owe it, to yourself, to receive the finest representation!

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Source by Richard Brody

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When, someone, decides, he’s ready, and prepared, to invest in real estate, for investment purposes, he must do his homework, and know/ understand, his options, in terms of investing in these types of properties. While investment real estate, often, is a superb investment, this is only the case, when the property is the correct one, and a well – considered, evaluation is done, and one is properly prepared, to consider the best way, to fund these purchases. The process must begin with, doing a thorough, financial analysis, and feasibility study, to consider, revenue flow, costs/ expenditures, and, whether, the purchase, makes sense. Once, this is carefully done and performed, one must consider, how he will fund the transaction. With that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, 4 possible options, to fund commercial real estate purchases.

1. Conventional loans: Begin your analysis, and review, by considering conventional loans, and whether, this way, makes sense, for you, and your needs/ requirements! A conventional/ traditional loan, generally offered, by a bank, or other lending institution, requires significant collateral, and other assurances, to qualify. It also requires a down – payment, often, approximately, 25%. One’s overall, credit rating, must be, at a level, which will generate the finest offers, etc.

2. Get funds from contacts/ investors, etc: Sometimes, the best course, is to seek partners, or shareholders, in order to get the necessary funding. Doing so, often, reduces your personal risk, but, also limits the upper – end, possibility! In addition, it requires, putting together, a legally, drawn – up, agreement, etc. This is often, attractive, when one doesn’t have the personal funds, or can’t put together, the necessary, down – payment.

3. Combination: Sometimes, the best course of action, for someone, may be using some sort of combination, of the two methods, listed above. Perhaps, using a conventional approach, for much of the funding, and attracting investors, to, either minimize risk, or create the ability to have the necessary degree of reserves, associated with managing these types of properties, might makes sense, to some.

4. Partnership; limited partnership; corporation; Real Estate Investment Trust (REIT): If you don’t want to, or are unable to do this, on your own, a partnership, limited partnership, or corporation, might make the most sense. However, if you aren’t prepared for quality analysis of choosing the right property, or would rather, be more diversified, a Real Estate Investment Property (or, REIT), might make sense, because, if you select, the right, General Partner, and experienced, expert advisers, you will be able to invest in real estate, in a similar manner, to investing in a Mutual Fund.

If you want to invest in investment real estate, do so, wisely, and be prepared, for making the wisest, possible decisions! Understanding, financing options, etc, positions you, to make the best decision, for you!

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Source by Richard Brody