Real Estate

  •Real Estate - Analyzing an Investment

Choosing the correct approach to analyzing a real estate investment is as important as choosing the particular property or strategy. Selecting the wrong approach for a particular market or type of property could cause investors to forsake profits. Here is a summary of some different approaches used to assess value and returns.

Sale comparison approach: Compares the subject property to similar properties recently sold and calculates an average price per unit or square foot to determine value.

Gross rent multiplier: A rough estimate of value: take the sale price and divide by monthly potential gross rental income. Generally used by investors who repeatedly buy the same types of property. This method determines the value of a property based solely on potential rental income for the
first year.

Limitations: It reflects a one-year snapshot in time. It only works when comparing properties that have similar operating expenses and similar occupancy/vacancy rates.

Direct capitalization (cap rate): Take the net operating income (NOI) and divide by sales price. It is expressed as a percentage of the sales price offered, or a percentage of the price an investor is willing to pay. It accounts for operating expenses, gross rents, non-rental income, vacancy and credit losses.

Limitations: It is a one-year snapshot. It does not account for the present versus the future value of the dollar (known as the time value of money, or TVM). It also does account for owner financing, tax implications, property depreciation and appreciation.

Cash on cash: Looks at cash invested up front-not borrowed dollars-as related to the first year cash flow before taxes. Divide before tax cash flow (NOI less debt service and reserves) by the amount of cash invested for the down payment. This method accounts for the impact of owner financing (investing with borrowed money). It also accounts for operating expenses, gross rents, non-rental income, vacancy and credit losses.

Limitations: It is a one-year snapshot. It does not account for TVM, nor does it take into account owner tax implications, or property depreciation and appreciation. When comparing properties in different areas, investors might consider a property with a lower cash on cash return, because it might be a better investment if the potential for appreciation is more predictable.

Demographic/trends analysis: Projects potential appreciation and potential obsolescence by closely examining economic indicators, building and demographic trends (profiles of current and future buyers). Property appreciation will be driven by overall demand in the market and impacted by obsolete property or community features. It is important to know how rare a property is in the market, and how likely demand for this property is to increase or decrease because of competing existing properties and planned new construction. The Economic Trends Report is a valuable resource for investors using this approach. This approach helps investors answer the question: Does this property have, or can it have, what buyers will be looking for in the future?

Limitations: To use this approach, investors must have reliable first-hand experience in a given market.

The following approaches take into account TVM, the investor抯 tax situation and mortgage debt service.

Internal rate of return (IRR): Measures the average annual yield (percentage earned) on each dollar for as long as it remains in the real estate investment (entire holding period). It uses the initial amount invested, projected after tax cash flows, and projected after tax sales proceeds.

Limitations: Reflects the return as long as the dollars stay in the investment and does not take into account reinvested returns. It measures an average annual return over time, so across multiple years it may exaggerate the impact of a single year with a high return. It cannot account for negative cash flows in future years, nor can it account for the initial investment being phased in over time. Investors must also make assumptions about future sales proceeds.

Net present value of discounted cash flows (NPV): Determines the dollar value of an initial investment by taking the sum of the present value of all future cash flows netted against (or compared to) the initial cash investment. If NPV is high, the investment exceeds investor expectations for a desired annual return. This approach uses after tax annual cash flow and after tax sales proceeds. This approach is often used to compare different types of investments, such as stocks and CDs versus real estate.

Limitations: This approach does not account for money reinvested during a given holding period.

Capital accumulation: Takes into account return of and on investment in the circumstance where money returned is reinvested during the property抯 entire holding period. This method allows investors to compare two or more investment alternatives in terms of accumulated dollars rather than rate of return. It accounts for dollars that remain in the investment and those that are returned from the investment and reinvested.

Limitations: Investors must make assumptions about the potential sales price as well as the potential returns of competing investments over time.

Please visit http://www.nuwireinvestor.com/ for many more articles about investing in real estate.

     • Real Estate - 12 Steps to Buying a Home

Why do you want to make a change? Are you ready to start a family, plant your own garden? Do you feel you've finally "arrived" at your company? Maybe a raise, or a bonus, or a baby on the way has made you think about living in a home of your own.

Whatever the reason you are thinking about a home, there are 12 steps you will inevitably take. If you do them in the right order, you will save yourself time, frustration, and money. For example, if you start shopping for homes on the Internet without knowing how much you can spend, you will not only waste time looking at the wrong homes, but you may ultimately be disappointed at what you can actually afford.

      1.FIND OUT HOW MUCH YOU CAN SPEND
The first thing you need to do is figure out what kind of home you want to buy and how much you can afford to pay in monthly installments.
Keep in mind that the results of your calculations will only be an estimate. Until you have chosen a home and the type of loan you want, and communicated with a lender, you can only use the calculated amount to help you determine a price range of homes you want to preview.
           2.GET PRE-APPROVED FOR A LOAN
Either go to a mortgage broker or a direct lender and find out for certain the size of mortgage for which you can qualify. The pre-approval letter the lender issues you will help you be taken more seriously by agents and sellers because they will recognize you as someone who is prepared to buy. If you want a larger mortgage or better rate, investigate the government sites such as HUD.
          3.HIRE AN AGENT, PARTICULARLY A BUYER'S AGENT
Using an agent can help you in numerous ways, especially because you are already paying for those services in the purchase price of the home. Both the seller's agent and the buyer's agent are paid out of the transaction proceeds that are included in the marketing price of the home. If you don't take advantage of an agent, you are paying for services you aren't getting. If you are planning to buy a home available through foreclosure or a for-sale-by-owner (FSBO), you can still use the services of an agent. Agents will negotiate with you on their fees and the amount of service you will receive for those fees, and you can arrange for them to be paid out of the transaction, not out of your pocket.
Start by narrowing the field. If you are interested in a certain neighborhood in your town, find out who the experts are in that area of town. They will be better informed and more attuned to the "grapevine," and are better positioned to network with other agents in the same area. Contrary to popular belief only 20 percent of homes are actually sold through newspaper ads. The other 80 percent are sold through networking among agents. If you are relocating to a new city, ask agents in your own town to refer you to agents in your new area. They will be happy to do so, because if you buy a home from their referral, they will receive a referral fee, so they are motivated to make certain you find the right agent to assist you in buying a home.
          4.SIGN A BUYER'S AGREEMENT
Again, if you find an agent you like, go all the way and sign a buyer's representation agreement. This agreement means that you will have one agent representing you as a buyer. The agreement empowers the agent to not only search out the latest Multiple Listing Service list, but to seek alternative means of finding you a home, including searching foreclosures and homes for sale by owner. With a signed agreement, the agent becomes a fiduciary and must act, by law, in your best interests.
          5.BE AWARE OF YOUR LIKES AND DISLIKES
As you shop for homes, keep in mind what you like and don't like and pass along your feelings to the agent. You should feel comfortable looking at numerous homes, but neither you nor your agent is interested in wasting time on homes that aren't appropriate. Like any relationship, your home will not be perfect. If you are finding that most of your criteria is met, it shouldn't be long before you find the right home. Think in terms of possibilities as well as what you see is what you get. Perhaps a home isn't move-in perfect, but with a little work it could be the home for you. Don't let cosmetic or minor remodeling problems discourage you. Many remodeling jobs add tremendous value to a home. If you remodel a kitchen, for example, you may receive as much as a 128 percent return on your investment. Talk with your agent, friends, relatives, and contractors and find out what it will cost to remodel the home the way you want it.
           6.WRITE A CONTRACT
When you find the home you want, you will write a contract, either through your agent or your attorney, or on your own. Your offer should spell out what you are willing to pay for and what you are not, when you want to close, and when you want to take possession of the home. Your contract should be contingent upon getting an inspection and evaluating the results. If the inspection reveals a big problem, you and the seller can renegotiate the purchase price if you are still interested in buying.
           7.GET THE LOAN UNDERWAY
As soon as the seller agrees to the contract, you must start following through on your loan. Take the contract to the lender and let it start the loan process in earnest. If you have been preapproved, much of the legwork has already been done and your loan will process more quickly.
            8.THE HOME WILL BE APPRAISED
The lender will arrange to have the home appraised, which may affect whether the loan is granted. But the likelihood of a homeselling for more than a lender is willing to lend is slim. The real estate industry not only keeps up with how quickly homes sell, but how much they sell for in an area. Most lenders will have a ceiling on the amount of square feet per home they will lend in a certain neighborhood. If a home is overpriced, it will quickly be obvious. You can then go back to the seller and renegotiate.
          9.THE HOME IS INSPECTED
In many markets, you will have the inspection after the contract is signed, rather than before. This is a better protection for the buyer. The inspection can reveal some nasty shocks, though. Your inspector may find a major problem with the furnace or the foundation. These are problems that must be fixed or the home cannot be conveyed. The seller then has to arrange to pay for the repairs, or have the repairs paid for out of the contract proceeds via a mechanic's lien. Before you can truly set the closing date, the repairs have to be made and approved by the buyer.
          10.NEGOTIATIONS CONTINUE AS YOU GET READY TO MOVE
As you find a mover, pack your things, and arrange days off a work around the closing date, you will find that things can still change. It is the most intense, nerve-wracking time of the transaction -- waiting for the other shoe to drop. You think you may have addressed all the issues and closing will proceed without any other hitches, but negotiations still continue as you reevaluate the inspection report, or find out the chandelier you thought was included is actually excluded from the contract. As you revisit the home to show your relatives, your hopes raise, even through your doubts that the home will ever be yours increase.
           11.CLOSING -- BE PREPARED FOR ANYTHING TO HAPPEN
Until closing, and even during closing, anything can happen. You find out that your closing costs are higher than you thought they would be because some additional service fees have been added by the lender. A glitch could come out in your credit report that delays the sale; a problem the owner was supposed to fix wasn't repaired in time; the homeowner can decide that she or he doesn't want to pay for the home warranty after all; the appraisal may come in the day before closing and be short of the asking price of the home. If so, the buyer, seller, and their agents have to figure out how to make up the shortfall. Do they lower the price of the home? Do the agents pay for the difference out of their commissions? How will last-minute problems be handled? The negotiating table is an emotionally explosive place. That is why closings are generally held in private rooms with the buyers and sellers separated.
         12.YOU GET THE KEYS
It's all over. The home is yours. Congratulations.

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