I know we were all a little surprised last week when we didn’t win the billion dollar lottery.  The great news is we have other options for building our wealth that don’t have to include luck and unachievable odds.  Since I get to talk a lot about real estate investing I thought I could share a few of those ideas with you…

If we could all win the lottery the reality is we probably would not be in the market for investment real estate. However, since the odds of winning the lottery are incredibly low, it would be good to have a backup plan if you are not planning on working your day job for the rest of your life. But before you get started, you need to realize that being a landlord can be financially rewarding, but you will need to invest time, money and energy to get the results you are looking for.

Asking the right Questions

  • Why do you want to be a landlord?
  • What type of landlord do you want to be?
  • Why do you want to make more cash?
  • What are you going to do with the cash?
  • Do you want more cash now or in the future?
  • Do you want monthly income or a large future payout?
  • How does your real estate investment compliment your larger investment portfolio?
  • How do you plan to create a balanced investment portfolio?
  • How long do you plan on being a landlord?
  • How much time can you routinely dedicate to your rental properties?
  • What geographic area do you want to be in and why?
  • What type of properties do you want to buy and why?
  • Would you be interested in living in the same property as your rental?
  • Do you have a backup plan if you move away from your rental?
  • How much of your cash savings are you willing to invest?
  • How much of your other investments are you interested in transitioning?
  • What type of rental return are you looking for?
  • What is your risk tolerance?
  • Can you afford to loose money in the short or long term?
  • Is your spouse /partner in agreement with this investment?
  • Have you considered investing with a partner?
  • What is your exit plan?

Cash flow

Cash is ultimately king and whether you are trying to make the money today or tomorrow everyone enters an investment to make cash in the end. When you buy a stock it is easier to calculate how much cash you made on your investment because you know exactly what you bought it for and what you sold it for and there really aren’t variables in the middle that make a difference. The opposite is true when you invest in real estate because there are lots of ways to count cash, profit and expenses and the way you calculate cash may also be different from the way Uncle Sam will want to count cash at the end of the year for taxes or capital gains.

When life gets complicated it is always best to go back to the basics so lets take a minute to talk about the P & L or the Profit and Loss Statement.

LINGO  A Profit and Loss Statement is an important tool used by appraisers and other real estate professionals who are interested in determining value of property used for income purposes.

Again, keeping it simple, to figure out how much cash you are going to make you need a simple formula based on cash flow.

      Total Income (Gross Income) – Total Expenses = $$ Profit (or Loss)

Yes, we told you the math was going to be simple, but understanding how to find all the income and all the expenses can be a challenge if you don’t own the property and haven’t been paying the bills. If you start with a general Profit and Loss form and fill in all the blanks for each of the investment property your are looking at, you will be able to best compare each investment property to another. By examining the numerous costs connected with the property and understanding the dollar value of each expense, you will be able to calculate the total expenses. And once you understand the income and expenses connected with a property you can better understand what you are willing to pay to buy the property.

TIP  Take advantage of your accounting software to develop a budget for your investment property and create a sample Profit and Loss statement.

LINGO  Net income is what the property will earn in a given year. It is calculated before adding accounting items like depreciation.

Gross Income = Total Income.

Net Income = Total Income – Expenses

When setting up and reviewing your profit and loss statement both monthly and annually you will need to know the following:

  • Gross income is the total amount of rent collected.
  • Gross expense is the total of all monthly expenses associated with the property
  • Gross debt service is the amount you will on mortgage payments associated with the purchase price of the property.
  • Gain or loss is how much cash you can expect from the property.

Leverage  When thinking about leverage the idea is you are using the bank’s money to make money, yeah. But you need to understand what the bank’s money will actually cost you so make sure you don’t end up just making the bank money. When starting to look at financing your rental investment take a minute to ask the following questions:

  • How much of a first mortgage can I take and should take to ensure my investment produces the cash I expect.
  • Should I take a second mortgage?
  • How much money should I put down?

The bottom line is will the property make you successful and are there ways to manage the money you get from the bank to make you more successful. For example you may want to keep your first mortgage under a certain value to get a lower interest rate or you may want to utilize a second mortgage to minimize the amount of cash you will need to put down. There are lots of different ways people choose to finance their investments and you will need to think about what works best for you and this specific investment. Often investors will choose to finance multiple investments in different ways based on a number of factors including how long they plan on keeping the property and what they believe the economic outlook is for the next few years. Ask your accountant, your CPA, your real estate agent and even your friends to find out what they suggest.

Source: Corporate Housing Chat from CHBO

{ 0 comments }

We are now through the third quarter of 2015 and the overall housing market continues to move at a steady and positive pace with buyer interest as strong as the fall of 2014. The overall economic news remains good as well, with Michigan leading the Midwest in terms of economic growth. The combination of steady job growth, low interest rates,  increasing household income, and home values give consumers increasing confidence in housing. 

The housing recovery has been surprisingly strong considering so many homeowners have been sitting on the sidelines waiting for their home equities to rise, and with For Sale inventories so low, waiting for a home to purchase. With home values up, it appears that those homeowners are finally beginning to act, increasing the number of homes for sale, which in turn, should bring more buyers into the market, providing fuel for the 2016 housing market. Add to that the credit easing up for first time home buyers, (and their desire to move out of their parent’s basement) and it looks like a steady flow of buyers entering the market for the balance of this year and into 2016.

We do anticipate that For Sale inventories will be rising faster than sales, which will give buyers more choices and sellers more competition.  At the same time, sellers will see increased time on the market, as well as a leveling out of home values. The charts below confirm these trends across all price categories. 

Going into the fall and winter markets, sellers should be wary of over-pricing.  Values are rising but not as fast, and in fact, most of the current inventory, particularly over $400,000, is over-priced compared to homes on the market this past spring.  With more listings coming on the market, values may settle a little and homes that might be just a little over the market now, will be quite a bit over this winter.

The under $100,000 market has shown a steady decline in sales and inventory over the past three years as a result of fewer bank-owned homes. Removing the bank-owned properties, the number of sales are down only slightly and the number of listings are actually rising over the past 2 quarters. Values based on the average price per square foot have had a steady rise, the most of any price point, as a result of both fewer lower priced bank-owned properties and more buyers competing for fewer listings.

 

The next price point, $100k to $250k, shows a more pronounced rise in inventory, along with a strong jump in sales, with the rise in inventory since mid-2014 out pacing the rise in sales which has resulted in a corresponding flattening of the increase in value per square foot during 2015. We expect these trends to continue through the fall and winter, keeping values relatively flat.

 

 

The $250k to $500k price points follow the same trends as the prior charts with a more pronounced increased in listing inventory this year which results in an even flatter pricing chart for 2015.

For the luxury market, the gap between the rise in inventory and sales has been the most pronounced, so it has not been surprising to see values remain flat, and even start to decline, during this past quarter.  We don’t expect this value decline to be a long-term trend, but until inventories are absorbed later in 2016, values will remain flat, or in some cases, continue to decline. 

 

All investment markets, whether stocks or real estate, don’t recover in a steady line, they jump around as demand jumps, then supply follows, then demand jumps again. So for the next year or so, across all price points, we should see a temporary jump in For Sale inventory, and over the balance of 2016, the market should settle back down to a better balance as those new listings are sold. 

 

 

{ 0 comments }

Coming Soon: New Opportunity for Investor Buyer Leads!

January 27, 2015

We are the process of being the only real estate broker in Michigan to invest in a program which is tailored to investor buyers. It is a pioneer in its space that will benefit buyer investors by allowing them to financially analyze any home for sale for rental cash flows and other metrics that would […]

Read the full article →

Property Managers Face Housing Slowdown as 2015 Begins

January 20, 2015

The year 2014 ended with the U.S. housing market appearing on the verge of a downturn. Sales of new homes in November slipped almost 2% from the previous year according to the Commerce Department. Existing homes sales for November also were down 6.1%. A more disturbing trend came from a survey of U.S. home builders […]

Read the full article →

Southeast Michigan January 2015 Monthly Market Update

January 20, 2015

The overall market in December continued the trend of sales growth for the second half of 2014, but at a slower rate. December’s new sales contracts picked up in all price ranges after a lull in November. For Sale inventories continue to fall in the under $250,000 category, while rising in all price ranges above […]

Read the full article →

Southeast Michigan Market Update December 2014

December 5, 2014

There were no dramatic changes for the housing market in November and the first part of December. Home values continue to rise in excess of 6%, slowing a bit from a pace that was higher than 10% earlier this year. The number of homes for sale continues to rise giving buyers some relief from inventory […]

Read the full article →

September 2014 Southeast Michigan Market Update

September 19, 2014

August was a month that gave mixed signals. Sales and new listings entering the market were down, different from the last 60 days, when both were up. Prices still continued to rise (using average price per square foot) at the same 10% clip and the number of homes for sale remained about the same. It […]

Read the full article →

August 2014 Monthly Market Update

September 1, 2014

The business activity in early August and throughout July defied our predictions in a good way, as business was surprisingly robust. It seems the release of the weather-delayed- activity really hit stride in June and July. Also, the increased number of listings entering the market has brought out some buyers who, with the low inventories, […]

Read the full article →

May 2014 Southeast Michigan Market Update

June 5, 2014

The spring market continues to move well in both May and the first part of June. Overall, for Wayne, Oakland, Livingston and Macomb Counties, new listings entering the market were up over last May (4%), however, new sales have risen even faster (12%) holding For Sale inventories down by 24% compared to this time last […]

Read the full article →

Putting the Recession in the Rearview

April 23, 2014

Homes in more than 1,000 cities and towns nationwide either already are, or soon will be, more expensive than ever, erasing any losses in value experienced during the recession, according to Zillow. U.S. home values climbed 5.7 percent year-over year in the first quarter, to a Zillow Home Value Index of $169,800. National home values […]

Read the full article →