Although this article was written almost a year ago, I thought it would be a good post for some of the new investors who want to buy properties to rent...
Valerie
Investing For Cash Flow
August 3, 2010 by Jeremy
"What is just as important as location, location, location when analyzing a piece of real estate? Cash flow, cash flow, cash flow! The Lucrative Investor defines cash flow as the net profit left after expenses. This includes all of the expenses associated with owning real estate such as mortgage payment, insurance, taxes, property management, maintaince and in some cases a property owners fee (commonly referred to as an HOA). Too often, investors purchase an investment property without throughly conducitng their due diligence.
For seasoned investors, what I’m about to tell you is nothing new, but often comes a surprise for newer investors. In general, cash cow properties will not be prettiest property on the block, but running a successful real estate portfolio comes down to at least covering the monthly and unforeseen expenses. “Aligator” properties as we call them, or negative cash flow properties take from investors bank account every month, opposed to contributing to it. Some investors, are fine with this due to future appreciation, or because they plan to use the property as a vacation home. This is commonly seen in higher priced markets such as California or New York.
For the average investor, a portfolio that produces a consitant negative cash flow, could inhibit their desired lifestyle, or even cause forecloses. This is a problem that is currently plauging our country after so many homeowners lost significant value in their real estate portoflios. The average investor is not able to take a 20% or more decline on their real estate portfolio and continue to make high mortgage payments on properties commanding lower rental amounts. Do not make the mistake of buying a property on emotion opposed to the numbers and later regret your decision. It generally takes a lot of good decisions to build wealth, but one poor decision can destroy a lot of wealth.
So how can real estate investors best protect themselves from getting into an alligator property? The Lucrative Investor team has several measures and approaches it uses when analzying prospective deals. One of the pillars that we use is price to rent ratio. In general, if a property is priced at $150,000, we ideally want the property to command at least $1,300 to $1,400 a month in rent. Investors in an ideal world would have a 1 to 1 price to rent ratio, where their property would command $1,500 a month in rent or more. This is one general figure that indicates a strong factor for positive monthly cash flow.
Monthly expenses will make or break your prospective deal. We pull our monthly numbers by acting as a renter our self. What are comparable rents on craigslist for the area? What is the average quotes from 3 to 5 property management companies that are located locally (we act as a renter opposed to a prospective owner because these companies want your business and often tell you what you want to hear opposed to the reality). Beyond what the rental rate is, what will it cost to insure the property? This can also be done by calling 3 to 5 insurance companies with an address and obtaining a written quote. The same principal applies to taxes. Call the assors office and figure out the property trends and taxes for the few previous years.
Conducting the proper due diligence will take some time, but it is time well spent to prevent yourself from adding an alligator property. Once you have all of your numbers accurately estimated, simply run the math and decide if you can live with these monthly numbers and build a nice buffer account for any unforeseen expenses.
Evaluating real estate is pretty simple in principal and fairly stable and safe if the correct procedures are taken to calculate the cash flow. After the first few times it will become easy to you and allow you to assemble a strong real estate portfolio that meets your desired cash flow needs."
__________________
Valerie
“And will you succeed? Yes indeed, yes indeed! Ninety-eight and three-quarters percent guaranteed!” ― Dr. Seuss
"I believe in angels, the kind that heaven sends; I am surrounded by angels, but I call them friends" - Unknown
Although this article was written almost a year ago, I thought it would be a good post for some of the new investors who want to buy properties to rent...
Valerie
Investing For Cash Flow
August 3, 2010 by Jeremy
"What is just as important as location, location, location when analyzing a piece of real estate? Cash flow, cash flow, cash flow! The Lucrative Investor defines cash flow as the net profit left after expenses. This includes all of the expenses associated with owning real estate such as mortgage payment, insurance, taxes, property management, maintaince and in some cases a property owners fee (commonly referred to as an HOA). Too often, investors purchase an investment property without throughly conducitng their due diligence.
For seasoned investors, what I’m about to tell you is nothing new, but often comes a surprise for newer investors. In general, cash cow properties will not be prettiest property on the block, but running a successful real estate portfolio comes down to at least covering the monthly and unforeseen expenses. “Aligator” properties as we call them, or negative cash flow properties take from investors bank account every month, opposed to contributing to it. Some investors, are fine with this due to future appreciation, or because they plan to use the property as a vacation home. This is commonly seen in higher priced markets such as California or New York.
For the average investor, a portfolio that produces a consitant negative cash flow, could inhibit their desired lifestyle, or even cause forecloses. This is a problem that is currently plauging our country after so many homeowners lost significant value in their real estate portoflios. The average investor is not able to take a 20% or more decline on their real estate portfolio and continue to make high mortgage payments on properties commanding lower rental amounts. Do not make the mistake of buying a property on emotion opposed to the numbers and later regret your decision. It generally takes a lot of good decisions to build wealth, but one poor decision can destroy a lot of wealth.
So how can real estate investors best protect themselves from getting into an alligator property? The Lucrative Investor team has several measures and approaches it uses when analzying prospective deals. One of the pillars that we use is price to rent ratio. In general, if a property is priced at $150,000, we ideally want the property to command at least $1,300 to $1,400 a month in rent. Investors in an ideal world would have a 1 to 1 price to rent ratio, where their property would command $1,500 a month in rent or more. This is one general figure that indicates a strong factor for positive monthly cash flow.
Monthly expenses will make or break your prospective deal. We pull our monthly numbers by acting as a renter our self. What are comparable rents on craigslist for the area? What is the average quotes from 3 to 5 property management companies that are located locally (we act as a renter opposed to a prospective owner because these companies want your business and often tell you what you want to hear opposed to the reality). Beyond what the rental rate is, what will it cost to insure the property? This can also be done by calling 3 to 5 insurance companies with an address and obtaining a written quote. The same principal applies to taxes. Call the assors office and figure out the property trends and taxes for the few previous years.
Conducting the proper due diligence will take some time, but it is time well spent to prevent yourself from adding an alligator property. Once you have all of your numbers accurately estimated, simply run the math and decide if you can live with these monthly numbers and build a nice buffer account for any unforeseen expenses.
Evaluating real estate is pretty simple in principal and fairly stable and safe if the correct procedures are taken to calculate the cash flow. After the first few times it will become easy to you and allow you to assemble a strong real estate portfolio that meets your desired cash flow needs."
Valerie
“And will you succeed? Yes indeed, yes indeed! Ninety-eight and three-quarters percent guaranteed!” ― Dr. Seuss
"I believe in angels, the kind that heaven sends; I am surrounded by angels, but I call them friends" - Unknown
My journal: http://www.deangraziosi.com/real-estate-forums/investing-journals/59110/...