I am continually amazed at the lack of understanding some businesses and business owners show when it comes to this one simple rule. It seems that today, many in the investment real estate business want to confuse complication with innovation!
I recently reviewed the financial analysis, or “cash flow analyzer” as some call it, that other companies use to showcase their properties and the financial advantages of the properties. I give most everyone the benefit of the doubt here and believe that the best interest of the individual investor is always the end game.
But when you look at the complexity of some of these “analyzers”, it raises the question of whose best interest is really being looked after. It’s easy to try and “quick talk” a buyer with lots of numbers and calculations and ultimately a positive conclusion that the property is a great buy. Often the details are murky and confusing at best and downright misleading at worst.
Even companies who specialize in cash flow properties can muck up the process of analyzing a property by trying to make it easier and only creating a bigger more confusing mouse trap!. Realizing that the simple basics to investing have not changed, just the delivery of the information to the investors. In the end, a Memphis real estate investor only needs to focus on a few key elements of the deal to determine if it fits their criteria.
For the purposes here, we are going to assume that an investor has already determined that a property is located in an area they want to invest and that is has the proper number of bedrooms & baths and other amenities. Once that is determined:
1. What is your immediate exit strategy?
Some companies will assist you with determining exit strategy before you get started. If you are not dealing with a company that gives you a little direction, then make sure you have thoroughly considered what your immediate and long-term strategies are for investing.
When investing in a city like Memphis, TN., the long-term benefits of investment property ownership is a major factor in exit strategies. Today, a majority of investors are purchasing investment real estate in Memphis for monthly cash flow and long-term appreciation while a renter reduces their principle. This allows an investor to capture long-term tax benefits, appreciation and monthly cash flow.
2. Determining Cash Flow
If you are purchasing your property for all cash and holding for a return on investment, then skip directly to #3. However, since most of us purchase properties with some sort of financing attached, this is where you want to slow down and really pay attention. This step refers directly to those who are putting a long-term mortgage on their property and having a renter make the monthly payment. Monthly cash flow in its simplest form is the amount of rent received minus the monthly note. As an investor you need to take into consideration certain costs that you will most likely incur. Property management fees, taxes, mortgage interest, rainy-day funds, etc… There are many places to look online for copies of sample cash flow calculators which help you to breakdown cash flow after PITI (Principle, Interest, Taxes, Insurance) and property management fees. Be aware what monthly cash flow really means and how much to put away for future needs such as vacancy and maintenance.
3. Cash on Cash ROI
Again, try to keep this calculation very simple. You divide net rental income (rents minus taxes, insurance and set% for vacancy & maintenance) by total investment (purchase price, rehab costs, closing costs). Most savvy investors understand this NET Cash on Cash Return On Investment and recognize that a property with a double digit return after expenses is much better than the 2% return from the local bank CD. Every investor is different and every investor has different criteria for location, size & amenities that they want their properties to include. As long as the property meets those criteria and you are happy with its location, don’t allow a lot of calculations and fancy looking spreadsheets to confuse or impress you. Stick with the basics and keep it simple. Calculate your cash flow or return on investment and purchase properties that give you the return you are looking for!
Derrick is a Memphis native specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses over 8 years of experience in real estate investing and property management in the Memphis and Nashville markets… Learn More…… www.memphisbuyandhold.com