Understanding Investment of Income Property

Understanding-Investment-of-Income-Property

Many investors find rental income property a good way to build wealth. As an investor, it is essential to have income producing properties as part of your portfolio. The idea of owning real estate is gaining popularity as investors tire of the stock market’s volatility. However, not everyone has what it takes to be a landlord. Correctly investing in rental income properties requires an effort to acquire knowledge which is crucial to your success. Don’t be completely dependent on so-called “experts” to make decisions for you. Remember, it’s your money, not theirs. Timing is a critical component because buying in an overheated market will require a bigger potential annual return to make up for that risk. You should also have a good idea regarding how long you plan to own a rental property. The longer you plan to own the property, the more you’ll probably need to invest in maintenance, repairs and improvements. A 20 year old property will require more money to maintain then a 5 year old property. Avoiding the expense of any major improvements will naturally result in a better investment.

Lenders and their requirements

During the last 25 years as a mortgage banker, my career has evolved around lending, underwriting and approving loans to potential clients. Lenders look at any loan as an investment and the stability of that investment and the applicant seeking financing to is part of that approval. Potential investors should understand what and how lenders look at applicants and what it means. The better your credit rating, the better the chance of having your loan approved. This translates into the less credit card and other consumer debt you have, the better your prospects for getting a decent loan. Lenders also look at the down payment towards the purchase. A bigger down payment is an indication of strength as a borrower and that is important. Lenders look favorably on a large down payment because they see you as an investor that has the resources and ability to save by properly and efficiently managing your finances since the default ratio on investment property tends to be higher. The amount of cash reserve left over after buying a property is as important as the initial down payment. Lenders need to approve the borrower as well as the investment property. Know that the property will be thoroughly scrutinized before approval is given. It is extremely important to understand the Debt Coverage Ratio (DCR). It is also known as (DSCR). Debt Service Cover Ratio is a widely used benchmark which measures an the income producing property’s ability to cover the monthly mortgage payments. A debt coverage ratio of 1 to 1 or 1.0 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses. A DCR of.95 indicates of a negative income. A property with a DCR of 1.25 generates 1.25 times as much annual income. Let’s use the DCR of 1.25 as an example. The property creates 25% more net operating income (NOI) than is required to cover the annual debt service. It is imperative to get a good interest rate as the interest rate has a direct impact on the DCR. Verify the current interest rate given by your local lender on a similar property prior to your purchase. Start asking you lender what they prefer to lend on in terms of the DCR and down payment. This step will alleviate most of your problems early in the process and allow you to present the proper offer to meet your lender’s requirement.

Overpaying

Keep in mind that profit is made when you purchase the property, not when you sell it. It is important to spend some time researching the property and the area in which you are interested in buying. The rental real estate market is generally tougher on investors who overpay for an income producing property. This is not an emotional purchase. Successful investors look strictly at the numbers to see if their investments will pay off. If you pay too much for a rental property, don’t count on getting bailed out by another fool. Some investors tend to use a single formula to analyze their purchase such as a gross multiplier (GM), Net Multiplier (NM) or cap rate (CR). Others try to estimate what the property could be worth after needed repairs and upgrades. All that is fine but it is really not enough. The truly successful investor examines all of these factors and more in order to make a correct calculation. A comprehensive assessment achieves the desired result: a clear picture of your investment.

Expense

Analyzing the expense of any income property is tedious and can be an inaccurate presentation. The national average operating expense in the US is approximately 40 to 45% plus or minus 2% which includes management fees, vacancy rate of 3 to 5%, operating expense, maintenance, property taxes, legal fees and so on. It is important to verify the information before you commit to the purchase of the property and all offers should be subject to proper verification and validation of the income and expense statement. If not properly verified, false information will skew the numbers and result in an incorrect analysis of the property. You also should know how repairs and improvements are treated for tax purposes. Understand that some improvements can also mean an addition to the amount you paid for the property to determine your tax basis when selling. The higher the basis, the lower your taxable profit. Any property income-expense statements prepared by the seller that typically show operating expense of around 30% or less is called the “Liar’s Statement”. An income property’s expense usually runs at 40% to 45% depending upon the age of the property. Many property buyers tend to ignore or overlook expenses such as vacancy, collection loss, managing the property (time that it takes you to manage the property has to have a value attached to it of about 6%), eviction fees, attorney cost replacement of capital such as ( water heaters, repairs, roofs), and other non common expenses. Utilize 40% to 45% as the percentage to use for calculating operating expenses, regardless of what the seller gives. Another option is to employ the percentage used by lenders in your area since it will probably be more accurate than the figures issued by the seller.

Inspection

Although property inspections are often thought of as being for owner-occupant purchasers of single-family homes, there is no reason not to use a home inspector, as well as other specialized inspectors, in the purchase of investment properties of all types. Such inspection will give you a better understanding of your potential investment. You should request a non biased third party to thoroughly inspect the property as part of your offer to purchase.

Conclusion

Determining whether a property is giving you a cash flow or not depends on several factors. The seller of a particular property is not going to give you something for nothing, Investigate your options and be ready for a great ride. Most investors use appreciation to get most of the return on an investment. However, this is not the whole picture. A positive cash flow remains a priority when investing in an income producing property. Sustaining a negative cash flow for an undetermined period of time is neither safe nor smart. If investors are willing to accept a negative cash flow, then they must have better reasons to justify the negative cash. Most properties that are purchased without proper analysis will have the exact opposite effect on your cash flow and your cash will be held hostage while trying to feed that rental property. Negative cash flow properties require constant support or else will turn on you quickly. Whether you can afford the financial drain of your well earned cash depends on your ability to generate cash somewhere else. If depreciation of asset is your need to acquire the asset please note that assets depreciation is not to avoid paying taxes but a merely a deferment of the tax obligation. Upon the liquidation of your assets, all appreciation will be added back to your capital gain tax bill. Even in this depressed economy, investors stand to make good buys and profit if they are armed with the knowledge of what it takes.

Article Source: http://EzineArticles.com/3283399


Memphis Buy And Hold is 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

Five Basic Tips for Investing in Real Estate

Five Basic Tips for Investing in Real Estate

There are a lot of things to learn in Real Estate before you start investing. In fact, investing in Real Estate is much more complicated than the stocks investing. That is why Real Estate has become the common investing area for many people and thus have become more popular over the years. One needs to have financial and legal knowledge before investing in the Real Estate.

So, here we are providing you five basic tips which helps you to familiarize yourself with the basic concept of Real Estate.

1. Location:

Location Matters which is an old age saying perfectly suits when we think of the investing in Real Estate. The first thing you should make sure while investing in a property or proceeding forward is whether it is located in a good place or not.

If it is the best location, it can be the worst house there, but that doesn’t matter as you can just fix the issues or resell it to someone who wants a house in the best location. This is called as the Fixing and Flipping formulae by the professional Real Estate investors.

2. Wholesale properties:

Being wise is also very much important while investing. You need to follow the Warren Buffet formulae from the stock market investing which says “You need to be greedy, while everyone else is feeling fearful.” You need to look out for the wholesale properties that are being offered at great discounts and thus avoid paying full prices.

Using this technique, you can buy the property at low price and keep the selling price twice the buying price which helps you in maximizing your investment return.

3. Connect with local investors:

Hanging out with the local investors and talking with them about the local Real Estate market will help you in knowing the things better. Ask them to show their properties and take in every single bit of information they give you.

4. Reading helps a lot:

There is a tremendous amount of information available online these days. You can also gain information that you may need regarding the Property field and investing as well. Buy and read books that give you practical knowledge about buying, flipping, renting and selling the properties.

5. Find a good Realtor:

This is the best part. When you are all set and finally ready to invest in some property, then a Realtor is the person who helps you with it. And a good Realtor who understands the concept of investing returns and also have sold a number of properties can be the best choice.

Property investment can offer fabulous returns, but there are also people who are bankrupted after investing in Real Estate. It is all in your hands, so be sure and know everything involved before you invest.

Article Source: http://EzineArticles.com/9720237

Memphis Buy And Hold is 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

What to Ask When Looking for a Good Property Manager

What-to-Ask-When-Looking-for-a-Good-Property-Manager

If you’ve ever searched for a good property manager before, then you know how difficult it can be to find a good one for your rental property. There are several property managers out there, probably more than what you really need to bring your property into the market.

With so many choices available, you may find it difficult to choose one for your unit. But don’t worry – if you ask the right questions while shopping around for property managers, you’ll get a better idea of who would make the best fit for your property. Ask them these questions when discussing your property to see if they’re the right property manager for you:

1. What type of properties have you managed?

Experience counts for a lot in property management, and it can separate the good ones from the ones you should steer away from. Experience in this field, however, isn’t just about the number of years worked in the field; it’s also about what type of properties they’ve managed. Depending on what type of property you have, you can either go with someone who specialises in managing properties like yours or someone who has more varied experience managing different types of properties.

2. How do you screen potential tenants?

Screening potential tenants is one of the most important steps to property management, so the way they do this often reflects their level of service to your property. Ask them how they’ll match tenants to your property and what their process is like for finding tenants. This will give you a better idea of how they operate and what lengths they’ll go to find the right match for your property.

3. How do you handle late payments by tenants?

Finding tenants is just one phase of property management; the longer phase involves managing the tenancy itself. Asking them this question will show you what their management style is like and how they’ll deal with critical rental issues like these. See if their process aligns with what you expect them to do and how you want your property to be managed.

4. How do you respond to complaints?

Similar to the previous question, this question allows you to gauge how well a potential property manager will handle the landlord-tenant relationship. Remember that a property manager will act as the mediator between you and your tenant, so it’s important that you’re comfortable with their process for dealing with any complaints or issues.

5. How often do you do inspections?

Routine inspections are important to any tenancy agreement, and the number of times it’s done per year will help give you better peace of mind as the landlord or owner. This question will also show you how well the property manager will look after your property even after the start of the tenancy.

6. What’s the right rental price for my property?

If you’ve done your research beforehand, this question will let you assess how well a potential property manager knows the market and what they can offer you. It also allows you to get a better idea of what your property is worth in the current market. Compare their answer with different property managers to see what they offer and to better understand where your property stands in the market.

7. What are the things I can do to improve my listing?

Asking them this question won’t just reveal their expertise in property management, but it’ll also help you put your property in the best position in the market. Note their suggestions, assess how relevant they are, and decide whether or not they can get your property where you want it to be.

8. What are the full costs and fees for managing my property?

Some have small sign-up fees but a variety of hidden fees once you sign on and let them manage your property. Avoid getting surprised by such fees, and ask them to indicate all management and service fees included in their service. The more complicated their fee structure is, the bigger the headache (and expense) it will likely be.

9. What can you do that others can’t?

This is where prospective property managers will try to sell you on what they offer and how well they set themselves apart from the competition. It’s also the part where you assess the intangibles in any working relationship, giving you a better idea of how well they meet your standards. Listen well, take notes, and assess if they provide what you’re looking for.

With so many choices available today, finding the right property management company can be difficult. But by asking the right questions and doing your research beforehand, you’ll find that all the hard work you put into finding the right manager will be worth it. Once you find the right one, your property (and wallet) will surely thank you.

Article Source: http://EzineArticles.com/9685653

Memphis Buy And Hold is 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

Finding a Down Payment for Your Real Estate Investment

Finding-a-Down-Payment-for-Your-Real-Estate-Investment

In order to meet their loan to value ratios (LTVs), nearly all lenders require borrowers to have some “skin in the game” or equity in each fix and flip project. How does a real estate investor who is just starting in the business or is tied up in another project obtain the down payment necessary to qualify for a hard money loan?

Friends and Family: A Logical Start

Friends and family are a great place to start when looking for help with money down. You know them, have a track record with them, may have worked with them before on other types of projects, and you have access to them to propose your deal.

Laying out your Proposal: Risks and Rewards

Before you approach friends and family, prepare a detailed analysis about the specific investment opportunity. Research the project thoroughly, and be very clear and honest about the pros, cons, and associated risks fix and flip success.

Next, devise a business plan that clearly articulates the time line, projected milestones, and budget of the project as well as the terms of the proposed partnership, joint venture or investor relationship you wish to enter into with them. Approach the entire process like the business relationship that it is.

Real estate partnerships offer your chosen family and friends the chance to invest money into your fix and flip project(s) in exchange for a designated ownership percentage. As equity partners or investors, your family and friends will have an opportunity to receive money that the property generates at closing. So, while they will be taking an investment risk, they will also be in a position to benefit from the sale of the property.

Partnership Considerations

  • Legalize your arrangement. This is a business partnership and should be structured as such. The most common way to structure these partnerships are as general partnerships, limited liability companies (LLC), limited partnerships or corporations. Consulting with an attorney who specializes in real estate partnerships can provide valuable information about the process and the best type of agreement for your situation.
  • Clearly establish the role of each partner or investor. For example, your friend or family member might contribute the cash needed to make the initial down payment and closing costs, while you will be responsible for securing the remaining funding, buying the property, and managing all of the construction. Alternatively, your partner may want to take a more active role in the day to day operations of the renovation. Spell this out clearly ahead of time.
  • If you choose to set up a partnership, determine the aspects of the deal that will be included in the partnership and split. As partners, your family and friends will be able to participate in all aspects of real estate property ownership. This will allow them to receive a designated ROI percentage that might include: property appreciation, loan paydown, cash flow, and monies from the sale of the property. Remember that the addition of your partner’s funds reduces the amount of your construction loans so that should be taken into account as well when determining what is included in the profit split.
  • Decide how the NET (profit or loss) will be split. Remember to include all costs when determining the profit (or loss): fees, refinancing costs and any appreciation. There are many different ways to split the profits, and not one right way. It all depends on how much money each party brings to the deal, how the work is divided, who takes the most risk, etc. Splits range from 50/50 to 80/20 based on the above factors and what the two parties agree to. The key is to decide and formalize the split ahead of time.
  • Outline terms for reporting the income (or loss) for tax purposes for each party.

Following the steps above gives your partnership the highest chance of success, which can be a foundation for many future successful real estate deals.

Article Source: http://EzineArticles.com/9621762

Memphis Buy And Hold is 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

Factors to Consider Before Buying a Property

Factors-to-Consider-Before-Buying-a-Property

Everybody dreams of owning a house at one point of time. But possessing a house is no joke. It requires careful consideration and planning to make such a heavy investment. A lot many things have to be kept in mind before buying any property. The main concern is finance but there are so many other things that are directly related to it.

Here are some factors that should be considered before buying a property:

1) Stability of income: Doing well in your work and earning good money may excite you to buy property at the moment. But it is very important to analyze your financial condition before making any big purchase. How stable your job is at the moment, will your salary increase in some time, what are your other expenses and how safe is it to invest in an asset are some of the most important questions to answer. If you’re uncertain of your future income situation, then picking up a mortgage isn’t a really good idea at the moment. Wait for some time and save more money for down payment.

2) Credit Score: A credit score is a statistical number that depicts a person’s creditworthiness. Lenders use a credit score to evaluate the possibility of a person to repay his debts. It also determines the rate of interest at which the mortgage will be given if it gets approved by the bank or creditors.

3) Personal commitments: What are your personal goals? What expenses do you see in the near future? Are you getting married or planning a baby? What are the expenses that may delay your mortgage buying? All these events will incur heavy expenses and may delay your property buying task. Ask these questions to yourself and consult your dear ones before planning to take such a major step.

4) Real Estate scenario: What is the real estate trend in your area? Are the property prices going upwards or are in a stable state. If the prices have gone up, will your finances allow you to make that purchase? Some area of your city may be attracting a lot many builders hence the rate of property might be on an upsurge. If the prices are going down, you may be lucky in buying your desired property at affordable rate.

5) Expectations from the property: Buying a home may be for different purposes- it could be for your own use or may be your second home i.e. investment. Since investing in real estate is considered to be the safest bet, a lot many people buy homes and put it on rent to get returns. If you are buying it for your own purpose, you may prefer a specific locality or a specific area, but if buying for investment, you may overlook such points and just concentrate on buying a property that may suit your budget.

We are sure that once you have considered all these points, you will make the best deal. Property related issues are critical and sensitive and should be dealt with great concern.

Article Source: http://EzineArticles.com/9707601

Memphis Buy And Hold is 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

How to Choose the Right Rental Property Manager

How-to-Choose-the-Right-Rental-Property-Manager

Investing in real estate can be a very lucrative endeavour, but it is also one that requires a lot of effort. Especially if you have bought a property with the intent of renting it, you should be prepared to provide a number of services for your tenant. From finding tenants, collecting rent, building maintenance and everything in between, collecting income from a rental property is not a passive exercise.

As such, many investors choose to work with a rental property manager so they can collect a regular income without being overwhelmed by the day-to-day tasks associated with managing the property. If you’re wondering how to choose the right rental property manager, you’ve come to the right place. The following tips will help you find the ideal manager that will help you maintain a profitable portfolio of rental properties.

Experience

First things first, you want to get a sense of a property manager’s experience before you hire them. Ideally, you are looking for an individual with experience managing similar types of properties. Do they manage single family homes, apartments, or commercial properties and what type of property are you intending to rent? Obviously, you want to find a good match between your property and your manager. In addition, you probably want to have an idea of how many properties a potential manager currently oversees. Not only do you want to know that your manager has adequate time to devote to your property, but also that they are active in the business.

Referrals and References

As you would likely do before hiring any professional, speak to colleagues, friends, and family about their experiences with property managers. Referrals are a great place to start when making a shortlist of potential candidates. Still, once you start meeting with property managers, also ask for references from current and/or past clients. You want to get a sense of their experience and skills from people who understand the property owner’s perspective.

Also, be prepared with a list of questions

  • How do you find tenants?
  • Describe your tenant screening process?
  • How many people are on your staff?
  • How do you handle building maintenance? Do you have in-house staff or is maintenance contracted?
  • Are your maintenance staff/contractors properly insured?
  • What are your fees?
  • How will you add value to my operation?
  • Sign a Contract

Finally, once you have chosen a property manager that meets your needs and budget, always be sure to sign a written agreement that includes the term and cost of management as well as the services that are included. In order to ensure effective management, you want your expectations clearly outlined in writing.

Article Source: http://EzineArticles.com/8969612


Memphis Buy And Hold is 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

Why You Should Never See Your Investment Property

Why-You-Should-Never-See-Your-Investment-PropertyWhenever I give this piece of advice, I often get blank stares. It is a very different approach to what most property investors take. But it is actually a smart strategy when you start to understand the reasons why.

But so what if you visit your investment properties?

Sure, if you’re okay with getting the results most investors get, feel free to ignore my advice and do what most investors do. But if you want to go further than most investors, I strongly recommend you stick to this rule.

Never see or inspect your own investment property.

A good investor never visits their property, as a general rule. In fact, you don’t even need to live in the same state as your property.*

* Side note: this is actually very exciting as it means you are FREE to invest anywhere in the country, opening up way more options for awesome locations. But that’s another topic entirely.

Why You Should Never Inspect Your Property

  • Before you finalize your purchase of the property, you’ll get a good building inspector to check it. They’ll do a far better job than you could ever manage, so checking the property yourself is a waste of your precious time.
  • Once the property is in your hands, you’ll get a good rental manager. It is their job to routinely inspect the property. As a professional, they will do a far better job than you could.
  • You should have full confidence in the professionals you hire to take care of your property for you. If not, you have the wrong people.
  • Inspecting the property in person will result in emotional attachment, which is bad for financial-based decision making.
  • Your time is worth more than that.
  • The real money is made in capital growth, something which you can’t see at an inspection.

So get the professionals in and get them to do it. It’s their job! Stay emotionally detached from the property and focus on making money – YOUR job as the investor.

Just because you shouldn’t visit the property in person, doesn’t mean you should ignore it. You should be looking ahead to see what the market is doing and anticipating what your capital growth is likely to do in the future. This will help you with growing your portfolio, which is how you really make money.

The exciting part is that you can do all of this online.

How to Inspect for Capital Growth

  • Check online sources for evidence of infrastructure projects and investment in the area
  • Is the population growth trending upwards?
  • Are more jobs being created?
  • What notable changes are happening in the area that might attract more people?

Inspecting Your Property is a Waste of Time

And sure, you could stop by your property and have a look. But what are you going to see? A house? Yep.

If you actually happen to notice any problems while you are there, you’re very unlikely to be able to solve them, unless you’re a qualified builder. And because you lack the qualifications and experience of a rental manager, you probably won’t understand the laws that govern how you should deal with your tenants. It’s best to avoid wasting your time and effort and let the professionals handle it.

Even though it sounds counterintuitive at first, it makes sense to never inspect your own property.

If you feel that you need to inspect your property, something isn’t right.

Perhaps you’re in a situation where things aren’t going as smoothly as they should. Or perhaps your team aren’t doing their jobs right.

If you’re struggling to find a good building inspector or rental manager, or your properties are causing you problems that you feel need your personal attention, find a good property investment coach to help you solve these problems as soon as possible.


Memphis Buy And Hold is 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