The Top 5 Emptiest Cities in America

With the bursting of the recent housing bubble in the late 2000 comes the spike in vacant homes. According to the Census Bureau, vacant properties have increased by 44% across the nation since the year 2000, most of which belong to the unoccupied rental property category. In fact, the total gross vacancy rate as of 2011 has increased to 10.6%.

So, if you are a real estate investor looking to acquire more properties to generate rental income, then it would help you a lot to know which cities in America have the highest vacancy rate. Below are the top five emptiest cities in the country, based on their 12-month averages.

5. Richmond, Virginia

Rental Vacancy Rate: 15%

Homeowner Vacancy Rate: 2.4%

The 15% rental vacancy rate of Virginia's capital is the fourth highest among major cities in the country. In addition, figures that came out for the first quarter of 2012 show a whopping 19% rental vacancy rate. On a brighter note, home vacancy rate sits lower at 2.4%.

4. Detroit, Michigan

Rental Vacancy Rate: 16.9%

Homeowner Vacancy Rate: 1.7%

With an unemployment rate of 10%, Detroit is definitely gravely hit by the recent recession. Amazingly, the homeowner vacancy rate is below the nation's average of 2.18%.

3. Memphis, Tennessee

Rental Vacancy Rate: 15%

Homeowner Vacancy Rate: 3%

Tennessee's 15% rental vacancy rate is the fifth highest in the country, while its homeowner vacancy rate of 3% is the 13th highest.

2. Dayton, Ohio

Rental Vacancy Rate: 11.3%

Homeowner Vacancy Rate: 5.4%

Dayton City holds the record for the highest homeowner vacancy rate in the country. The good news is, their 5.4% average vacancy rate is much lower than the Q3 2011 rate of 6.5%.

1. Orlando, Florida

Rental Vacancy Rate: 18.8%

Homeowner Vacancy Rate: 2.2%

At 18.8% rental vacancy rate, Orlando in Florida is the nation's most vacant city. In fact the first quarter of 2012 shows a higher figure at 22%. On the bright side, other economic indicators in Orlando seem to be better than the other states. The city keeps $125 million cash as a general fund and has over $1.1 billion total assets.

Housing Demand Starts To Pick Up

From the global financial crisis last 2007 that sent house prices plunging to what seemed like a bottomless trench, the housing market now seems to be showing good and progressive signs of recovery. According to the Census Bureau, there has been a significant increase in housing starts and building permits last June, compared to previous months and year.

Data gathered from the census show that housing starts increased by 6.9% in June to 760,000 – the highest number in four years and 23.6% greater than last year’s record. On the other hand, total permits to build new houses was around 755,000, 19.3% higher than the recorded figures last year for the same month. 

According to Glenn Kelman, the founder of discount broker Redfin, demand for new houses has been steadily increasing. “Homebuyers are like a herd of hungry goats right now, going from hillside to hillside looking for something to eat,” Kelman said. “There’s not enough inventory to go around.” He said families and households looking for houses wanted only clean, ready-to-move-in homes which are scarce since most of these homes are occupied. The owners of these homes are not willing to sell their houses at current market prices, therfore, house hunters have to settle with building their own homes to get what they want.

According to Nevada Credit Union Leagues chief economist Dwight Johnston, this huge demand has initiated the construction of some long-delayed projects. “Within a 20-mile radius of Claremont, there were three big developments that had been dormant for years and they started building on them again,” he said. The National Association of Home Builders (NAHB) has reported that builder confidence has been on its highest level in five years. It’s chairman said that confidence has strengthened in every region of the country and even future sales projections are looking good.

Evaluating Foreclosed Properties

In this article, I’ll be discussing some techniques you can use in evaluating if a foreclosed property is a good deal or not, specifically for those who are planning on using it to generate rental income. Note than when browsing listings, only basic information are given such as address, lot area, floor area, price, and minimum downpayment. There is no indication on the property’s current state or if previous owners are still residing there. Furthermore, you will not have an idea if the foreclosed property is really selling at a discounted price – you will have to research the current market value of properties in the area to get an idea.

After getting firsthand data, the first thing you need to check is the monthly cashflow that the property will generate. While on mortgage, your net cash flow will be the difference between rental income and your monthly amortization. But how will you determince the monthly rent?

The easiest and fastest way to determine monthly rent is to talk to the people around, especially those who also own properties for rent. This is actually easier for lofts or condominium units since you simply have to approach their office.

After getting the projected monthly rental income, you need to determine how much your monthly amortization would be. This can easily be computed using an amortization calculator, which is readily available in many websites.

Next, compute for the return on investment (ROI). Yes, just like in any business, the ROI shows how effectively the money you used in acquiring the property generated returns for you. The ROI can be computed using the formula below:

To help you better understand the concept, let’s illustrate using an example. Suppose you read about a foreclosed 5-door apartment 5 miles from your residence. The selling price is $61,000 with a minimum required downpayment of 20%. The balance is payable up to 15 years and the interest rate is 10% per annum.

To compute the ROI, you must first determine the monthly cashflow that the apartment will generate. The cashflow is the net monthly rent you’ll get after deducting the monthly amortization. Simply enter the information above to the monthly amortization calculator to get the needed figure.

The monthly amortization is $524. Now suppose after talking to people in the neighborhood, you found that the going rental rate for similar units is at $150/unit per month. The monthly total rental income from the 5-door apartment is therefore equal to $750. Subtracting the $524/month amortization, the monthly cashflow is $226.

The ROI is therefore equal to the monthly cashlow time 12 months, divided by the downpayment:

Comparing against the S&P 500′s 15-20% average annual gain over the past decades, the property therefore seems like a good investment.

Just like in any company, the ROI is a significant gauge of how effectively you are rewarded for your investment.

The Risks Involved In Real Estate Investing

Investing in real estate can really be a rewarding experience once you do your part well. And when I say do your part, it means putting some time and effort in looking for the best deals out there, incorporating some due diligence, and continuously increasing your knowledge about real estate investments.

Here we discuss some of the common risks involved in real estate investingand steps we can do to minimize them.

1. Interest Rate Risk

The interest rate at any given time fluctuates, depending on local and global economic conditions. Therefore, your monthly amortization may either increase or decrease after the set lock-in period. It is therefore advisable to go for the option with a fixed interest rate for the longest period of time possible. This is to hedge you from the cost of sudden increase in interest rates that may leave you unable to pay for monthly dues. After all, you don’t want your property to end up in the foreclosures listing right?

2. Tenants From Hell

This is one of the most common problems that owners encounter when renting out their properties. And this is why due diligence is very important in screening your potential tenants. Always check for their capacity to pay and if possible, do a background check on their lifestyle to see how well they handle their own finances.

3. Going All-in

As investment gurus always say, never put all your eggs in one basket. This is also applicable in real estate investing. Don’t put all your life savings in one property, especially when you haven’t done your due diligence yet. Go for properties that suit your budget and won’t leave a hole in your pocket. Think about what will happen if you suddenly lose your job and can’t pay for your mortgage. Therefore, it is vital that you manage your finances well and invest only what suits your risk appetite.

4 Simple Tips In Getting Started With Real Estate Investing

If you had been planning on making your very first real estate investment for some time already but haven’t put them into action yet, then you’ve come to the right place. Here, I’ll give some simple tips and things you need to consider before making the big move.

1. Ask yourself what your objectives are.

Always begin with the end in mind. Why do you want to invest in real estate? What goals do you want to achieve in doing so? Is it for passive income and eventually for financial independence? How much do you want to earn from real estate? These are just some of the questions you need to answer before starting your search. Concrete goals translate to a concrete plan of action, and with this, the odds of succeeding increases.

2. Knowledge is power.

Before getting your feet wet, try to learn as much as you can about real estate investing. We are lucky to be living in a world where a vast range of information is available over the world wide web for free. Learn the taxes involved in acquiring and selling a property, research on the different financing options available, read about real estate laws that may affect your decision in buying a property. Practically everything you need to know can be found on the net, you just have to be diligent and patient enough to learn.

3. Find your niche.

There are several ways of making money from real estate investments. Renting, flipping, rent-to-own are just among the most common practices. There are people who have built expertise on finding foreclosed properties. Whatever niche you choose, just remember to be an “expert” in that category so that when an opportunity comes, you’ll be more than prepared to grab it.

4. Start building your network.

Finally, you can accelerate your chances of finding good deals by increasing your visibility in the real estate market. Make the properties come to you and not the other way around. How? Join clubs and communities that share your passion in real estate investing. Participating in auctions is also an option.

With these tips in your mind, I’m sure it won’t take long before you acquire your first ever real estate investment.

The Importance of a Property’s Net Operating Income

In the previous article, I showed an example on how to compute the net operating income (NOI) of a property. Expenses such as property insurance, property managament, taxes, and repairs have to be considered. In addition, some allowance for vacancy and collection loss have to be accounted for. Some properties, which may look very attractive at first, may have a low, or worse, negative NOI and may not be a good investment after all.

If you are buying a property thorugh bank financing, then computing the NOI is also important to see the net cash flow the property generates while you are still paying off the loan. This is also a great tool in comparing a property investment versus alternative instruments such as stocks, bonds, and mutual funds.

Note however that the NOI is just a rough guide that you can use in determining if a property is a good investement. The soundness of your decision is highly dependent on the accuracy of your assumptions. It is therefore important to make your assumptions as accurate as possible. How?

Go to the municipality and ask for the latest tax rates of properties located in the area. Get several quotes from insurance companies to get a rough estimate of annual insurance premiums. Ask the neighborhood or property owners nearby how often the units are vacant. Also, make sure to screen your tenants well to ensure a worry-free collection.

As mentioned in previous articles, reaping off the rewards from your real estate investment may take a long time and will involve lots of effort. Nevertheless, I’m sure that by the time you get there, you’ll never regret that you chose to take that first step towards having your own real estate investment.

How To Find Good Properties

In any business, the net operating income (NOI) is a vital measure of a company’s performance and is a clear indication of whether the company has made profits from its operations. The net operating income is defined as the company’s income after all expenses related to operations such as cost of goods sold and employee’s salaries are deducted.

Similarly, real estate properties that are used to generate rental income such as multi-door apartments, duplex, and condominiums also incur operating expenses like real property taxes and maintenance costs. Below is an example of how NOI is computed.

Example. You have found a beautiful 8-door apartment where the monthly rent per unit is $125.

Assumptions:

• Real Property Taxes = $750/year
• Property Management = $120/month
• Property Insurance = $300/year
• Allowance For Repairs and Maintenance = $70/month
• Vacancy Rate = 10%
• Collection Loss (assume not all tenants will be able to pay) = 3%

For this particular example, you will be earning a little less than $600 per month net after paying off your mortgage. Therefore, this looks like a good deal for you as it will put additional money in your pockets. Of course, reaping the benefits will take some time as you have to finish paying the monthly amortizations first.

In the next article, I will show why it is vital for you to compute a prospective property’s net operating income.