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 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.

Financial Independence Through Real Estate

Have you ever dreamt of the time when you can just quit your day job and spend precious days doing what you really want? Tired of waking up early in the morning and facing the daily hassles of the rush hour? Chances are, you are not alone in thinking that way. Many have thought of financial independenceand many have made plans towards achieving it. But most failed to put their plans into action.

Gaining financial independence through real estate is very achievable. But how come only a few succeed? The answer varies from person-to-person but the common denominator among them is the lack of patience and effort to make it work. Most have ventured thinking that success will come their way instatntly. What these people should realize is that it takes a lot of time and effort to reap the benefits from their property investments.

If you would look at the general trend of real estate prices, you will see that over the years, prices of properties do tend to increase. The capital appreciation may not be as quick as your stock investments but at least, the risks are minimized and you are assured that the value of your property will not plunge overnight.

Rental income from properties such as multi-door apartments, townhouses, duplex, and condominium units are also a great way of earning passive income that can eventually take the place of your day job as your main source of income.

Let’s say that as soon as you got your first job, you have already started saving enough cash to afford the downpayment of an income-generating apartment. You then use the monthly rental payments of your tenants to pay off your mortgage. After a few years, you manage to save some cash again, enough to fund a duplex for sale nearby. You then repeat the cycle and use the rental income as mortgage payments. Then do that again everytime you have saved enough. Eventually, the mortgage payments will mature and the rent you get from tenants will purely be your own passive income.

Those are just a few ways you can escape the rat race. Remember that all it takes is time, patience and effort on your part.

Top 3 Reasons Why You Should Invest In Real Estate

With the housing bubble that occurred a few years ago, several people have strayed away from any form of real estate investment and have resorted to keeping cash in their bank accounts. They are afraid that the crisis is not yet over and that there’s still some room for property prices to plunge. They are waiting in the sidelines waiting for the right buying opportunity that may never come.

Here we discuss why you should invest in real estate or stay invested if you already have one.

1. Leverage

The use of what Robert Kiyosaki calls “other people’s money” or OPM. With leverage, you can acquire and control properties even if you don’t have enough cash to buy them in full. This is possible through several financing options that are available. There are some property owners who rent out their properties and use the monthly rent to pay off their monthly mortgages – it’s like having someone else pay for the property you acquired!

2. Capital Gains

People invest in real estate with the hopes that the prices of the properties they acquire will eventually go up. This difference between purchase price and the property’s current market value is called capital gains. Of course this doesn’t happen all the time. Take for example the recent housing bubble that trigerred a global recession during the late 2000. Therefore, the best strategy here is to hold on to your asset as generally, real estate prices do climb over time.

3. Passive Income

This is one stable source of passive income, especially when the property is located in an area near offices and schools. The monthly rental income becomes pure passive income once the mortgages have been completely paid off.

Remember that making money through real estate is not an overnight get-rich scheme. It takes time and effort, the essential requirement that people fail to do when they venture into real estate.

Real Estate Investments

Most people, when asked about real estate investments, would almost always mention their own homes as their only real estate investment. After all, their homes are most likely the single largest investment they will ever make in their entire life. But what they don’t realize is that there are numerous ways of investing into real estate. Here, we discuss a few of them.

Income-producing properties

Multi-door apartments, duplex, condominium units for rent – these are just some examples of properties that people buy or build to augment their income. The ever-increasing population and influx of people to highly urbanized areas has established a strong demand and high occupancy rate for these types of properties. In addition, this can provide owners a continuous flow of passive income with minimal effort needed for periodic repairs and maintenance.

Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a security that is traded on major exchanges much like any other exchange-traded funds but primarily focuses on property stocks. Think of it as pooled funds coming from various investors, individual or institution, invested in a basket of property companies, e.g. Property1, Property2, Property3, that are publicly traded during market hours. Another feature of REITs is profit distribution through regular dividends.

Purchase of publicly-traded property stocks
Another option is to invest directly in individual property stocks by buying publicly-traded shares. This is highly recommendable to people who have the knowledge and time to carefully analyze stocks and can be more rewarding than REITs if one is able to perfectly catch good buying opportunities. These individual property stocks may also give out dividends from time to time, depending on company performance.

Given the options above, there are now many ways you can call yourself a real estate investor. But just as in buying your own home, due diligence must be done in choosing which particular investment instrument to use.