Number Crunching for Successful Real Estate Investing | eboden.org

Number Crunching for Successful Real Estate Investing

Article by Marie-France Dayan

When it comes to investing money in assets it is more likely that you will be seduced by the lure of real estate than Stock, Bonds, mutual funds or even retirement funds. Often folks fall emotionally for properties for looks and ego trips which are in my opinion the wrong way to go about it. Investing in real estate is about crunching your numbers first and fore most. Real estate is not sexy but practical, the property has to make money under 8% in net income there is not point. So yes plain, boring condo?s building apartments and condos are great. Very often these are the properties that generate the positive cash flow you?re looking for.

When it comes to running a business your cash flow is king, whether it be property or other business types. Asset appreciation is good and does add value to your net worth which is temporary and on paper only. On the other hand cash flow is immediate and should be your focus when investing. Future appreciation is good but unfortunately can?t be deposited in your bank account.

With that being said I like you to consider this article for your education in knowing the key numbers that drive investment in real estate, Net Rental Income, Cash on Cash Return, Net Rental Yield and finally the Capitalization Rate.

Annual Net Cash Flow

I like to buy property assuming no natural capital appreciation will ever occur (even though of course that it will). Property can generally double in value every 10 years or more depending on its location of course. This is a trend in no way a guarantee. In any event you do not want to be waiting years and years to be building your wealth with appreciation. Ideally every individual property needs to provide you with positive cash flow also considered as passive income depending on how it is managed.

Your fist plan of action is to clearly define and focus on your net cash flow. Your real estate agent is mostly likely to quote you a gross yield figure which is the annual rent as a percentage of the property?s price. This is indicative of your potential return on investment, not the positive or negative cash flow you could have acquiring the property. It is preferable that you focus on your net cash flow which is the amount of money that comes back to you at the end of the month.

To determine this figure you need to calculate your Gross revenue minus your operational cost and debt servicing costs = this leaves you with your net cash flow.

Operational costs are the monthly costs that include your property taxes, school taxes and other taxes where applicable, insurance, utilities (heat, light, power, water) property maintenance as well as any inside or structural budgeting costs, potential vacancy rate you need to allow at least 5% yearly.

Your goal should be achieving a gross rent which is at least 150% of the mortgage repayment to cover all of the operation?s cost as well as net cash flow for you the investor. It is wise to build in a provision for interest rate hikes of 1- 2% as well as what could happen to your cash flow if your property was vacant for 3 to 4 months. One thing for sure real estate is affected by the markets and central bans interest decisions.

Cash on Cash Return

Most experienced investors use the cash on cash return as the test to establish if a property investment is worth their time and investment. This is calculated by taking the Annual Cash Flow before tax and dividing it by the total cash invested. For example lets say you have a duplex that generates ,000.00 per year before tax, and lets assume you would need to deposit ,000.00 to purchase the property your cash on cash return should be 13%. I like to see between 10% and 15% Cash on Cash return before considering any investment.

Net Rental Yield Versus Gross Rental Yield

When you are working with real estate agents recognize that the figures the majority will give you will be the Gross yield rather than the net. You need your net yield figure to work with when you are investing in other geographic areas. This is part and parcel of doing your due diligence by working out the operational costs associated with a particular piece of property.

Gross Rental Yield is calculated by dividing the Annual Gross Rent by the Property Cost. An example of this is assuming we have rent of 0.00 x 12 months and dividing by 0,000 (cost of property) = 9.6%

Net Rental Yield is calculated by assuming monthly rent of 0.00 minus monthly expenses of 0.00 which equals 0.00 x 12 months 00.00 and divided by the property cost 0,000 equals 6% big difference?..

This being said when anyone who is selling you property quotes you income percentages of any sort be sure to ask him/her if that is the net income figure. If they can?t answer you need to research that information and be absolutely positive of the operational coast of the property. Generally about a 30 to 33% of the rental revenue serves to operate the property not including debt service. With this figure in hand it is much easier to make comparable analysis of other properties to see which one offers the best value and the most positive cash flow for you.

Capitalization Rate

Let?s assume that you purchase a property for 0.000 and it generates ,000 net operating income or net rental yield; this is what remains after your fixed costs and other variable costs are deducted. Your Cap Rate for this property is 10%

,000 (Net Operating Income) / divided by 0,000 Property Cost equals 10%

When using this formula it is preferable to be using current property value versus cost. In time the value of property appreciates and this is then reflected in income increases.

The cap rate tells you how fast your property is capitalizes and paid for.

As an investor you must expect a rate of return, for instance if 00.00 is the amount used for this particular investment. If your expectation is to earn 8% on your acquisitions then what ever amount you invest is divided by the 8%. ,000 is the amount required after all expenses based on a 0,000 acquisition. When an agent proposes an investment property to you and claims that it has net operating income of say ,000, you as a professional investor look for a cap rate of 8% thus taking the ,000 divided by .08 equals 7,000 as the maximum you pay for the said property

In summarizing the calculations of these categories of numbers you are miles ahead of the majority of new investors. This knowledge will help you to stay away from negative cash flow properties that would only eat away your profits and the wealth created. All investment has risk and now that you have this acquired knowledge you avoid the risk of having properties that you have to re invest in month in and month out because they do not cash flow. This is what defines profitable real estate and the easy way of passive wealth creation.

About the Author

Born in Corsica, Marie left France at the age of 20 to obtain her MBA from San Francisco State University in the United States. She began her international career as Director of Business Development for the Danzas International Group. After 8 years, Marie took a sabbatical from the corporate world to pursue her passion of ?Feng Shui?, which she then taught until 2005 and still practices today.

Unable to stay away for long, Marie returned to the business world in 2005 with an invigorating strength and balance to form her own company focused on the acquisition of investment properties worldwide. Expanding this venture, she then created a commercial financing division to meet the needs of developers seeking private financing, as well as a marketing branch to assist developers in better promoting their projects to international investors.

Content with her success and ready to give back to the real estate community and investors that have supported her career, Marie has now created her own personal web alias, The Zen Investor, to help ease the often harsh and unforgiving process necessary to be successful in property investment. She is dedicated to helping others follow their path to financial freedom through the power of group purchasing and passive income that property investment has to offer. Go and click here to learn the Zen Investor methodology to safe and secure investing with all the free educational tools you need.

Source: http://eboden.org/?p=7448

chicago white sox arizona baltimore sun equatorial guinea dart dart giant hogweed