With about the mid-1990s up until the housing bubble burst, Arizona's economy was driven primarily by the real estate industry. At the time of those years, high population growth and lax credit standards resulted in a booming housing market. This boom produced a need for more real estate-related jobs (real estate agents, construction companies, title/escrow agents, etc). This also became a stylish market for property investment companies. These investors flooded the market buying up property left and right. The following ultimately led to inflated home prices, which played a big role in the bust that started in late 2006.
Easily forward to today... It is late 2010 and over the past 4 years the effects of the housing collapse are seen. The market has definitely changed, but those real estate investors (who are not shell shocked) are seeing great ability. It is time to shift the mind set of the investor. Investing no longer can be based solely on speculation. An expense opportunity needs to produce cash flow, which provides a monthly passive income for the investor. There are other advantages; however this informative article will focus on the impact property investment companies have on the cash flow investor. The first step is to understand the different categories of property investment companies. There are 3 main categories; property wholesalers, rehab specialists, and private equity funds. One must always understand the services these companies provide and how they impact a cash flow investor's profitability. Property Investment Companies: Asset Wholesalers With the increasing supply of distressed real estate, there have been a number of property wholesale companies entering the Arizona market. A lot of these property investment companies purchase property at a discount, then wholesale (or flip) the properties to an investor for a higher price. Typically, wholesale companies are purchasing short sales, bank-owned (REO) properties, or properties at trustee sales. Anywhere they can buy at the lowest possible price and resell for the highest possible profit. Generally, the residences being sold by wholesale companies are 'as is'. This means that they will not be doing any improvements to the property, that can be a disadvantage for the buyer. Impact on a cash flow investor: There can be advantages and disadvantages to working with a property wholesale company. Most of the advantages could include acquiring a property at a price below market value, since many companies try to purchase at 50 or 60 cents on the dollar and sell for 80 cents. Also, property wholesalers are typically dealing with attributes under $150, 000, so cash flow investors are investing a smaller amount of capital with the potential for higher returns. A issue to working with a property wholesaler is not knowing exactly what you are getting, in terms a property's condition. As mentioned sooner, the properties are generally sold 'as is'. This could mean more capital is needed over and above the acquisition cost. Without the need of a quality estimate of that additional cost, it could definitely impact the cash flow investor's return. Property Investment Companies: Rehabilitation Specialists Rehab specialists, more commonly known as fix and flippers, are property investment companies that purchase property along with the intent to improve and sell for a profit. As with property wholesalers, the Arizona real estate market has seen an increase with rehab specialists. The distressed KI Residences is fueling this growth. Companies are able to purchase property at a cut price, rehab, and sell to buyers looking for a move-in ready home. It is important to review the quality of the rehab work, since there are good and bad rehab specialists. If the work is not done well, then more problems can arise for the asset buyer. Impact on a cash flow investor: There are several advantages to using a rehab specialist; however there are also some disadvantages. A giant advantage is that a rehab specialist can provide a cash flow investor with a turnkey investment property that is ready to get a tenant and has the potential of quickly generating monthly income. These properties may require a bit more capital at pay for and priced a bit closer to the actual market value; however shouldn't have additional rehab costs. One disadvantage is actually if the rehab specialist did not do quality work, which could require additional expense to maintain the property. It is important to always require references. A reputable rehab specialist will have a portfolio of completed projects they can provide to investors. Property Expense Companies: Private Equity Funds Private equity funds are quite a bit different from the other 2 types of property investment agencies. They build capital from many investors with the goal of acquiring property and returning a monthly earnings over a set period of time. A private equity fund is approved and regulated by the Security and Exchange Commission (SEC) and each individual fund sets its own investment terms. They vary based on property acquisition, return percentage, and duration of the investment. The fund is controlled by a group of fund managers, typically the principals of the company issuing that fund, and not by the individual investors. There have been some past challenges with private equity funds stemming from punishment of funds, improper capital allocation, and poor asset management. Impact on a cash flow investor: Private equity monies can offer advantages to cash flow investors who are only concerned with the return and do not want to deal with acquiring the property. There does exist typically a minimum capital investment with these funds; however in most cases it is cheaper than purchasing an actual property. Which includes a collaboration of capital, a fund has the ability to purchase larger pieces of real estate with the potential for higher returns and produce a larger portfolio of property providing diversification to the investment. There are also some disadvantages to private equity funds. Some sort of cash flow investor would have no control of how the fund is managed or what type of property the fund is normally acquiring. An investor will get a prospectus that outlines the terms of the fund. Also, it is important to research the principals involved and make sure the fund has filed the appropriate SEC documents. Property investment companies provide many terrific services for cash flow investors. It is important to find the right company that fits in with your investment strategy and how their own services can increase your profitability. Clear Vision Investment Group is a resource for cash flow investors. Get some of our recommendations on what types of property investment companies are right for you. Also, learn how Clear Vision Investment Group can help you see profitable cash flow opportunities.
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The important thing to hitting a home run in Real Estate investing is to buy a property with strong income potential for less than sales value of that income. This, actually very simple process, is usually the determining factor in a successful property investment strategy. So as to buy a property below the value of its current or potential revenue it is essential to make an accurate analysis of the both property and its future earnings. This should be done at the very beginning as a way of screening potential investments. To do this accurately nevertheless there are a few key indicators to keep an eye on.
Cash Flow A strong and stable cash flow is the backbone of any good expense property, and can very easily be compared to other similar properties as an indicator of the properties' relative performance. To analyze monthly cashflow simply subtract the properties' mortgage from its total rents, it should go almost without declaring that if this number is negative its best to walk away, at least for a novice investor. Cash On Cash Profit Not a very important measurement technically speaking, the cash on cash return simply indicates how long it will take the property to pay in the down payment. The strength of the cash on cash return analysis is that it essentially compares properties' prices to income grades as a ratio. To determine the cash on cash return for a property multiply the monthly cashflow by 12 supplies the properties' annual cashflow, then divide your down payment by the annual cashflow. Gross Income One of the most basic and now and again miscalculated indicators, the Gross income is simply the sum of all the properties' income streams. Typically this will mean the total of all accommodation income, but other income such as laundry machines or storage should be included as well. The addition of these additional streams of income may turn a seemingly poor income property into a real money maker. Effective Gross Income A much more realistic look at a properties gross income, the effective gross income factors in the vacancy rate. It is calculated by taking that gross income as an annual total and subtracting the percentage of vacancy. This is an important filter for taking a more detailed look at properties that seem too good to be true, often a property will have a very low vacancy rate since rental rate is too low, or a very high rental rate and concordantly a fairly high vacancy rate. Really investment properties should find a balance between profitability and stable predictability. Net Operating Income Perhaps the first serious glimpse at an investor's potential income from a property, the net operating income is derived by subtracting the doing work expenses from the effective gross income. Capitalization Rate The capitalization rate, often referred to as the CAP rate, looks at the buildings net income in terms comparable to a more conventional investment such as CD's or bonds. To determine the CAP rate for a asset divide the total sales price by the net operating income. It is worth noting that the CAP rate looks at the home as if it were paid for in cash with absolutely no financing. Debt Service Debt service is essentially industry vocabulary for the monthly mortgage payment. It is important to compare apples to apples when dealing with debt service, however , the previous managers may have had extremely good or bad credit or purchased the property at a time when interest rates were either very high and very low, dramatically affecting the amount of their interest payment and the rate and terms of their loan. Also be sure to evaluate the number of loans on the property, as there may have been second or even third lines of credit taken against it. This is a critical step for generally calculating a properties income potential, however , bear in mind that it is only an estimation at this stage. Doing work Expenses The operating expenses are all of the properties other expenses aside from any mortgage payment or debt product. These usually include insurance and property taxes as well as landscaping, maintenance, repairs and management fees, and possibly some others depending on the property. Always be sure to verify that the properties expenses actually are what a seller claims they are, this may involve some digging but it is much easier than being stuck in a property that is losing money every month. Vacancy A openings is any unit that is either unoccupied or is occupied by a tenant who does not pay rent. Several owners would rather sell than try to deal with a difficult or unruly tenant who refuses to pay, whether the tenant may be evicted or not is an important consideration before moving forward on any such property. Vacancy Rate The number of vacancies per annum divided by the number of units, for smaller one to four unit properties it is a good idea to calculate vacancy at least 3 to 5 years to get an accurate measurement of it. While some degree of vacancy is natural, too much could be an guage that the current rental rate is too high or even signal a change in the local Real Estate market. In time crunching the results on a list of potential investment properties becomes fun and fairly easy to do, many seasoned investors can perform a quick test literally on the back of a napkin. Bear in mind too, that these are not the only indicators of a property's value; there are many even more sophisticated, technical ways to determine a properties true value, however for small properties these will serve as a superior indicator of whether the property deserves a closer look or not. |
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