Investing in Single Family Homes (3)
Where can I find great single-family home rental properties?
In some markets, such as Ohio, New York and Indiana, where average home prices are much lower than other markets, it is easier to purchase high cash flowing properties with a favorable rental rate to home price ratio. That is buy say a single-family home for under $50,000 that can produce a gross rent of almost $10,000 per year and a 10% cap rate. In other markets, such as California, there is substantial competition for any property and cash flow returns maybe as low as 4%. It’s clear the opportunity is to follow the foreclosures. In October 2014, 1 out of every 1232 homes in the USA received a foreclosure filing (source realtytrac). The real estate crisis created a big opportunity to buy distressed properties and there are still many foreclosure sales in judicial foreclosure states. See Where to Find Foreclosures in 2015 www.howmanydoors.com/members-home/education-center/find/finding-foreclosures/
What are the operating costs of a single-family home?
Costs vary significantly widely from location to another based on age, pricing, weather, labor costs etc. Costs usually fall within the range of $3,000 to $5,000 per housing unit for a middle-income property. Investors often look at ratios and operating expenses as a percentage of collected rent, in which case a normal range is 35% to 50%. However, in low income markets operating expenses can be a higher percentage of collected rent.
Investors must consider all the items that must be deducted from gross potential rent to determine net operating income (“NOI”). See measuring returns in Education Center for expense items
How to select an investment location?
When you’re in the market for an investment property finding the right location is crucial to ensure it meets your goals. Whether it’s long-term capital growth, cash-on-cash return or immediate value creation, we’ve rounded up some advice to help you identify the best possible location. Here are three great tips:
- Find Regions with Favorable Rent-to-Purchase Ratios
- Follow Redevelopment Infrastructure Spending
- Seek Out Big Companies and Colleges
Want more? See 10 Tips to Select a Location
www.howmanydoors.com/members-home/education-center/find/defining-what-to-buy-three-example-plans/
Rental Economics (4)
How big is the residential real estate market?
It’s big. It’s ginormous! According to studies there are approximately 20 million housing units in the single-family rental market. These units are defined as properties with between one and four units. This number represents just over half of all rental units in the USA. With average home prices at around $195,000 that’s almost 4 trillion dollars
How many renters are there?
There are just over 43 million renting households with around 104 million residents occupying them in the US today. That’s about a third of the population and is growing as we added over one million renting households since the 2008 housing crisis that highlighted the many advantages of renting.
Where are best housing deals in USA?
Prices appear to be the most suppressed in markets with more foreclosures. These tend to be states with a judicial foreclosure process. The foreclosure process varies by state, and depends on whether the state uses the court system to file a foreclosure. The judicial foreclosure process requires court action on a foreclosed home and can take a very long time. The real estate crisis created a big opportunity to buy distressed properties and there are still many foreclosure sales in judicial foreclosure states.
See Where to Find Foreclosures in 2015 www.howmanydoors.com/members-home/education-center/find/finding-foreclosures/
What is a cap rate?
The capitalization rate (cap rate) is the ratio between the net operating income produced by a property and the original price you paid, expressed as a percentage. Does that sound a little complicated? Don’t worry let’s dig in and I’ll keep it real world and simple.
Assume you buy a $100,000 property renting for $1,000 per month
Let’s assume you are looking at an investment property with a purchase price of $100,000. You’ll have some purchasing costs like an inspection report and title insurance but lets keep it simple and assume a total cash investment of $100,000. This property is rented for $1,000 per month so we know your projected rental income.
Estimate your expenses
Let’s look at this property’s expenses broken down into a monthly view. The annual property tax is $1,000 (verified online with local county records) and is budgeted at $80 per month. Your landlord annual insurance premium is $550 for dwelling coverage and personal liability, and is a $45 per month expense. Your property manager charges 10% of gross rent received, so that’s $100 per month. Lets assume $50 per month for repairs and one month a year for a vacancy rate say $80 per month. So that’s $355 per month.
Calculating Your Net Operating Income
So now that we have your projected income and expenses we can calculate your Net Operating Income (NOI). Your income is $1,000 per month and expenses are $355 so your Net Operating Income is $645 per month and $7,740 per year. Cap rates measure the annual net operating income produced by a property as a percentage of the original price paid. In this case it’s $7,740 divided by $100,000, which is a 7.7% return.
See Measuring Return: Cap Rates and Cash on Cash
Terms and Acronyms (1)
Terms and Acronyms
Below is a list of common terms and acronyms used in the real estate industry. Often you will see these used in contracts, lease agreements, mortgage paperwork and many other documents. However, some of these terms will be used in conversation or will just help you to understand the industry better. This is not a complete list of all real estate terms; just the more important ones are defined.
Appreciation
The increase of a property’s value based on changes in various conditions, inflation and other reasons.
Appraisal
A document that certifies the price paid for a property is based on a comparable analysis of similar properties in the area.
Assessed Value
What the tax man thinks the property is worth based on local tax regulations
Bill of Sale
A document that transfers title to personal property. Lenders usually require this to verify sufficient funds for payment.
Capitalization Rate
Or Cap Rate, is the rate of return on a property based on the income the property will produce. Make sure you know this. See Measuring Return: Cap Rates and Cash on Cash
Cash-On-Cash
A measure by which the annual dollar income is divided by the total dollars invested. See Measuring Return: Cap Rates and Cash on Cash
Clear Title
A title that does not have any liens or questions as to who owns the property. Your property needs one of these unless its your strategy to buy a dodgy deal!
Contingency
Section of the purchase contract that says some or all of the terms of the contract will become void by a specific event. For example, the seller may ask that the buyer show proof of funds before signing the contract.
Deed
The legal document that shows ownership of title.
Deed In Lieu
Also called “deed in lieu of foreclosure,” which transfers title to the lender when the borrower is in default and wants to avoid foreclosure. It may prevent foreclosure documents from becoming public record, and may only show up on the borrower’s credit history. Both parties must agree voluntarily and in good faith.
DTI
Debt To Income Ratio. Don’t over leverage or you’ll regret it one day!
Equity
The difference between the fair market value of a property and what is owed on the property.
FNMA
The Federal National Mortgage Association, or Fannie Mae, is the largest supplier of home mortgage funds in the country.
Foreclosure
When the borrower cannot pay the lender the monthly payment for typically three payments in a row, the lender will seize the property, evict the homeowner and sell the property. The property is typically sold at a public auction and the proceeds go toward paying off the debt. In October 2014, 1 out of every 1232 homes in the USA received a foreclosure filing (source realtytrac).
Gross Annual Multiplier
Or GAM, is the number you get by taking the gross annual rent and dividing it by the selling price.
Judicial Foreclosure
A type of foreclosure proceeding where a civil lawsuit is filed and the outcome is handled entirely by the courts. This can be good for buyers because the process is very long, and can give buyers time to get in a swoop up a property that is headed into judicial foreclosure. See Where to Find Foreclosures in 2015 www.howmanydoors.com/members-home/education-center/find/finding-foreclosures/
Lien
A legal judgment against a property that must be paid when the property is sold. A lien on a property usually means something bad has happened to the owner. Research any liens before signing on the dotted line.
LTV
Loan-To-Value ratio is when you compare the amount owed on a property to its fair market value, and usually the sales price or appraised price is considered the fair market value.
Location, Location, Location
Do we really have to define this? Always remember it!
Net Operating Income
Take your gross income and subtract all the operating expenses except income taxes and financing expenses and voila, you have your net operating income. See Measuring Return: Cap Rates and Cash on Cash
MI or PMI
Mortgage Insurance or Private Mortgage Insurance
PITI
Principal, Interest, Taxes and Insurance. All four of these things play a key role in determining how much cash flow you will have each month. If one of these is out of whack it will most likely have an adverse effect on your bottom line. If you have an impound account, or points, on your loan PITI is usually included in the monthly payment to the lender and this makes it easier to calculate returns.
ROI
Return on Investment is the percentage of the amount an investor earned divided by the amount of money received. See Measuring Return: Cap Rates and Cash on Cash
Tax Deferred Exchange
Also called a “1031 Exchange” this refers to the IRS code Section 1031 where the tax laws allow you to “exchange” one property for another to defer capital gains taxes. Most properties qualify; however, before entering into an exchange make sure your reasons are valid and produce positive results for you. The last thing you want is to do it wrong and get hit with a huge tax bill!