INNOVATIVE REAL ESTATE INVESTING
Posted by Tim Ryan on Friday, April 8th, 2011 at 10:33pm.Successful Naples real estate investing is the result of hard work, doing your homework, researching several options and possibilities, along with a stringent study of each and every investment opportunity. There is quite frankly no other way to achieve real estate investing success other than implementing these very important methods. Indeed, a proficient and knowledgeable real estate professional is key in assisting you to find, research, and even analyze the profitability of specific investment possibilities but it is good for you to be prepared as well and to have some knowledge of the rates of return profitable real estate investors use during the analysis process before making that most important decision to purchase an investment property.
If one is new to real estate investing, it is wise to discuss with your real estate professional three of the most commonly used measures and returns. None of these would provide enough data to sway a decision by themselves, so you cannot make a decision solely on the results of these returns. Getting a handle of these widely used measures of returns will certainly better prepare you, the real estate investor to achieve your investment goals by becoming familiar with them.
First and foremost is to understand about Cash-on-Cash Return, which is the measuring of the initial profitability of a rental or investment property. Cash-on-Cash Return indicates the return you can expect to receive in the first year on the money you invest when you purchase an investment property. There are no rules in regards to what Cash-on-Cash Return makes a good investment, but remember that the higher the Cash-on-Cash Return is the better. The formula for this is to take the amount before tax cash flow, divide it from the initial investment on the property, which equals the Cash-on-Cash Return.
To test your understanding on the subject, take for instance if you were given the chance to invest $50,000 for a Cash-on-Cash Return of 6.5% or an investment of $75,000 for a 10.2% return, which appears to be the better investment? Though it would require more cash for the $75,000 investment it would be the smartest investment, because a first-year yield of 10.2% on the $75,000 cash investment is better than a first-year yield of 6.5% for the $50,000 investment.
Secondly is to grasp the understanding of the Gross Rent Multiplier. This is a formula which measures the ratio between annual gross rental income and the sale price of the investment property. The Gross Rent Multiplier is easy for simple comparisons between rental properties. It is an straightforward calculation that can be figured in one’s head and can be used when trying to get an idea of how one investment property compares to a similar investment property or properties, which have recently sold or are for sale in the real estate market. Here, the higher the Gross Rent Multiplier indicated a higher property value. This equation is basically this: to get to the sum of Gross Rent Multiplier take the purchase price of the investment property and divide it by the gross rent; this final amount is the Gross Rent Multiplier.
Thirdly is Capitalization Rate, which is an indicator of how much debt an investment property can carry; the higher the Capitalization Rate, the more debt a property can support, and vice-versa. An investment property's capitalization rate indicates the percentage rate of the sale price attributable to the investment income minus operating expenses on the investment property. Essentially it shows how much cash flow is generated to make the mortgage payment as a percent of sale price. Mortgage lenders use Capitalization Rate in appraisals as the higher the Capitalization Rate, the more money is available to pay the mortgage loan on the investment property. To figure the Capitalization Rate on an investment property, divide the net operating income by the purchase price of the investment property.
To succeed in real estate investing, it is imperative to seek the advice of a seasoned real estate professional, one who has the knowledge in regards to purchasing investment real estate, and one who can run numbers for you so that you can make a wise return on your investment purchase.
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Share2 Responses to "INNOVATIVE REAL ESTATE INVESTING"
Tim,
Enjoyed the article, looking forward to reading others that you publish. We starting one soon, hope when we get it running you'll enjoy exchanging thoughts in the future.
http://myhamptonhomes.com/
Posted on Monday, September 12th, 2011 at 7:20pm.
Hi, I just came across your blog this morning and I have to tell you that I found it very informative and well written !! I will continue to follow your blog in the future waiting for more great articles !! Kudos to you
Posted on Monday, May 30th, 2011 at 2:09pm.