To Become Wealthy: Cap Rate

I have discovered that the cap rate is useful when determining the value of a property. Cap rates differ with each area and type of property, but on average you want the cap rate to be between 10-12% for a good investment.

The cap rate is basically the ratio of the net operating income to the price of the property, expressed as a percentage.

CAP RATE= NOI/PRICE

Sounds simple enough, right? I believe it is. So basically the price that I would want to pay for a property should be no more than 10 times what I calculate for the net operating income.

In case you do not know, the Net Operating Income is calculated before any debt services or taxes are considered. It only takes into considerations the cost of operating the property.

Here is how it is calculated:
Goss Income from rents
- any vacancies (assumed at 3-5%)
- taxes
- insurance
- utilities
- property management
- repairs and maintenance
- supplies
= Net Operating Income

So, I am going to start considering this for every property that I investigate.

To Become Wealthy: Commercial Real Estate

I was recently introduced to a site called Loopnet.com by my realtor in Tulsa, OK. You can sign up for free, or pay for different “premium” packages for a monthly fee. I chose the freebee for now. If it turns out to be a useful site, I may upgrade. This site offers listing of commercial properties as well as some residential. It is not part of MLS, and I am not sure how the sellers can list on the site. All I know is that I like all of the information that I am learning from it about commercial real estate possibilities. Here is a brief summary:

1- Commercial Real Estate is not as expensive as I thought.
2- There are a lot of opportunities for developers.
3- Options for unconventional financing are more prevalent.
4- Strip Malls have a High Return on Investment.

So far I still have a lot of questions about purchasing and operating commercial real estate. This will be something that I will try to find more information about in the upcoming weeks.

1- amount of down payment needed for financing
2- requirements and costs of property management
3- leases for commercial tenants
4- aspects to consider of property logistics, such as parking and traffic
in the area
5- other considerations yet to be imagined

Once I learn more I will share my knowledge here.

To Become Wealthy: Other Ways to Make Money

I do not plan on relying on only one source of income to support me in the present day of in the future. Currently I have only one source of income from my 9-5 job as an employee. If I lose this job through my own fault or no fault of my own, I will have nothing but unemployment checks to keep me fed and housed. I am fortunate enough to be part of a two earner household so I could survive a little longer with no income than I could if I were single. However, if both of us were to lose our jobs at the same time, we would have approximately 3 months before we would have to sell our home. It would take less than 1 year before we would be basically bankrupt.

I do not hold a high opinion of my current situation. But, I put myself here, so it is my responsibility to get out of it. Hence my interest in real estate investing. But there is more to life than that. There are a lot of people out there making money with blogs. I want to be one of those people. I read about one man who used his blog to help show off his talents in order to land a better paying 9-5 job. I guess it was sort of a supplement to a resume. There are others who use their blogs as a medium in order to sell products like books to other instructions materials. This may be a method that I will also pursue in the future.

The current method of income that I am using on the blog is Google Adsense. It was very simple to set up. My husband did it for me in about 5 minutes. Today, I am proud to announce, I have made my first $0.35. Yes, you read that correctly, 35 cents. I would like to send out a special thank you to whoever it was that clicked. Thank you and feel free to click anytime that you want!!!

To Become Wealthy: The Secrets of Real Estate Investing

These are the worst kept secrets of the modern day. Every Barnes & Noble across the country has a section dedicated to Real Estate Investing. I just did a Google search for the term last week and came up with 83 million hits. This week the search brought up 93 million hits. Nothing is hidden from anyone willing to look and learn. However, that is where the secret lies. The secret is to figure out what you need to be looking for when you have no idea that you even need something. Most people want out of the Rat Race, but do not know their option to get there. I am giving you two options with this blog. People make money with blogs, and people make even more money investing in real estate. Keep reading, sign up and find out how along with me. I have not invented anything new.

For most of us that have not been fortunate enough to have been born with large trust accounts, we are born into the rat race. Dad works and most times so does Mom. We are taught in school the skills needed to get a job out in the “real world”. Continuing education is used in order to get a better job. We are conditioned to believe that we need to work for someone else until we can retire at 65. We believe that those of us that are fortunate or just lucky will get the really high paying jobs and may be able to retire early. Only those people who are truly gifted and industrious will be successful at starting their own business. You need to invent something new in order to succeed on your own. I believed these things my whole life. Until now.

If you know any real secrets about real estate investing, please share. There is no greater way to grow that to be able to share your knowledge with others.

HAPPY THANKSGIVING

Things I am thankful for:

1- My good health and the continued good health of my family and friends.
2-My husband who is always there for me.
3-A stable and loving home.
4-The yearing and ablitity to always learn more.
5-Two Sensei's who are always willing to train me more.
6-A very prosperous future.

Have a safe, health and happy holiday.

To Become Wealthy: The Master Plan

Ultimately the question is ,”How do I want to live my life?” I never aspired to be a real estate investor. I have no training or formal education in this area. I am enjoying what I am doing so far, but it is far from what I would call one of my passions. However, I am passionate about making large bank deposits.

I am investing in real estate as a mean to an end. That end is financial freedom. To be able to do what I choose with my time. To not have to make a contract with someone for 40 hours a week of my time for only $40,000/ year. I want my time to be my own and my families. Time is the ultimate currency for me.

My husband has different reasons. His passions is to start a company of is own. He is a web designer and a graphic designer. He has some innovative ideas on how to run a business in this field. He plans on starting his own blog about it some day soon. So for him the money w make from real estate investing will free him up to pursue his passion and make a real go at his own business. Of course if it also frees up my time, I will be able to be by his side to help him along the way however I can.

We have done a lot of taking and planning for the next few years of our lives together. We have already survived the wedding and the first home buying. Now we are trying to figure out who should leave the rat race first. We have discovered that it takes a decent amount of time to look thru properties and prepare to purchase them. So we decided that if I stay home from work that I would do most of the work to manage the real estate investments and expand our portfolio.

I make less than he does, so in one way it makes sense for me to leave my job first. We are also planning on starting a family next year and the mother is traditionally the one that stays home with the children. This is something that I look forward to being able to do. Even though both of the grandparents are hoping to be able to take care of any babies during the work week, I would rather have that responsibility myself. My plan is to have any potential baby sitters come over during the day to give me the freedom to attempt to have uninterrupted time to manage our investments. Those of you out there that are already parents may be laughing at this plan, but I think I am allowed to dream.

The other option is for my husband to leave his job first to pursue his own design business. If he can do this free from most financial stresses his can take more risks, try more things, and do what he needs to do to take this business from just a start-up to a self supporting entity. All while I have the rat race job and the health insurance.

Health insurance. This is the real issue that keeps me in the rat race. I am too dependant on other people paying for it. I did a quick search for rates for small businesses. We are planning on holding our properties in an LLC that we would purchase the policies under. It would be approx $8-10,000/year for the two of us, more if we have any children. Of course we can just calculate this into our numbers and be done with it, but some mental block I have makes me worry about it. For me it is the largest issue that we face when deciding when to give up our day jobs.

Oh how I dream about giving up my day job……

To Become Wealthy: A Better Property in Dallas

I have spent the last two weeks looking over one very good property. We are about to bid on it. I have gone over all sort of numbers and asked all sorts of questions and learned all sorts of info about it.

It is a 15 unit building that has had some work done to it over the past year to each unit. I am not-so-secretly proud of myself for finding it. Now I just hope that all of the details of the bidding process and purchase go thru.

Here are some numbers:
Gross Scheduled Income: $82,200
10% estimated vacancy : $8,220
(only one unit is currently vacant)
Insurance: $4,500
(based on current coverage)
Taxes : $6,630
(based on current year)
Utilities : $4,620
(elec for common areas, water/sewer, garbage)
10% for property manager: $8220
NET OPERATING INCOME: $50,010

The current asking price is $425,000. At that price, with 15% down and a 30yr fixed mortgage at 7.5%, we would pay $30,310.92 for the year, leaving us with approx $19,700 pre-tax profit for the year. We have no plan on bidding that much, but it is the amount that I use for my calculations.

Our wonderful realtor has sent me some background info on the property. The current owner bought the property in Sept. of 2005. He purchased it for $204,000. Since that time he has put in $66,000 to redo each unit. From what I can estimate, he did make some money off of rents collected thru the year. From the rent roll I can see that most of the units were vacant until they were redone. So vacancy has increased steadily throughout the course of the year.

I think $425,000 is a bit much to be expecting from this property, even though it is still a money maker at that price.

Here is what I am estimating his thought process to be for the money he might want to make off of this sale.
$204,000 initial purchase price
$10,000 in possible closing costs for initial purchase
$66,000 in improvements
$5-10,000 loss from vacancies
$5,000 loss due to bad property manager who can off with some money. (We heard this from the previous property management company.)

So that is a minimum of $295,000. Add in a generous $50,000 profit and we get almost $350,000. That is probably going to be what we will bid. I may even go as high as $375,000. There is also an offer from the seller for a credit to redo the outside stucco and siding.

So at the price of $375,000 and NOI $50,000, that cap rate is 13% which is pretty good. I do not yet know how to calculate the prevailing cap rate in the area, but it seems that most places use 10-12% as the average.

How does this deal sound? Much better than the last one, right?

To Become Wealthy: Money for the Down Payments

Where does the money come from for the down payment for all of these investments that people by? This is still a bit if a mystery to me. I do not subscribe to a lot of the “no money down techniques”, at least not yet. But then there is the problem of where that money comes from. I have seen a few listings where the seller offers the option to help finance the down payment and this is probably where I will end up a lot of the time. I believe the term for this is seller financing. It is good for the buyer because you are buying the property with the all important OPM (other people’s money), but it is also beneficial for the seller, especially if they have a lot of equity in the property. Of course it is another way for them to make money thru loan interest, but it is also another way of deferring the profits from the sale to avoid any capital gains if they can not do a 1031 exchange.

I have saved enough money to cover the down payments on a couple of reasonably priced properties, but after that I do not know yet how I am going to buy more. My husband and I have discussed pulling some equity out of our current residence, but we have only owned it for 1 year, so there is not too much there.

At first I thought that Hard Money was going to be the key. But I recently did a lot of research into that, and it is not at all what I thought it would be. The big companies that lend the money do so at very high interest, for only 65-70% LTV and for very short periods of time. They only seem useful if you need the money ASAP and plan on paying it back in the near future with a lower interest loan or sale of the property. They also have minimums amounts that they will lend, usually around 500,000 to 1 million. I would love to be able to but a property with that amount as 70% of the LTV, but for now this offer is not on the table. So, this is clearly not an option for a small loan for the down payment.

I know that Hard Money can also come from individual lenders. I was advised to mention our needs to lawyers and accountants that we use. They are some professionals who are privy to their client’s financial info and are likely to know people who are looking to invest money. I have yet to try this, but it seems like a reasonable option. I have no idea what sorts of rate or terms these sorts of investors expect.

There is a web site that my husband recently discovered via a podcast. It is called prosper.com and it is a wonderful idea. Individuals can ask for any amount of money for a personal loan. They can put in photos and a description of what they need the money for. The site rates their credit and debt ratios and then people can bid to lend them money. I think the range of rates is somehow predetermined based on the borrowers credit. Lenders can join groups, or bid solo any amount as low as $50. The site then combines all of the bids into one loan. The loan is then paid back over three years thru automatic withdraws and deposits. We have considered borrowing money this way. I have actually seen a few other people borrowing money for investments already on this site.

The advice that I hear most often is to borrow money from family or friends or to join investment groups. I have considered both of these and am not totally happy with either.

Friends and Family- Unfortunately I do not have many friends that have extra money sitting around, at least not in the amounts that I would want to borrow. Most of them would have to take equity out of their homes or borrow from their children’s college savings to lend me the money to invest. The wealthiest friend that I have is currently in bad financial straights due to the loss of a job and may have to sell her own home to make ends meet. Honestly, my parents are the only people that I would feel comfortable taking a loan from. They would always lend me money if I needed it. Unfortunately they would be the hardest to convince that I would be making a wise investment. They would assume that I needed the loan to get out of some financial troubles regardless of what I told them. So, borrowing money from them means that they will worry that I do not have money to buy groceries until I can pay them back in full.

Investment Groups- Honestly I would love to form an investment group. The problem is that I have been burned before by getting involved in business with people that I thought I could trust. So, I do not know if I could be open enough, or trust others to be open enough to make one of these groups successful for me. We have discovered several meeting groups thru meetup.com and the richdad.com that we are going to try to see where they may take us. If we do go, I will be sure to write a blog about it all.

So, the only solutions I am leaving for myself is seller financing or to use our own personal money, savings and assets to grow our real estate portfolio. Of course first we need to purchase at least one property to put into the portfolio. But it looks like we are going to have to use the monopoly technique of trading in four houses for a hotel technique.

If anyone else has any creative financing options I would love to hear them!!!

To Become Wealthy: To Bid or Not To Bid

I have learned to break down the numbers to evaluate any given property from two books by the same author, Frank Gallinelli. The first one is called “What Every Real Estate Investor Needs to Know about Cash Flow.” This is the main one that I am using this week to decided to bid or not to bid on a quad-plex in Dallas, TX.

These are the numbers that are given on the MLS listing:
Asking price $174,900
Gross Rent $1975/mo or $23,700/yr
Taxes $2717
Insurance:$2200
Owner pays Water/Sewer/Trash:$175/mo or $2100/yr

These are estimates of other expenses that we will have:
Property Management: $1896/yr
Repairs and Maintenance: $1200/yr

This gives me a Net Operating Income of $13587.

I have not added in a vacancy rate because I have been told that all tenants are long term tenants. Of course I will verify this once I get the opportunity to see the leases.

So far the numbers look pretty good to me, until I calculate the mortgage costs. My knowledge of mortgages comes solely from the purchase of my primary residence last year.

First I looked at a 30yr fixed at 7.5% with 10% down payment and no PMI. (I am assuming that we can do an 80:10:10 piggy back loan.) In this case, my mortgage payment for the year would be $13.207.56.

This will only leave me with $380 pretax cash flow for the entire year. This is a whopping 2% return on our initial investment of the down payment.

Then I thought about an interest only loan at the same rate for the same amount. Then the payments for the year would be $11805.72.
This leaves me with $1781 pretax cash flow.

Now, I have done a lot more numbers with the mortgages, since that is the biggest expense by far for the whole property. If we put down 20% instead of 10% then we increase our yearly cash flow to $1847 and that increases our cash on cash return to 5%. This is the bare minimum cash-on-cash return that we want for our money. However, we do not want to put that much money into any one property unless it has a lot more units in it.

Our best bet will be to take shorter terms for a much lower rate. If we could get an ARM with a 6% rate. With only 10% down, the yearly payments would be $11,325, leaving us with a positive cash flow of $2262. A 13% cash on cash return would result. If you add in an estimated $10,000 other up front costs (lawyer, etc), the return on investment is 8%.

So, is this property worth my while? I still need to evaluate the taxes and depreciation, and then do another analysis to figure out how low I should bid.

To Become Wealthy: A Property in Dallas

We have been working with a wonderful realtor in Dallas. We found her thru a Google search. She has put us on an automatic list that sends us newly listed properties each day that fit our criteria. We had further inquired about several properties so far, but none has worked out. This week we are very excited by a Quadplex that has just gone on the market for $174,000. Each unit has 2 beds and 2 baths. We are waiting to hear back from the seller with more details before we can decide if we want to bid and how much we are going to bid.

Let me go back a step and explain how we became connected with different realtors. We are currently working with two, one in Dallas and another in Tulsa.We basically did some Google searches and then sent them a pre-written email asking for their assistance. We stated that we were out of state investors and what our criteria are. The only question we really asked was if they had experience working with other investors. We initially contacted about 3 or 4 realtors in each area and just went with the ones that we got the best feeling from. There are tons of realtors out there, so if we get to a point where one is not working very well for us, we can always switch to another.

These are the criteria we use for our search. The purchase price is based on the amount of money that we have to put down on any one property.
1- purchase price up to $200,000
2- minimum of a two family house/duplex
3- minimum of 2 bedrooms per unit
4- currently used as a rental property
5- the property does not need a lot of work

I am keeping my fingers crossed for the Quadplex.