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Converting Home Equity to Cash

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By Rick Tobin

The average American homeowner has the bulk of the household’s net worth tied up in the equity in their primary home where they reside. As noted in my past Equity Rich, Cash Poor article, the average US homeowner at retirement age has 83% of their overall net worth tied up in home equity (or the difference between current market value and any mortgage debt if not free and clear with no liens). As a result, the typical homeowner only has about 17% of their overall net worth available for monthly expenses.

Real estate isn’t as liquid, or the ability to quickly convert to cash, as a checking account. We can’t just go to our local grocery store and ask the cashier to deduct the full grocery cart from our debit account tied to our home’s promissory note or deed of trust. Yet, we all have to eat, so what are some ways to gain more access to cash that originate from the equity in our primary home or investment properties?

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Let’s take a closer look at ways to convert equity in real estate into spendable cash:

● Sell your primary home or rental properties: If so, where will you live? Are rents nearby lower or higher than your current mortgage payments if you need to move? Are there any potential unforeseen tax consequences or benefits? Will you miss the monthly rental income from your investment properties?

● Sale-and-leaseback: You find an investor willing to purchase your primary home while allowing you to stay there for months or years as a tenant.

● Cash-out 1st mortgage: Pay off some or all forms of consumer debt (credit cards, auto loans, school loans, business loans, tax liens, etc.) with a larger mortgage while possibly lowering your overall monthly expenses significantly with or without any verified income.

● Reverse mortgage: A combination of a mortgage and life insurance hybrid contract that gets you cash out as a lump sum and/or with monthly income payments to you while not requiring you to make any monthly mortgage payments. Lower FICO scores are usually allowed and minimal sourced monthly income like from Social Security may be sufficient to qualify.

● Business-purpose loan as a 1st or 2nd: A type of loan that may be tied to an owner-occupied or non-owner-occupied property for so long as the funds are used for business or investment purposes such as assisting your self-employed business or buying more rental properties. These types of loans have much less paperwork and disclosure requirements and can be funded within a few weeks with or without income or asset verification.

Declining Dollars and Rising Expenses

Although U.S. wage earnings rose 5.1% nationwide between the 2nd quarter of 2021 and 2022, the published Consumer Price Index (CPI) inflation rate reached 9.1% in June 2022 which was the highest inflation rate pace in over 40 years. As a result, the purchasing power of our dollars continues to decline while consumer goods and service prices rise too quickly.

In July 2022, credit card rates and overall consumer debt balances across the nation reached all-time record highs. This was partly due to more Americans relying upon their credit cards to cover basic living expenses to offset inflated prices.

Simultaneously, the Federal Reserve increased short-term rates a few times so far this year while making consumer debt balances more expensive. At the June and July meetings for the Federal Reserve, they increased short-term rates 0.75% at each meeting. This was the largest back-to-back or consecutive rate hike for the Federal Reserve in their entire history.

To bridge the gap between expenses and income, total credit card debt balances surpassed $890 billion in the second quarter of 2022. The increase in overall credit card debt rose 13% in the second quarter of 2022, which was the largest year-over-year increase in more than 20 years. Near the start of 2022, the average American had close to $6,200 in unpaid credit card balances as per the Federal Reserve and Bankrate.

An additional 233 million new credit cards were opened in the second quarter. This was the largest new credit card account increase in one quarter since 2008 (or near the start of the Credit Crisis). A consumer who pays just the minimum balance for a credit card with a few thousand dollar balance may need more than 30 years to pay off the entire debt partly due to the horrific annual rates and fees that are generally much higher than 30-year mortgage rates.

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Short-Term Cash Supplies

It would take 64.4 days for a Californian to run out of cash if they had average American savings amounts of $9,647 based upon a recent study from ConsumerAffairs.

Here’s the top 10 most expensive regions in the nation and the estimated time that it would take to run out of cash:
Hawaii (62.5)
California (64.4)
Washington, D.C. (72.1 days)
Massachusetts (73.6 days)
New Jersey (74.8 days)
Connecticut (76.3 days)
Maryland (77.9 days)
Washington (79 days)
New York (79.9 days)
Colorado (80.8 days)

Living Wages, Debt, and Wealth Creation

Another survey conducted by GOBankingRates that was published in July 2022 found that the median annual living wage, which is defined as the minimum income amount needed to cover expenses while saving for retirement, is $61,617 per U.S. household. However, the Top 14 most expensive states required much higher annual household income or living wages as listed below:

1. Hawaii: $132,912
2. New York: $101,995
3. California: $94,778
4. Massachusetts: $86,480
5. Alaska: $85,083
6. Oregon: $82,926
7. Maryland: $82,475
8. Vermont: $78,561
9. Connecticut: $76,014
10. Washington: $73,465
11. Maine: $73,200
12. New Jersey: $72,773
13. New Hampshire: $72,235
14. Rhode Island: $71,334

Nationally, the lowest required living wage income for households was $51,754 in Mississippi.

These Top 14 expensive living wage regions also share something in common in that they have some of the highest median-price home values in the nation, especially Hawaii, New York, and California. While the monthly living wages may be highest in these regions, the net worths for homeowners is probably much higher due to so many properties valued well over $1 million dollars.

Ideally, we should all focus on keeping our monthly expenses as low as possible while investing in prime real estate to boost our overall net worth. If so, you’re more likely to retire sooner rather than later while your money works hard for you (or rapidly increasing annual home value equity gains) instead of you working too hard for your money.

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

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HOW TO WIN IN A DECLINING MARKET 🏡🛠️ Private Lender’s Guide for Fix & Flip Investors Included

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Please review this important post from our sponsor.

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TOUR of Fastest Growing Tech Hub in The Sunbelt

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Please review this important post from our sponsor.

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REO’s (Real Estate Owned) Investing Explained

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By Tamera Aragon

Let’s explore a real estate investing niche that could bring you riches: REO’s (Real Estate Owned By The Bank). It’s formed from the third and final stage of the foreclosure process. An REO property is created when no one purchases the house at the auction, forcing the bank to buy the property back itself. Remember the bank didn’t want the house back, but the property was the collateral for the money lent to the homeowner. The property now becomes “Real Estate Owned” meaning- it’s 100% owned by the bank. REO investment properties can present many profitable opportunities for real estate investors.

Why Is Investing in REOs a Good Niche to Consider?

  1. Below Market Value – One of the prime benefits of buying a REO property is most REO properties are available at below market value. The reason for this is that the bank is liable for the taxes on the property and they generally prefer to sell it to you at below market value and get it off their books.
  2. REOs are a Nightmare to Lenders. Property taxes, city and county assessments, utility bills, and maintenance costs eat into the lender’s profit. The threat of vandalism and illegal occupancy requires that lenders board up REO windows and doors. Often times lenders must hire security services to watch over REOs to keep out trespassers. For these reasons, lenders are often eager to sell REOs quickly.
  3. You are Buying Property Free and Clear of Liens – once you close, you receive clean title policy without exception.
  4. No Back Taxes – banks have paid everything at closing.
  5. House is Most Often Vacant – I can go there as much as I want before I close.
  6. Clear Equity Value – You do not have to argue about “correct” amount of equity with the homeowner.
  7. Minimum Risk – Among the different types of bank foreclosed properties – pre-foreclosures, foreclosure at auctions or HUD foreclosures – REOs offer the buyer the least amount of investment risk. REOs are generally properties that have survived a foreclosure auction and now belong in the lender’s inventory of non-performing assets. The banks maintain these properties and are generally sold free of liens and other encumbrances. This is why you would use a title company to insure the property in case a lien as later found.
  8. Availability – Compared to other foreclosure properties, REOs are easier to locate. All you need to do is to contact any Real Estate Agent who will send you current listings. You might also go online to mortgage companies or banks directly. You can usually find a list of REOs in your area online if there are any. Pick an area and start buying every good deal in sight. 🙂
  9. Potential for Great ROI (Return on Investment) – Reselling a foreclosure home can provide a great return on your investment. You may not be interested in buying a foreclosure property for yourself, but you still have the option to make a profit by reselling it. After all, this has been the most frequent practice used by many real estate agents to generate income. Moreover, a little renovation work can further add to the value of the property and generate higher returns.

Buying REO’s is one of the best ways to generate profit in the real estate market today. However, before you finalize your purchase, make sure you do your due diligence and research the property so you feel comfortable with the purchase. It’s important to research as much as you can about the area, current housing prices, planned developments, proximity to stores, the town, etc. This research can save you many headaches and problems down the road. The research required and other steps to succeed in this niche should be supplied to you by your mentor, trainer and coach.

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What Are The Downsides of Investing in REOs?

  1. While there are bargains to be found, REO properties don’t always sell below market value. The bank will always do a BPO (a kind of appraisal) and often the person doing this property appraisal is from out of town and does not completely understand the market.
  2. It can be difficult dealing with bank-owned properties as some lenders are in offices far away from where the loss-mitigation department is struggling to process the listings and getting everyone in sync on your end can be a challenge. Today’s REO’s are almost always handled by the bank hired Real Estate Agent who would be accepting your offer from another agent or representing you in the process.
  3. The investor must be careful when looking at bank owned property to know what the real value of the property is. The bank owned property might not be a great bargain. Be sure and include a time for inspection in your offer contract and do your homework before finalizing. Make sure that the price you pay (if you’re successful in getting offer accepted) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a bidding war and pay more than you should.

Good Market Conditions:

  • A lot of houses on the market
  • Average time on the market for houses is 4 months or longer
  • Depreciating Market
  • Large number of foreclosures

Bad Market Conditions:

  • Low inventory of Houses
  • Average time on the market for houses is 3 months or less
  • Appreciating Market
  • Low number of foreclosures

10 STEPS TO INVEST IN REO NICHE

1. You must find the right buyer’s agent to work with you on finding properties. If you are going to employ the services of your own real estate agent (a buyer’s agent) be sure to find one based on the following criteria:

2. Ask Realtor for a list of all REO properties with some recommendations for good deals.

3. Ask Realtor to contact you first when they know of an impending listing giving you chance to make an offer before it hits the market.

4. Before finalizing your offer, have your agent contact the listing agent and ask the following:

  • Are there any inspection reports?
  • What work has the bank agreed to?
  • Is there a special “as is” form?
  • How long does it take the bank to accept an offer?
  • How does your agent deliver the offer

5. Make an offer.

Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct. Even though you agreed to purchase property “as is,” always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes the bank will re-negotiate to save the transaction instead of putting the property back on the market.

Banks do not want to see a lot of proprietary disclosures; For instance, they are exempt from the California Sellers Transfer Disclosure Statement (TDS-14). If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.

Offers are usually FAXED to the bank. The listing agent needs your originals. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed).

6. Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter along with proof of funds and copy of down payment check. A cover letter adds a nice touch as well. You should make your offer easy to accept.

7. Wait for bank to counter or accept offer.

8. Negotiate terms until a profitable offer is accepted by the bank in writing. (Do not spend money on property until you see a written acceptance by the bank)

9. Close on the property

10. Sell or Rent property for profit.

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Where to Obtain REO leads:

  • Search Public Records:
    In various stages of the foreclosure process, notices are recorded with the County Clerk at your County Recorder’s Office. This information is public record and is available to anyone. Just visit your county’s office and you can search for a Notice of Default (NOD), Lis Pendens or for a Notice of Sale. The best part of searching public records yourself is that it is Free. In addition, you’re likely to find newly posted properties that haven’t yet reached many of the online foreclosure data providers.
  • Find Asset Managers:
    You can also find REO properties through Asset Management companies. Simply put, these companies help lenders dispose of assets. Many of these asset management companies will provide listings of the REO properties that they represent on their website.
  • Find Government Foreclosures:
    The government can also foreclose on properties. Good place to start is www.hud.gov.
  • Make contacts at local community banks who take in their own REO’s and make friends with the person who oversees the sales of them. Many smaller banks don’t have as many REO’s therefore, don’t send out to other companies to handle.
  • MLS: This is the most common way to find REO’s today is this way. After a property has been foreclosed on and taken back by the bank, they are usually listed with a Realtor on the Multiple Listing Service (MLS). .With the number of foreclosures banks are holding right now and most are not handling their REO’s sales in-house. In fact it is nearly impossible to purchase 1 single REO from a large bank, let alone going in with millions of dollars offering cash for bulks of them. I personally have not been able to get through to the big banks directly to buy REO’s for the past 18 months as of the time of this training. This is the source I have used most successfully in today’s market.

This concludes my article on Investing in Real Estate Owned by the Bank (REO’s)

Tamera Aragon

Tamera Aragon is a professional online entrepreneur and has bought and sold over 300 properties, establishing her as an expert in the real estate investing field. Since 2003, she has purchased over 10 million dollars in real estate and currently holds properties all over the world. Tamera’s focus is on the booming Foreclosure market, buying Pre-foreclosures, REOs and Short Sales. Tamera who is a noted Author, Success Trainer, Speaker & Coach, shows her passion for helping others with the 17 websites she has created and several specialized products to support fellow investors throughout the world. When Tamara is not busy running her website, she is very involved with her Fiji joint ventures and investments. Tamera Aragon is one of the few trainers and coaches who is really “doing it” successfully in today’s market. Tamera’s experience has earned her a solid reputation in the industry as well as the respect and friendship of many of the top national real estate investment and internet marketing experts. Tamera Aragon believes her success has garnered her the financial freedom to fully enjoy her marriage and spend quality time with her children.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Tips for Financing Fix and Flip Projects

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By Vista Capital Solutions

With interest rates at historic lows, many properties are selling like hotcakes. Additionally, many regions of the country are experiencing a historic influx of people moving in, adding fuel to the boom in the property market. Because of these underlying trends, it’s a good time to be in the fix and flip business. Your cost of capital can be quite low. Fix and flip financing terms can be excellent.

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Game Plan for Your Fix and Flip Business

Before we get into the actual financing aspects of your business, it’s best to start at the beginning. Do you have a solid business plan for your fix ad flip enterprise? This may be old hat if you are an experienced fix-and-flipper. If you’re just starting out, make sure that you:

  • Scout out your target properties in advance
  • Have a specific business plan, including strategy and timeline, for each property under consideration
  • Obtain a professional appraisal of the current value of the property and the estimated value after your work is completed
  • Seek out and obtain any fix and flip financing that you may need

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Financing Your Fix and Flip Business

There are a number of ways to get the capital you need to be successful in the fix-and-flip arena. Here are several to think about:

  • Obtain funds from a financing partner. Often used by those with deep market knowledge, the property flipper borrows from a partner for a share of the profits.
  • Take out a home equity loan. If you have substantial equity built up in your personal residence, a home equity line of credit may serve you well.
  • Finance via your 401(k). Many folks have considerable sums in their 401k accounts. You can borrow against these sums and use the money as you see fit.
  • Business Lines of Credit. In this form of financing, often used by experienced fix-and-flippers, you get access to a pool of money that can be used as working capital in your business.
  • Borrow from family. This is generally not a preferred method. It may be useful for those who work closely with close family members who understand the business and are engaged in it themselves.

Vista Capital Solutions offers financing programs specifically designed for property flippers. Contact our team today to learn more about our fix and flip loans, as well as our fix and flip lines of credit.

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Realty411’s VIRTUAL Investor Summit – Learn REI From Your Home or Office

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Discover the Latest News, Insight and Opportunities in Real Estate

Attention savvy real estate investors, it’s time for another educational and exciting Realty411 Virtual Investing Summit. This special online conference will unite readers from around the nation for an amazing day of information and motivation. Realty411 is ready to help investors take their life, business and real estate portfolio to a NEW LEVEL in our “new world” of online learning.

Register for Our NEW Virtual Investing Conference on Friday, September 23rd and Saturday, September 24th, 2022 from 9 am to 3 pm PT.

Realty411 will virtually unite some of the most successful, knowledgeable and savvy investors in the REI (Real Estate Investing) industry to help our readers make educated and informed decisions.

Guests can join Realty411’s complimentary investing summit and learn from experts sharing important knowledge, strategies and insight.

Since 2007, Realty411 has produced real estate-investing events and expos throughout the nation.

Our mission is to educate and empower individuals to invest in real estate. Our virtual events have united hundreds of new and sophisticated investors in real-time from 47 states so far — in total representing 375 cities across the United States.

Join us for an amazing day of real estate education. Every online event we produce is unique, be sure to reserve this day for REI learning at its best.

OUR COMPLIMENTARY VIRTUAL CONFERENCES HAVE REACHED THOUSANDS OF INVESTORS – THIS IS YOUR CHANCE TO LEARN EXPERT STRATEGIES ONLINE.

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How Could You Pursue Business Growth This Year?

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By Vista Capital Solutions, LLC

No matter the size and type of your enterprise, you probably have goals related to ongoing success. After all, it’s not sustainable to keep your company at the same level for too long. It’s ideal to keep exploring new ways to appeal to customers and move into new markets. Moving ahead with business growth strategies is much easier when you know the kinds of options that exist.

Market Penetration

Market penetration is one possibility. It involves selling more of your product to existing customers. For example, if your business provides a common food, like peanut butter, you might feature recipes on the back of each jar, encouraging buyers to use your product in new ways. Then, they’ll likely need to restock more often, which helps your profits.

Similarly, if you offer a product that people use frequently and regularly, you might sell it in larger packs that cost a bit more. Consumers probably won’t mind the extra expense if they buy the item often enough anyway.

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Market Development

Market development is another way to help your business grow. It occurs when you develop new market segments for your product. For example, you might have the company headquarters in San Diego, California. After getting established there, a market development plan could help you branch out to more cities, getting a larger number of total people acquainted with what you offer.

Have you thought about making items accessible through additional channels or models? Those approaches could also help your company become more profitable and well-known. Consider the example of a business that sells tractors. If it launched a rental service or rent-to-own model, those additional options could make more people interested. Some consumers cannot afford the upfront costs associated with farm equipment. Letting them rent tractors instead makes the expenses more manageable.

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Product Development

Product development could also be vital for growth. However, since this is one of the most cost-intensive ways to help your company gain momentum in the marketplace, it’s crucial that you perform the necessary research to ensure that people want your proposed products enough to buy them.

These are far from the only options concerning business growth. However, it’s worth exploring each of them and considering whether they could help take your company to the next level. Before choosing a strategy, make sure that you and your business partners have the dedication to stick with it, even if there are challenging times ahead.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Do I Have to Network to Succeed in Real Estate Investing?

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Image from Pixabay

By Tamera Aragon

Yes! I know you may have wanted a different answer, but this is the honest truth. Networking is such an important part of your business. You must introduce yourself and let others know what you are doing. Everyone can be a referral resource for you… and you for them.

The best book I’ve read to help me to become more comfortable with the idea of networking is called ‘How to Win Friends and Influence People’ by Dale Carnegie. It’s a great book that helps you to understand why you need to network with others as well as teaching you exactly how and what to say when you meet with new contacts.

Throughout my own 30 years of owning several businesses, (W0W – Am I that old?!), I can honestly say personal networking has been the most effective … and the most fun way to market myself!

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How to Network Your Way to REI Success

As a real estate investor, where can you reach out to network your business?

1) Search Real Estate Investor Clubs in Your Area.

2) Check meetings and trainings for local Real Estate Associations.

3) Check meetings and trainings at local Title Companies.

4) Check on handyman, builders and contractor associations in your area.

5) Ask everyone you talk to for referrals for networking events that have worked for them.

6) Of course chamber events and networking clubs that meet at breakfast and lunch are a general source to get to know the general public.

What do I say? Just remember the acronym F.R.I.E.N.D.S.

I know the biggest fear and reason many people don’t attend networking events is they don’t know how to approach or what to say to others when first meeting them. I am going to give you a script that will be easy for you to memorize…

Image from Pixabay

For every person you come in contact with at any type of networking meeting, your conversation might go something like this: Just remember the acronym FRIENDS:

F is for Forthright. Be forthright in reaching out and saying hi. Don’t wait for others to come to you.

“Hi there, my name’s __________. What’s your name?”

R is for Remember. You need to first always remember to ask them their name.

Ask for their card – and them hand them yours.

I is for Income. Ask them what they do for a living? How do they make their income?

“Say their name, and ask “What is it that you do?”

E is for Everyone. Everyone likes to talk about themselves.

Ask questions like, “How long have you been doing this?” or “What do you like most about what you do?”

N is for New Business. No matter if the person you are talking to has an occupation that is real estate related or not, you will want to find ways you both can support each other .

Ask : “What sort of clientele could I refer to bring you additional new business?

D is for Determine. After listening for possible ways to support each other, Determine where to take this relationship from this point.

S is for SUMMARIZE: When the time comes to share what you do, be prepared! Have a 30 second summary of what it is you could say to leave an impression on your new friend.

1) Hand everyone you network with your business card.

2) Summarize your business in 30 seconds or less. This is where spending time writing down how you want to market you and your business is important. You want to be concise and clear in describing what you do and what types of referrals would be most helpful. Try to incorporate something that differentiates you from the rest?

SAMPLE: REI 30 Second Commercials

6 Important Things to ALWAYS REMEMBER When Networking;

  1. The important thing is that you are interested in what they do for a living.
  2. Don’t talk about yourself until asked or the timing is right.
  3. Ask them questions about their occupation and how you can be of support to them in their line of work.
  4. If this person is a potential power team member for you, ask if you could contact them in the future. (You would be able to follow your list of questions for power team members and take notes when you called them back)
  5. Make sure to collect a card from everyone you meet
  6. Make sure you have their email address, fax, cell, and correct spelling of first and last name. (Write on the back of the card if any of this information is missing – it shows your interested!)

Questions To Ask When You Meet Real Estate Investors

  • “Do you buy, fix and sell or do you buy and hold?”
  • “How many properties do you own and/or have you sold?”
  • “What part of town do you invest in?”
  • “Really, why that area?”
  • “What do properties cost in that area?
  • “Do you pay cash for them or what banks do you use that are investor friendly?”
  • “What title company do you enjoy using the most?”
  • “Do you know any of the other people here?”
  • “Who are the big investors in this area?”
  • “If you ever come across some good deals and you don’t want them let me know.”
  • “By the way, do you have any property you want to sell?”
  • “We sometimes have properties for sale as well, if you’re looking to increase your inventory.”
  • “Well, Mr. /Ms. Investor based on what you told me and where you prefer to buy; if anything comes along I’ll make sure to call you first”.

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Final Important Points To Maximize Your Networking

Always write notes on the back of business cards you collect, helping you remember the next steps you will want to take with this contact in the future. Often times, just a “nice meeting you” card in the mail or email can be seen as a memorable gesture encouraging future communication to support each other’s business needs.

… as you get in front of people and

NETWORK YOUR WAY TO REI SUCCESS!

Tamera Aragon

Tamera Aragon is a professional online entrepreneur and has bought and sold over 300 properties, establishing her as an expert in the real estate investing field. Since 2003, she has purchased over 10 million dollars in real estate and currently holds properties all over the world. Tamera’s focus is on the booming Foreclosure market, buying Pre-foreclosures, REOs and Short Sales. Tamera who is a noted Author, Success Trainer, Speaker & Coach, shows her passion for helping others with the 17 websites she has created and several specialized products to support fellow investors throughout the world. When Tamara is not busy running her website, she is very involved with her Fiji joint ventures and investments. Tamera Aragon is one of the few trainers and coaches who is really “doing it” successfully in today’s market. Tamera’s experience has earned her a solid reputation in the industry as well as the respect and friendship of many of the top national real estate investment and internet marketing experts. Tamera Aragon believes her success has garnered her the financial freedom to fully enjoy her marriage and spend quality time with her children.

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Essential Real Estate Calculations

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Image from Pixabay

By Bruce Kellogg

Introduction – Why Calculate and Analyze?

This is probably intuitive to most investors, but we calculate and analyze properties for the following reasons:

  • To understand present operating performance.
  • To project future performance under different scenarios.
  • To compare alternative investment opportunities.

#1 – Cash Flow Analysis

Figure 1 is a simple EXCEL™ spreadsheet that can be used for initial analysis of a property. Scenario A is typically the property’s present numbers. Scenario B is for “what if” analyses such as increasing rents, reducing selected expenses, or refinancing the loan structure. Figure 2 contains a larger list of expenses that should be used on this spreadsheet, and any others, to ensure that everything is accounted for.

Fig.1

A “quick and dirty” way to avoid applying every expense to a cash flow analysis is to estimate a percentage of rents, and use that. Say, use 35% if the property is under 5 years old, and the tenants pay most or all of the utilities. Go up to 60% of rents if the building is old, poorly-maintained, or the landlord pays most or all of the utilities. Initially, you might just use 50%. That’s pretty common. As you gain more experience, you can vary up or down, as described here.

#2 – Monthly Rent-to-Cost Ratio

This metric is used for initial screening, to see if you want to evaluate the property any further. Just divide the Monthly Rent by the Total Cost (Purchase Price + Rehab + Acquisition Costs), and express it as a percentage. You might want to do this twice, once for the present rents, then again for market rents if there is much difference. A result below 1.0% is not worth analyzing further under most circumstances. Above 1.2% you’re getting somewhere.

#3 – Gross Rent Multiplier (GRM)

The Gross Rent Multiplier is computed by dividing the Sale Price by the Gross Annual Rents. It is used to roughly compare properties as a screening method where higher is better.  One caveat is that operating expenses are not considered, particularly who pays for utilities can make a big difference. It’s useful, but rough.

Fig.2

#4 – Capitalization (Cap) Rate

This is one of the most useful metrics for comparing real estate investment opportunities. It is best done using actual income and expenses from the previous year. Using it for pro forma performance projections is not as useful.

Cap Rate is computed by dividing the Net Operating Income (NOI) by the Total Cost (per #2, above), then multiplying by 100. Generally-speaking, the higher the Cap Rate, the better the cash flow. But one needs to consider property and location quality, as well because although a slum property might have a high Cap Rate, it still probably is an inferior investment. Inexperienced investors are misled by this sometimes.

Note that Cap Rate does not include debt-servicing costs. This is why different investments can be compared so readily using it.

#5 – Debt Service Coverage Ratio (DSCR)

DSCR is a favorite metric for lenders because it shows them how well the property will service the debt on it. It is computed by dividing Net Operating Income (NOI) by the Annual Debt Service, which includes both principal and interest, but not taxes and insurance. Most institutional lenders want the DSCR to be at least 1.2.

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#6 – Return on Investment (ROI)

Return-on-Investment (ROI) is one of the best measures of how your investment is performing. It is computed by taking the Gain on Investment minus the Cost of Investment, divided by the Cost of Investment. The Annualized Return is computed by taking the ROI and dividing it by the number of years the property has been owned.

#7 – Cash-on-Cash Return

Most of the time, investing involves the injection of cash which, for most investors, is limited. So, they want to know, “What is my cash doing for me lately?” This metric is computed by subtracting the Annual Debt Service from the Net Operating Income (NOI), then dividing by Cash in the Property. It is calculated on an annual basis, and is not appropriate for the first year. Additionally, a “cash out” refinancing will end its usefulness.

#8 – Internal Rate of Return (IRR)

IRR is especially useful when comparing returns on different asset classes. It is sometimes called “Discounted Cash Flow Rate of Return” because annual cash flows are discounted back to the total initial investment. The rate at which these equal zero is the IRR. It requires a financial calculator or software program to obtain this result. The HP-12C calculator and EXCEL IRR function are examples.

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Limitations

  • The real estate calculations presented here all depend on quality data, which must be verified, if necessary. Some sources, like MLS listings and brokerage marketing materials, sometimes have errors or omissions.
  • These calculations assume the investment property will not experience a “Black Swan Event”. The COVID-19 pandemic is an example.
  • Additionally, performing calculations is “desk work”. It’s essential, but it needs to be coupled with “field work” for an intelligent investment to be made.
  • Finally, the author recommends that after an investor does their calculations and conclusions, they share these with an experienced fellow investor, mentor, or consultant as a check on their work.

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 40 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

Mr. Kellogg is a contributor and copy editor for two national real estate wealth-building magazines: Realty411, and REI Wealth Magazine. He is a recipient of an Albert Nelson Marquis Lifetime Achievement Award, listed in Who’s Who in America– 2019.

He is available for consulting with syndication, turnkey, joint-venture, and other property purchasers and note investors nationally, and other consulting assignments. Reach him at [email protected], or (408) 489-0131.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

The Deed-in-Lieu-of-Foreclosure

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Image from Pixabay

By Bruce Kellogg

The Wrong Way

At a recent meet-up, I met a man who had recovered a property from a defaulting borrower on a note they had between them. Looking to save costs, the note-holder accepted a deed and promptly recorded it. Later, when he went to refinance, he discovered that several liens and judgments had attached to the title of the property. In total, they wiped out his equity! Sad tale, but true, and this wrong way of doing a deed-in-lieu-of-foreclosure happens a lot. So, what is the right way that protects both the defaulting borrower and the recovering note-holder?

Image from Pixabay

No. 1 Open an escrow, and order a title report. Specify that involuntary liens (liens, judgments, etc.) are to be searched as well as voluntary liens (mortgages, deeds-of-trust). Expect to buy title insurance and pay escrow costs.

No. 2 If you received an insurance policy from the borrower, and were named as “mortgagee”, or “additional insured”, call the company and find out if the policy is still in effect. If it is not, order a policy of your own. You need protection.

No. 3 Check the property taxes with the County Tax Collector. If they are delinquent, pay them current. Get a receipt to give to escrow because some counties are slow to update their records.

No. 4 Find out the status of any senior loans. Call first, but if the lender refuses due to privacy reasons, have escrow or your attorney make the request. Pay the senior loans current, preferably through escrow. If paying them yourself, be sure to get a receipt for escrow.

No. 5 See the property. If it is within driving distance, visit it personally. If not, hire a service like www.wegolook.com to go take pictures.

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Caution: If the property is rented, it is advisable not to step on the property or engage anyone there in conversation.

No. 6 If the property is a rental, try to get the defaulting borrower to turn over the security deposits and any advance rents. You might not get this.

No. 7 When the title report comes back, you need to check for any liens and judgments. If these are present, then you need to foreclose to shed them from your title.(This is what the unfortunate lender above failed to do.) You have no choice.

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No. 8 If there are no involuntary liens, or small ones (e.g., garbage liens) that you are willing to pay in escrow, then have a Deed-in-Lieu-of-Foreclosure drawn up for the defaulting borrowers to sign. These deeds are special because they have a recitation of several paragraphs on them called an “Estoppel Affidavit”. The borrowers affirm that they are deeding freely, without coercion or duress, and are not being compensated beyond forgiveness of their debt.

No. 9 If the borrowers go through this process, and escrow closes, then you need to return their original note marked “PAID” to them. In addition, escrow needs you to sign a Full Reconveyance of the mortgage or deed-of-trust in order to insure your clear title.

And that’s the right way!

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 40 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

Mr. Kellogg is a contributor and copy editor for two national real estate wealth-building magazines: Realty411, and REI Wealth Magazine. He is a recipient of an Albert Nelson Marquis Lifetime Achievement Award, listed in Who’s Who in America– 2019.

He is available for consulting with syndication, turnkey, joint-venture, and other property purchasers and note investors nationally, and other consulting assignments. Reach him at [email protected], or (408) 489-0131.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.