Living in Contra Costa County

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

More on Rate of Return – Real Estate Investing – Part 13

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange II

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange III

With this Post I am concluding the Series. But there are several things you need to know:

There is a lot more to learn about Real Estate Investing. This is an attempt to get very basic information out so people to give people systematic tools to look at investing. I hope to pick up again with more real estate investing information in the near future.
I have other tools for on Real Estate including information on Short Sales, First Time Buyers, and Bank Owned Homes.
I am starting another exciting series soon, probably Next Week on a surprise and unique topic I do not see a lot on.
I will be turning these post into an e-book with updated and new information. If you are interested in a copy of the ebook please let me know.
Be Sure to Get the Free Calculator to help you through this series.

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1 comment • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 26 2009 05:34PM

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange III

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange III

This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

More on Rate of Return – Real Estate Investing – Part 13

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange II

If you read the Bare Bones Summary on 1031 Exchanges and some of the Questions and Answers in the Next Section on 1031 Exchanges I want to go over a few strategies you might use and talk about some key issues:

Always Identify as your properties and get on with the purchase as soon as you can. You might even want to get in contract on the replacement property with in the 45 days to make sure you can get the property. Even if you are in contract on the replacement as day 45 approaches name some other properties as back ups. Keep you options open. Remember if your replacement properties get purchased by some one else or do not work out you will pay the Capital Gains Tax.
For most investors naming the 3 properties will be the best option on replacement properties.

The 200% option has limited potential for most people. Where the 200% option might work is if you are selling one very high value property and which to by a number of lesser price properties. For example if you sell an investment property for $2,000,000.00, then pick 13 replacement properties valued at $300,000.00 as your dedicated replacement you will have to buy at least 7 of them within the 180 time limit.
The 95% system would seem to work about like the 200% system.
If you want to divest of rentals and buy your dream home you might sell several homes and time the closings at about the same time. You could even lock up the dream home with options or a reverse exchange (if you are confidant of selling in 180 days). Use the equity to get the dream home, but it should be on the rental market for a year before you move in. Then you could turn you current primary into a rental property or sell it and take the exemption on the taxes when you move out. This will save you a lot of money!
If you have owned an investment property for some time and the loan value is getting down, you have a lot of equity, and you have pretty much taken all the depreciation out of it this is a good time to sell. But when you sell if the risk is acceptable use the equity to buy several properties, as long as the total cost is more than the value of the sold property you pay no capital gains taxes and have upgraded and diversified your portfolio. You now have more property to depreciate and can write off more interest.

The next installment concludes the series, but with a very exciting announcement. So watch for it. I have another exciting series coming up.

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1 comment • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 24 2009 03:31PM

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange II

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange II

This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

More on Rate of Return – Real Estate Investing – Part 13

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I

If you read the Bare Bones Summary on 1031 Exchanges in the last post you probably have some questions.

Let me anticipate and try to nail down a few of them:

What if I do not identify the replacement properties in 45 Days?

Your screwed pay the Capital Gains Tax.
What if the 45th day falls on Sunday, Christmas Day, New Years, or any Holiday?

Better get the replacement properties identified ahead of time. The 45 Days includes all the above mentioned holidays, Sundays, etc . . .
What if I do not close on the replacement property within 180 Days?

See above. Same rules apply. Get it done ASAP.
What if I pay less for the replacement property than I sold the original property for?

You will have to pay some Capital Gains Tax based on the difference.
What if I take some of the equity (cash) from the sale of the original property?

You will pay Capital Gains Tax on a portion of the sale.
Can I use some of the equity (Cash) from the sale of the original property to cover some of the expenses?

Yes you can. Generally speaking you can pay fees directly related to the sale (real estate commissions, and other cost directly related to the sale.). You cannot use the cash for cost of ownership such as repairs, utilities etc . . This includes fixing the home up for sale.

The IRS in all of it's wisdom has not clarified rather or not loan expenses are qualified expenses. If in doubt do not use the funds for loan expenses. Depreciate the loan expenses.
What is a qualified property of like kind?

Real Property for Real Property in the US. You can sell a house to buy a vacant lot. You can build on the lot as part of the exchange. You can buy and upgrade (put improvements into the real property.) To avoid taxes you must have a greater overall acquisition than sale.
What if I already know the property I want but have not sold the property I currently own?

You can do a Reverse Exchange. Buy first and sell the Exchange property latter, but you better get it done in 180 days. Consult the pros first.
What if I want to sell a rental and buy a property for myself?

You should have the new property on the rental market before converting it to personal use in order to avoid the Capital Gains Tax. There is no hard and fast rule, but they recommend about 1 year to avoid Tax issues.
What if I want to sell several properties and use the equity from all three to buy one property?

You can do this, but the 45 and 180 Day Time Limit begins to run from the sale of the first property. I recommend that you try and time the sale of all of the properties for the same time (this could be hard).
What if I want to sell one property and buy two or more exchange properties?

Excellent move to diversify your portfolio and use your equity. Just make sure the combined value of the exchange properties is more than the sold property.
Can I keep my low California Property Tax Basis on the Sold Property?

NO!
What is my Basis (For Income Tax and Capital Gains) on the new property?

The Basis is carried over from the sold property. Here is a crude example but you should consult with tax pros.

In General you start with Property A as a rental and the Basis (cost) is $100,000.00. After 27.5 years you have about depreciated it out and sell property A for $500,000.00. You then do the exchange and buy Property B for $800,000.00.

Your Basis is $100,000.00 (which is already fully depreciated) plus $300,000.00 cost difference (which can be depreciated out) for a new cost basis of $400,000.00.
OK, Gene you have shown me the nuts and bolts of the rules, but how do I make this work for me?

Subscribe to my blog and wait for the next post in this series and I will let you know.

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1 comment • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 22 2009 01:51PM

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I

Tax Strategies – Real Estate Investing – Part 14C - The 1031 Exchange I

This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

More on Rate of Return – Real Estate Investing – Part 13

Now we are going to look at one of the main ways to defer Capital Gains taxes in order to maximize your investments, and possibly reduce or avoid all the Capital Gains Taxes at some point with the use of the Tax Strategies Discussed in Part 14B.

A 1031 Exchange is when you Exchange one Property for Another Property of Like Kind and not pay Capital Gains Tax on the Sale. For this series we are going to focus on the Real Property Aspects of the 1031 Exchange and how it relates to and can help you with Property Investments.

You decide to sell an investment property, but still want to keep your investments in real estate. (Why you might want to do this we will cover latter.)

Here is the Bare Bones of What you do:

Consult with a Real Estate Professional and your other advisers first. This can be a lot more complex than I am describing here. A short consultation ahead of time can help you avoid problems down the line and make sure you obtain the goals you want.
Sell the Property you want to sell.
You do not touch the funds. The funds go to a Qualified Intermediary (That you took care of in Step 1).
Within 45 Days of the sale of the property you must identify possible replacement properties. Generally speaking you can identify the replacement properties in 3 ways:

1) Pick any Three properties you think you may want to buy to replace it.

2) Pick as many replacement properties as you want, but the value of all those properties combined can be no more than 200% of the value of the sold property.

3) Pick as many replacement properties as you want, but you must buy 95% of the value of those properties.

For most small investors # 1 will be the way to go.
Purchase the replacement property within 180 of the sale of the first property.
The Replacement Property must cost more (to avoid taxes).
All of the equity funds from the sale of the first property must be used to purchase the replacement property (to avoid taxes), except for qualified expenses.

That is it in a Nut Shell, but you should have a bunch of questions and there are many other minor rules and details I will cover in the next post in the series.

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1 comment • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 20 2009 06:09PM

Tax Strategies – Real Estate Investing – Part 14B

Tax Strategies – Real Estate Investing – Part 14B

This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

More on Rate of Return – Real Estate Investing – Part 13

The main tax issue we are going to be concerned with is the most unpredictable - Capital Gains Taxes. As I mentioned in the last installment on Tax Strategies the tax situation is always changing. If you are just starting to invest, more than likely by the time you sell what I will tell you will have changed. Right now I think most people would expect taxes to go up. At some point Capital Gains Taxes may go up, but there are always trends in the other direction. Follow the trends with your current and future needs in mind and try and time your decisions with positive trends. Very few people time the trends perfect, so do not beat yourself up too much on this.

Here are some long term ideas about avoiding or reducing Capital Gains Tax:

If you have lived in a property for the last Two out of five years you can take an exemption and avoid the Capital Gains Tax. If you are currently have a rental that you have lived in and meets this requirement you may want to sell while you still have those two of five years left. Or if you want to sell something in the future you could move into it for two years and sell. I have seen people who owned a series of rentals that want to get the cash out move every two years or so and sell them one at a time.
Right now Capital Gains Taxes are indexed to charge higher earners a larger amount. Sell in in years your income is low.
Selling the home on an installment basis may help you keep your tax burden low from year to year as you are paid for the home over a negotiated period of time.
If you are selling a number of properties and wish to liquidate your Real Estate holdings you may want to do like stock investing and dollar average. If you are unsure of price and tax trends sell them one at a time over a set periods of time. This way you can help avoid the cost of market fluctuation; you know you will sell some at good times to sell and some at less opportune times, but over all you will do well.
The last option to sell one property and buy another is a 1031 Exchange. We will cover that in the next installment.

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2 comments • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 17 2009 10:30PM

Tax Strategies – Real Estate Investing – Part 14A

Tax Strategies – Real Estate Investing – Part 14A

This is Part 14 of my Real Estate Investing Series. You can view the first 13 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

More on Rate of Return – Real Estate Investing – Part 13

This is the part no one wants to think about TAXES! Yikes, no one wants to pay Taxes and much of our investment Strategies is about avoiding Taxes. I am going to discuss some ideas about Taxes. I will not address property taxes as in California they are a fairly predictable amount and should be seen as an on going expense.

Making Long Term decisions based on Tax is important as we all want to lower the amount of Taxes we paid, but is also hard as Tax are not static. Taxes change at the Federal and State level with almost every budget and election cycle. Your personal Tax situation may not be static with a change in your top Tax Rate if your income goes up or down.

There are two types of Taxes we need to be aware of; Income Tax and Capital Gains Tax.

Income Taxes Directly impact the Rate of Return on the Property. Depreciation on the property might even allow a person to have a positive return on an otherwise negative investment. A person in a high Tax Bracket may even be OK with a Negative Cash Flow as long as they can take the Passive Losses.

The other Tax issue is Capital Gains Taxes. This is where the government gets back all the depreciation they have allowed you to take on the property over all those years (assuming of course you sell for a profit) and Tax you on any appreciation of the property over the time you have owned the property.

There are ways to avoid or minimize the Capital Gains which we will look at in the next installments.

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2 comments • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 01 2009 02:03PM

More on Rate of Return – Real Estate Investing – Part 13

More on Rate of Return – Real Estate Investing – Part 13

This is Part 13 of my Real Estate Investing Series. You can view the first 12 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

In Part 11 I promised you more information on rate of return. When we talked about Rates of Return before we were looking at what the experts call First Year Rates of return. First Year Rates of Return represents a fairly static number and I think it is one of the best tools available, but we live in a dynamic economic and tax environment.

Although I will not go into specifics other methods involved in the evaluation of an investment is Multi-year rate of Return, Internal Rate of Return, and Financial Management Rate of Return. The key issues with all of these is trying to project the long term value of money, the value of other investments, and the investment potential of other options for your money. You need to understand the Time Value of Money. In short a $1,000.00 today is worth more than it will be worth next year and a lot more than it will be worth in 10 years.

These kinds of projections take a good understanding of long term economic trends, both locally and nationally; both for the real estate market and general financial figures. Although I am bullish on long term real estate investing long term economic trends are hard to predict and you should do you own research. The only thing I see is the experts and the newspapers are frequently wrong; newspapers like to print negative news or give it a negative slant.

For the small or first time investor without an army of advisors I suggest you just be aware that your investments in real estate and other things is a dynamic investment. Continue to watch trends in rents, real estate prices, inflation, tax laws, and other investments. This will give you an idea of how good your investment is doing.

Real Estate is not liquid asset in that it is not usually quick or cheap to dispose of, at least when compared to stocks. So do not jump on every band wagon or minor change in trends when making a decision about real estate investing. Pay attention to how the trends look long term when considering your real estate investment.

Real Estate does offers some fairly predictable factors for an investor:

If you have a fixed rate loan your payments are known. Your cost in this regard are fixed until the loan is paid.
In California your maximum property tax rate is fixed at the basis (Purchase amount) plus 2% a year maximum.
Your loan will gradually shift more to principal payment and less interest, lowering your interest deduction; but this is a predictable and manageable factor.

The other thing about real estate is they are not making anymore of it. It is a limited investment opprotunity. Finally, barring some huge major disaster your land will always be there; some other investments can completely disappear.

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0 comments • Gene Riemenschneider East Contra Costa Home Sales 01492725 • October 01 2009 12:44PM

Growth or Income – Real Estate Investing – Part 12

Growth or Income – Real Estate Investing – Part 12

This is Part 12 of my Real Estate Investing Series. You can view the first 11 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

Today I was out with an Investor Client and we were looking at 2 - 4 unit properties. In this area most of the 2 - 4 unit properties are in older areas of town and some are even quite distressed. There are some that are well kept, but nothing modern. I don't think he has read this blog series yet, and he was asking me about return on the investment. I gave him my brief thoughts on investment returns as discussed in Part 11 - Rates of Return. I then pointed out that I thought the chance for appreciation was greater in single family homes. Appreciation in value is a long term investment out look and does not impact day to day cash flow. But Rate of Return would be better in the 2 -4 unit properties.

I may be wrong about this; but I shared with him my thinking. Almost all of the multi-unit properties we looked at were set up as rentals. You might find a few nice single family homes about with a studio or in-law unit that could be rented separately; but around here they are few and far between. People are not buying 2 - 4 unit properties to live in themselves (and if they do they are still looking at the income potential of the properties); they are buying them to generate income. The value of the property will be primarily driven by the rents and income it can generate. Now of course the nicer and more desirable the property the higher rent it can demand; but if you get it too nice the renters will figure it is cheaper to buy. The 2 -4 unit properties are designed to produce maximum income based on size and cost.

Now if you buy a single family home to rent, naturally you will be aware of what you can rent it for and the Rate of Return it will produce; but other factors will drive the cost of the single family home. That factor is people looking to buy these homes to live in. These people are not concerned about the income they will generate from living on the property. They may even be willing to pay a premium price for things an investor will not; because the tenants cannot afford to pay him rent enough to cover those extras. This is one reason as an investor when looking at single family homes you should look at marginal or fixer upper homes. There is less of a WOW factor that will drive the price up.

Both Single Family Homes and 2 - 4 unit properties will appreciate in an up market; but I think the Single Family Home will do better as it is not bound by a need for a Rate of Return. In an inflationary market the investor will need to maximize the rate of return to compete with other potential investments. Why settle for an 8% rate of return on an investment property if you can get 12% in another investment? This may even make rentals less appealing. However, rents will also increase during times of inflation and a lift will also be given to investment properties.

A good real estate investor should try to discern their goals in regard to the competing (or sometimes complimentary) goals of investment income and appreciation potential

Download the Latest Investor Calculator and compare some potential investment properties in your area.

THIS SERIES OF POST IS ONE OF THE MOST POPULAR I HAVE EVER WRITTEN. BUT I WOULD REALLY LIKE SOME FEEDBACK ON SEVERAL AREAS:

What other areas do you think I should go into. I plan to hit 1031 exchanges and capital gains tax. Any others.
How is the investor calculator working?
Do the numbers and figures I am putting out look accurate? How do they compare to your area of the country? Is my rough estimate of expenses decent? Higher/Lower? What are you seeing in terms of percentage of value being attributed to improvements for deprecation?
What Rate of Return do you want or feel is appropriate?
Are you more interested in Appreciation or Rate of Return?

This post was supposed to be More on Rate of Return, but I got on to this topic with my client today - so on my next post ...... Subscribe Below! Yes do it now!

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0 comments • Gene Riemenschneider East Contra Costa Home Sales 01492725 • September 22 2009 12:50PM

Rates of Return – Real Estate Investing – Part 11

Rates of Return – Real Estate Investing – Part 11

This is Part 11 of my Real Estate Investing Series. You can view the first 8 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

Now we are going to look at one of my favorite ways to evaluate a real estate investment - Rate of Return. There are actually several ways to calculate Rate of Return. The easiest and most important for the small investor are called Rates of Return for the First Year. I find this an odd name it does not really apply easily to the first year. Your first tax year of having the property will probably involve a pro-rated return since you will probably only be invested part of the year. If it refers to investment year the issue is that it will probably stratle two tax years. Your investment is dynamic and the results will vary from year to year. However, Rates of Return for the First Year is a good way to take current circumstances and project results. It is also good for evaluating results when you complete your taxes.

First you may want to go Download the Latest Investor Calculator that can be used with all of these chapters.

Rate of Return for the First Year comes in two forms; both are very easy to figure. The first one is for Before Tax Cash Flow:

Before Tax Cash Flow/Cash Invested = Before Tax Cash on Cash Rate

Using the example we have been working with it would look like this:

$2,183.63/$40,000 = 5.46%

You can do the same formula for After Tax Cash Flow:

After Tax Cash Flow/Cash Invested = After Tax Cash on Cash Rate

Now are example using the After Tax Cash Flow method:

$2,012.45/$40,000.00 = 5.03%

I know someone is asking where the $40,000.00 figure came from. That is your down payment. You would also include any out of pocket closing cost and rehab cost before you could rent the property. Don't beat up the numbers. If you figured your Rehab cost into your expense you should not include them in out of pocket expenses on the purchase. If you put them into the expense column they should be assumed to be offset by rents. As a rule of thumb if you can depreciate it leave it as part of your initial cost (Cash Invested); if you are taking what ever you spend as an expense for that year let is be an offset against your Cash Flow. If you have a lot of First Year Expenses it might lower the investment return the first year.

This may not sound like a great return. We live in an instant culture where everyone hears about someone making a quick fortune in the stock market or flipping a home. There is money to be made in flipping homes; however it is not as easy as everyone thinks and these may not be the best approach for a first time investor with limited funds. Compared to banks and other investments this is a good return. My figures and examples are all conservative; I think a smart investor could do better. Another huge consideration is that the value of your investment should appreciate over the long term; so you have growth and income from the same investment. Furthermore, if you have a fixed rate loan on the property your income from rents should climb, while your expenses are staying relatively fixed.

More on Rate of Return on my next post - so subscribe below.

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0 comments • Gene Riemenschneider East Contra Costa Home Sales 01492725 • September 08 2009 03:17PM

Comparable Pricing – Real Estate Investing – Part 10

Comparable Pricing – Real Estate Investing – Part 10

This is Part 9 of my Real Estate Investing Series. You can view the first 8 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

When you go to buy a residential investment property probably the most common way of arriving at a price is going to be to look at comparable properties in the area. As this is a book primarily directed at begining investors looking at a residential invesment the price will probably be determined by comps. Even if you want to use another method, the sellers and other buyers will be looking at comps.

Comps will be based on the size of the home, location, lot size, and the quality of the home and fixtures. Once you determine if a particular home will meet your needs as an investor and what the purchase price will have to be you can use the Gross Rent Multiplier or Capitalization Rate to determine if it is a good investment. Even within the same residential housing market, depending on demands and the quality of the homes different investment properties will vary in investment return.

Remember our earlier chapters - Maintain Your Leverage! Real Estate Investing – Part 3 & Picking Your Investment Property – Real Estate Investing – Part 4.