Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I am reviewing a few investment properties to see whether they worth purchasing. My rule of thumb is to look at types of rents/other income that is generated and then doing a back end analysis of costs. I arrive at the offer price based on the mortgage payments, taxes, insurance, maintenance, and other costs factored in.
Despite the weak housing market, prices in New England and California still seem to be inflated vis-a-vis the income that is generated. I am not watching the market to look for a major deflation in prices but instead using a simple formula to check whether I can pay the bills based on the income generated.
I wanted to ask the investors, real estate professionals out there: In making an offer can is it helpful to give my reasoning behind it? In soem desirable areas, I am going to be making offers almost $100K below asking price because buying the property near asking would mean leave me with negative cash flow.
Although I am interested in Cali/NE, I would welcome responses from all fellow investors. Hope to hear from you!
Location: Mokelumne Hill, CA & El Pescadero, BCS MX.
6,957 posts, read 22,309,298 times
Reputation: 6471
I think you'll find that most CA investment real estate wont pencil based on your criteria.
Your analysis doesn't seem to have a % down payment in it. Obviously if you pay cash the property will produce positive cash flow. The best method for valuing income property is the Capitalization method, where one takes the net operating income and values it based on a rate of return. In the '80's the vogue was to do an internal rate of return by throwing in depreciation and tax rates, but the change in any one assumption made the range of values too high in my humble opinion.
An important factor in valuing rents is whether the scheduled rental income can be increased from it's current level. If rents haven't kept up with the local market, and can be raised 10 % then an offer that doesn't provide positive cash flow might be a good offer if the rents can be raised.
I worked for a major apartment owner (40 buildings) in the '80's and we would always be on the lookout for properties that we could transform that way.
I think you'll find that most CA investment real estate wont pencil based on your criteria.
Thank you for the response. I think most CA investment real estate in the desirable parts of the state seem out of reach.
Your analysis doesn't seem to have a % down payment in it. Obviously if you pay cash the property will produce positive cash flow. The best method for valuing income property is the Capitalization method, where one takes the net operating income and values it based on a rate of return. In the '80's the vogue was to do an internal rate of return by throwing in depreciation and tax rates, but the change in any one assumption made the range of values too high in my humble opinion.
You are correct about the omission of the DP. It is due to the fact it will have a negligible (5%) impact. I prefer to use my DP pool to purchase highly leveraged multiple 1-4 investment properties scattered across two regions. I disagree that the Cap method is the best in valuation because I done plenty of calculations where the rate of return is lower in real estate (keeping CA/NE prices in mind) than other investment vehicles. For a hands on investor like myself it would not make sense for me to spend time and effort in locating investment real estate and managing them when my return is lower than my other investments. Sure you may counter with appreciation and the tax advantages being significant. However I do not rely on appreciation (no speculation) and my tax situation will not be significantly impacted.
I agree with you about the IRR, it adds another layer of complexity and should not be included.
An important factor in valuing rents is whether the scheduled rental income can be increased from it's current level. If rents haven't kept up with the local market, and can be raised 10 % then an offer that doesn't provide positive cash flow might be a good offer if the rents can be raised.
This is a great point! I have always invested in comestic upgrades to my acquisitions. Usually these upgrades are in the common areas such as carpeting, new mailboxes, at times, new appliances. In a few instances I have painted the exterior. Along with these upgrades, I tend to add a +2-4% premium over the regularly scheduled rent increases. So you can imagine that the funds get tight at outset, which is why I prefer to highly leverage the property.
When making an offer, I do account for the potential for rent increases however it is much more conservative than the market rates. For example, if the potential for rent increase is 10%, I use 7% as a figure. I would rather rent out the units at 3% lower cost to attract a wider group of tenants and be more stringent in criteria for renting.
I worked for a major apartment owner (40 buildings) in the '80's and we would always be on the lookout for properties that we could transform that way.
Now I understand where you are coming from. With larger apartment buildings you do have these luxuries, enjoy the economies of scale, however I prefer the horizontal apartment building approach with many units scattered. With 1 handyman and a part time secratary, I keep my overhead down and try minimize costs as much as possible.
I had been on a fundraising drive for the past 2 years (aka the boom times) and with sufficient capitalization, I am seeking to expand the investment portfolio. I am very conservative when it comes to investing long term, and would never speculate, so this downturn is a good time to invest.
Last edited by New Englander; 02-07-2008 at 12:51 PM..
Location: Mokelumne Hill, CA & El Pescadero, BCS MX.
6,957 posts, read 22,309,298 times
Reputation: 6471
Thanks for the clarifications, I think you've got yourself a good investment philosophy and tactical plan.
I think I forgot to address your original question about giving your reasoning behind your offers. I've never felt it mattered to add a backstory to an offer especially when it's income property. The owner of the property likely doesn't care what your reasons are, he's going to evaluate your offer based on his needs.
Thanks for the clarifications, I think you've got yourself a good investment philosophy and tactical plan.
I think I forgot to address your original question about giving your reasoning behind your offers. I've never felt it mattered to add a backstory to an offer especially when it's income property. The owner of the property likely doesn't care what your reasons are, he's going to evaluate your offer based on his needs.
Good luck to you
Thank you for the input!
I see what you mean in regards to the backstory in relation to the offer. Some of my offers have been blown away by other buyers but I am confident that I made the right choice walking away.
All the best to you too
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
