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Investors

We hope that you will find the investment information within these pages informative. It was written to give you a brief overview of how real estate investing can work for you. A a real estate investor, you want to make sure that you always have a network of professionals to consult with. We always recommend that you find a Realtor who not only knows real estate, but can refer you to other professionals such as lawyers, within the industry.

Real Estate Investment 101
Real Estate Investment 201
Real Estate Investment 301

Real Estate Investment 101

Intro to Real Estate Investment With the stock market continuing to punish most all who dare to take it on, a growing number of people are moving to an investment that will be around for generations to come, Real Estate. The goal of these articles is to help educate you on the basics of Real Estate Investing with the goal that you too can gain true long term wealth through an investment that you can actually put your hands on.
For the purpose of these articles, we will be referring to just the residential side of Real Estate Investing which will include Single Family, Multi-Family, Condo/Townhome, and Apartment type investments. For information on commercial investing, please refer to our section on Commercial Investments.
In the first section, we are going to cover the following topics:
Identifying your Tolerance forR isk
Deciding what Property Type
Identifying your Tolerance for Risk
The first step in choosing an investment that will fit you is identifying your individual tolerance for risk. Risk is defined as “exposure to the chance of injury or loss; a hazard or dangerous chance.” Many people define risk with the idea that the more risk you take on, the higher your profit will be. The first question you must ask yourself, is how much loss can you handle? You shouldn’t be investing without being prepared for the worst case scenario. Will your Real Estate business be shut down if the worst happens, or will you be able to push on? As with most other investments, Real Estate can have varying levels of risk and various levels of reward. It is important to identify how much risk you want to take on, so you know what property types to start looking for.
Your next step is identifying a property!

Real Estate Investment 201

Indentifying and Purchasing your Property
After assessing the risk that you are able to tolerate, it is now time to identify and purchase the property that will begin to bring you the long term wealth that you have always desired! We will cover the following topics in this section:
Type of Property
Mortgage or Cash
Determining the Potential Rent
Determining the Potential Expenses
Type of Property
The type of property that you desire could depend on a number of factors such as the amount of money that you have to invest, your tolerance for risk, and the general neighborhoods that you would like to own in. A good Real Estate Broker with experience in Investments is worth their weight in gold. They will be able to guide you through different types of property and the pros and cons of each. In Residential Real Estate, your investment could be a Single Family, Multi-Family, Condo/Townhouse, or an Apartment building.
In the category of residential, there are several sub-types of property that can be purchased for investment. With each type, you must consider the potential expenses going forward before getting an accurate estimate of the income a property can generate for you. Your Real Estate broker should be able to help you with determining potential ongoing expenses with any particular property.
Each of the property types has it’s own unique characteristics, but within them, you must also consider your tolerance for risk as this will determine the type of tenant that you want to rent to. If you want to earn a higher return, you may seek and investment in a lower income area. In turn, your units may take additional abuse that the tenants cannot afford to repair at the end of their lease. You may also seek owning a rental in a very high income area, where your tenant can certainly afford repairs if damage is done, but you will sacrifice your return as these renters are also just as savvy with their money as you are.
Mortgage or Cash
One of the first choices in purchasing a property is deciding whether to finance the investment, or pay cash. This can depend on a number of factors. Maybe you don’t have enough funds to cover the whole purchase, or maybe no bank will finance you. Whatever the choice you make, it has to be made prior to going out and looking for the property. This is very important because prior to making an offer, you will need to have a letter proving that you have the cash to make the purchase (also known as “proof of funds”) or a letter from a reputable lending institution showing a pre-approval (not a pre-qualification) for the loan amount that you are seeking. If you aren’t ready to make an offer after seeing a property, then you shouldn’t be out looking yet. With investments, you must quick with the decision to purchase, or someone else will and then you will be back to looking again.
Determining the Potential Rent
A good Real Estate Broker will be able to sit down with you and look at recent comparable properties in the same area similar to the one you are interested in. They will be able to look at previous rents received at those properties and help to determine an estimate of what the fair market price of your unit(s). When determining potential rent, it is very important to remember that you do not determine the rent, the market of renters does. There should be no emotion in this decision, as this is a business you are trying to run. Make sure that you take this into consideration when choosing a property. If the numbers do not work, then do not proceed. Move onto the next property with no emotion.
Determining the Potential Expenses
Every property will have it’s own unique expenses. When talking about expenses, it is important to speak with someone that has experience and knows all of the potential expenses that you may incur. There may be some expense up front to renovate (rehabilitate) and get the property to a livable state. There will certainly be ongoing expenses that you must factor into your business. Are you going to have the time to collect rent and manage upkeep and repair on your own? Most people don’t so you must also figure a management expense. A Real Estate Property Management Company can be a great management resource if you can’t manage the investment on your own. Potential expenses for various property types are: Mortgage (sometimes called Debt Service), Property Taxes, Insurance, Water/Sewer, Vacancy Loss, Lawn, Pool, Common Electric, General Repair, etc.
Once you have determined your potential rents along with upfront and ongoing expenses, you can take that information and make an educated decision to move forward or back away from that property. You’re almost there!

Real Estate Investment 301

Crunching the Numbers
There are a thousand terms in the investing world, but today we will concentrate on the most widely used terms pertaining to Real Estate. Below we will go through some basic math and some basic formulas to show you how to figure out the potential money that you could be earning! Let’s crunch the numbers on your future investment! We will cover the following topics:
Cash Flow (Gross Income)
Operating Expenses
Debt Service
Net Income
Invested Capital
Return on Investment
Cash Flow (Gross Income)
What money (revenue) will your Real Estate business be collecting to work from? Once you have determined a fair market price for the rent of the unit(s) you are planning to buy, you can figure out the amount of gross income (cash flow) that you have coming in to operate your business with.
Operating Expenses
What expenses will your business have to stay running? It is pretty standard that an owner covers property taxes, general building and liability insurance, and the mortgage (if any). What will those costs be? You will have loss of income from the units not always being occupied. This is called vacancy loss and with a well run business, will be somewhere between 3-10% of your gross income. Does your property have a way to meter each tenants use of the utilities such as water, sewer, and electricity? Will you be passing on the burden of lawn and landscaping to tenants, or will you be making sure your investment looks its best? Long term maintenance is also a consideration. If you plan to hold the building for the long term, what ongoing repairs and regular maintenance will you need to do? Over time, all of these things will need to be upgraded or replaced: Roof, exterior and interior paint, landscaping, kitchens, baths, flooring, etc. Set up a separate account, commonly called “reserves”, to deposit a portion of income every month to take care of the costly long term maintenances.
Debt Service (Mortgage)
A mortgage can be a wonderful tool to keep more of your working capital free to take on other projects, but what does the mortgage cost you every month? If your unit(s) go without rent for a month, will it place a burden on your everyday life or do you have the money in reserves just in case? Even if there isn’t much revenue left after a mortgage and your operating expenses, remember you still have someone else paying your mortgage, so at the end of the mortgage term, you will still have a free and clear asset.
Net Income
Net income is derived from subtracting your operating expenses and debt service from your gross income (cash flow). This is your profit, that is what were all after in the end, right?
Net Income = Gross Income – Operating Expenses – Debt Service (if any)
Invested Capital
This is the money that you have taken from your pocket to purchase and rehabilitate your property. If you have a mortgage, how much did you put down? If you didn’t get a mortgage, how much did you pay for the property? Did you do any renovations to the property to get it into a marketable property, or was it ready to go when you bought it?
Return on Investment
This is a term a lot of investors will use to determine what they have earned on the amount of money that they have put in. This number can vary greatly by the revenue generated and the expenses incurred. Figuring return on investment as a percentage is simple.
Return on Investment (%) = Net Income/Invested Capital
There are plenty of things for you to still learn, but you are now well on your way to becoming a seasoned Real Estate Investor!

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