In order to make an informed decision, you must be able to decipher operating statements, cash flows, rent schedules, and the like. Or, work with an agent who has done this for companies as well as investors in real estate. I take an investment approach to helping my clients with real estate investments.
The old saying "garbage in, garbage out" is appropriate with investing in real estate. When you go about buying a home to live in you place an emphasis on "soft" things like quality of the neighborhood, schools, community benefits, the size of the house and lot, and features in addition to the price and loan rates to see if you're able to pay for it!
An investor looks at potential investment candidates in a different manner -- they look at how it will benefit them in a financial sense. You need an agent with analytical skills on your team to advise how one investment property will compare with another. And an agent who can and will compare a real estate investment with an altogether different investment!
In analyzing a real estate investment, one needs to project or forecast what different expenses will be in future years. Unfortunately, information provided by listing agents (remember garbage in!) mostly provide the expenses and perspective of the seller and their experience. That doesn't help you, the buyer, and can actually hurt you tremendously. Many investments were sold sight-unseen by merely showing an investor a page-full of numbers that the listing agent and/or seller made up! Many of these investments were located out of state and are not performing satisfactorily for their owners.
When I analyze a property on behalf of my client, I look at what will likely happen to the numbers in the future and how it will fit into the investor's current and future portfolio of investments. You need someone with experience in developing and populating what's called "proforma" operating statements before any decision can be made to complete the purchase.
After all operating expenses have been estimated, there needs to be careful analysis and consideration of the major ratios inherent in analyzing investment properties. Most notable would be an analysis of Gross Rent Multiplier (GRM) which is calculated by dividing gross annual rents by the list price. This can be compared to other similar investment candidates. Another such indicator is called the CAP rate which is short for capitalization rate. The CAP rate is calculated by dividing net operating income before taxes by the list price to arrive at a percentage or yield equivalent. I provide both these analyses and others as well as important scrutiny of the investment's "cost of capital" using real, current rates.
While searching for and analyzing investment candidates, you need an agent who will "get into the numbers" and provide advice that will eliminate emotions or "knee-jerk" decisions that so often occurs. It is part of helping the client make the best decision possible. This agent has told investors "no" many times and is not afraid of doing so again! My goal is to serve my client at the highest possible level.
You also need an agent who is adept at reading and following market trends to keep investors away from potential problems. I research market areas to determine to best time to enter or exit from them. For example, I have a client with investments in the Phoenix area who was thinking about selling. Luckily, when I queried them, they didn't have to sell. So I recommended they retain their real estate investments and keep them rented out. They want me to alert them when the market condition in that area is more favorable for them to sell.
I tell my clients "cheaper is not always better and more expensive is not always more valuable". You can quote me on that!
To learn more about me, please click on the My Background link under my photo in the right column.
Let me know if you just want to talk. You can always feel free to contact me with any questions or comments.
Thanks for reading!
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