We’ll cover that in this video plus:
- Yes, cash flow is good, but appreciation is great.
- Investing in multiple cities.
- What moves markets.
- Why markets emerge.
- Rapid appreciation.
- Retaining equity.
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5 Signs Of A Real Estate Market
1. Local government funding
A hefty amount of dollars spent by the local government on local development is a sure sign of the revitalization and further development of an area which means that real estate is about to take off in terms of supply and demand.
2. A jump in commercial funding
The relocation of large businesses, the opening up of offices and an influx of new business in an area is also a clear indication that domestic real estate will take off as all those workers, office personnel and managers will need somewhere to live.
3. Expansion of local transportation
An upgrade of the local transport grid, local transport network and or building of new access routes is an indication of the revitalization of an area.
4. A rise in the local population
An influx of new visitors, a rise in the number of 'out of towners' and a jump in the people who normally live in an area is a sign that the particular market is about to become a real estate hot spot.
5. A rise in investment projects
Any jump in investment projects or any large-scale investment in an area, even if it has nothing to do with real estate is one of the signals that the area is about to become a hotbed of real estate activity and you had better get in there fast.
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3 Ways To Determine The Value Of An Apartment Building
There are three ways to determine the value of an apartment building:
- Replacement Cost Approach
- Sales Comparison Approach
- Income Approach
Replacement Cost Approach
The Replacement Cost Approach determines value by calculating how much it would cost to replace an existing structure. This approach is very time consuming to complete as you must obtain pricing for all materials (from 2×4’s to outlet covers) used in the construction of a property and then calculate replacement cost. Because of this, it is very rarely used.
Sales Comparison Approach
For single-family houses and 2 – 6 unit apartment buildings, the most common approach to determining value is the Sales Comparison Approach. This approach compares similar properties that have sold within the last six months, within a certain geographical radius from the subject property (usually no more than two miles, the closer the better) to determine value.
If you’re buying a 3-family apartment and a similar one on the next block oversold for $220,000, then your property will be valued around that area.
The Income Approach
For six units and more, you would use the Income Approach to determine the value of the property. This means that you would determine how much income the property is generating and determine its value based on that number.
There are several formulas that investors use to determine value, though one is more prevalent than others; that is the Cap Rate.
You’ll hear people talk about the “Cap Rate.” It’s what most investors use when comparing one property to another.
The Capitalization Rate is the rate at which the Net Operating Income (the income that is left over after all the expenses are taken out) repays the purchase price on an annual basis. Sounds technical, doesn’t it? Don’t let it scare you.
Cap Rate = Net Operating Income/Value (selling price)
How to Minimize Risk And Increase Profits in Real Estate Investing
Every real estate investor who wants to make money works under the same imperatives:
- The need to minimize the risks he is taking in terms of his own exposure.
- A certain amount of pressure to find ways to increase his profits.
Because working in real estate is all about being creative with the one resource you cannot get back:
- your time
- the amount of effort you put into each real estate purchase you make has to be closely linked to your expectations of making a profit from it
- or setting up a parallel income stream.
This is where the strategic vision that guides you comes in. Either you decide early on that you are going to focus on single-family dwellings, for instance, or go for multi-family dwellings.
The distinction here is an important one, hence the need for a ‘strategic vision’ in your planning.
Without that the decisions you are making are purely opportunistic ones and, as a result, you end up with the market running you instead of you running the market.
This is not to say that you preclude the one from the other.
Quite the contrary, the real estate investment market thrives on opportunities and when you find one passing it up because you are blindly following a by-the-book strategy makes about as much sense as leaping off a cliff because it’s fashionable to do so.
What a strategic vision does, however, allows you to decide when and why you should deviate from your chosen goal and it also enables you to assess what you can expect to gain by deviating from your game plan. In my career, for example, I have bought and sold single-family dwellings because I needed to make fast money for a bigger investment in multi-family dwellings.
While my focus and the thrust of my personal strategy have always been on the latter I have always known when to deviate and get involved in the former so that I can create more opportunities for myself.
It is exactly this approach that enables a focused real estate investor to make gains in everything he does every single working day.
How to formulate a working strategic vision, how to choose what’s right for you and how to stick to it is something I cover extensively in courses I give and in the boot camp weekends I run.
The thing is that without that strategic vision to guide you, you are left almost rudderless being blown about by the market conditions and unable to do much to actually affect your own destiny and that, is simply no way to run anything much less a lucrative real estate investment career.
Top 10 Features Of A Profitable Rental Property
- Neighborhood: The quality of the neighborhood in which you buy will influence the types of tenants you get & vacancy rates.
- Property Taxes: Property taxes are not uniform across an area and, as an investor planning to make money from rent, you want to be aware of how much you will be losing to them.
- Schools: If you're dealing with family-sized accommodations, you need a consider the quality of local schools.
- Crime: No one wants to live next door to the real-life Breaking Bad.
- Job Market: Locations with growing employment opportunities tend to attract more people – meaning more tenants.
- Amenities: Check the potential neighborhood for perks that attract renters.
- Future Development: Will you be competing with future apartments? Or will the neighborhood lose or gain amenities with future developments?
- Number of Listings and Vacancies: Too many vacancies in one area? That’s like neighborhood wentthe bad.
- Rents: Rental income will be the bread-and-butter of your rental property, so you need to know what the average rent in the area is.
- Natural Disasters: Insurance is a necessary evil, so how much do you need? Is your property in the flood zone, snow zone, or Apocalypse cone? (jk on that last one, don’t ask.)
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Are Apartments Really Commercial Properties?
If you ask any banker, he’ll tell you that anything over 4 units is considered a commercial property. If you ask any municipality regarding their trash pick up, you’ll get the same answer, ditto with insurance companies but are apartments really commercial properties?
When you think of commercial property, do you think of tall skyscrapers, office buildings, and warehouses…and possible large apartment complexes?
Well, apartments over 4 units are commercial properties but there is one big difference between apartments and offices. One space is occupied by residents and the other spaces are occupied by businesses.
That’s a big difference! Did you know the 3 out of 4 businesses go out of business after the first year? Ninety percent are out of business by year five! If you're renting to businesses, chances are, your turnover rate is going to be higher than a residential property and you should know that tenant turnover is your biggest expense in any multi-unit property.
People always need a roof over their heads If they move out of your place, they are moving into someone else’s (if you treat them with respect, they will stay longer!) Businesses just disappear and when they break the lease, it’s hard to get money out of a bankrupt company!
A lot of commercial properties rely on 3 or 4 big tenants. If they lose a tenant, they’ve lost 25% of the income. If the property cost you $1,000,000 and you lose 25% of your occupancy, you could be at a breakeven point or worse…upside down.
Statistics show that it takes an average of six months to fill commercial space. The main reason is that the pool of potential renters is not that big. In contrast, with a residential property, there is a vast pool of potential renters and the turnaround is one or two months instead of six.
For the same million dollars, you could get a 20 – 60 unit property (depending on where you invest), if you had 20 units and lost one, you’ve only lost 1/20th of your rent, you still have plenty of cash flow and more importantly, plenty of spendable income.
There is one other thing you should consider, when you’re attracting a commercial tenant for your property, you usually agree to do a “build-out” which means you change the space to make it conform to the business. This could cost you thousands of dollars.
With an apartment unit, the “make ready” usually consist of paint and carpet. If more is needed, it’s usually paid for from the previous tenants security deposit.
Yes, apartments over four units are considered commercial properties but as you can see, they are in a class by themselves when you compare risk versus reward.