What's Its Worth?
Understandably, clients want to know "What's it worth" or "what will it appraise for"? Where an experienced real estate practitioner will only answer, what a "ready, able and willing or ready, willing and able" buyer will pay, is the answer to "What's it worth" and "What will it appraise for" the same?
Worth is intrinsic or sentimental, which doesn't apply very well to a very technical appraisal. For example, where installing air conditioning will not give a dollar for dollar return, it's worth its weight in gold to someone from a hot or humid climate, even when the climate they are in now is not. On the other hand, the value of a 1,500 sq ft ranch with 3 beds, 2 baths, and a 2 car garage is reasonably determined.
Value and Price
Equal parts art and science, there are many moving parts to a real estate valuation. Amenities such as mountain views and landscaping are harder to price than a bedroom or garage space might be.
A real estate broker licensee may only give an opinion on price, which cannot be used for loan purposes and only an appraiser can decide value.
Multi-unit or Single Family?
Which are better, multi-unit or single family investments? Well, it depends. Where a multi-unit asset may offer more immediate cash flow, a single-family asset may appreciate better over time. Also, consider the amount of deployable cash. Priced at roughly $100k a unit and normally requiring 25% down from non-owner occupants, it will take something close to $110k to acquire a modestly priced fourplex, where the modestly priced single-family need is closer to $55k.
Finally, because multi-family units have that many more carpets, walls, water heaters, furnaces, etc., not to mention more turnover than single-family, there's a case for the relative stability and universal appeal of one over the other.
It Starts at Home
Often overlooked, financing options that offer as little as zero to as much as 5% down that exist for military, veterans, and non-veterans alike allow anyone to start building a real estate empire, right from home.
Once minimum occupancy requirements are met (two years recommended to avoid capital gains), a determined homeowner can amass a sizable portfolio in a 20 - 30-year investment career. Add the benefit of tenants paying each mortgage payment with rent and it's easy to see the ability real estate has to create wealth.
Is it Worth It?
With the risk and rewards of the various investment vehicles properly weighed, most of which do not offer the leverage that real estate does and none that offer the same intrinsic value, it's no wonder there's more wealth made in real estate than other market segments.
Consider this. We decide to create future wealth and start with a $250,000 investment. After comparing stocks, bonds, mutual funds, REITs and physical real estate, we find only one that allows us to control a $250,000 asset with as little as $17,500, real estate. Given a modest rate of appreciation of 5%, the asset may very well have a value of $663,324 after 20 years, while someone else has dutifully paid your mortgage in the form of rent.
Destination: Long-Term Wealth
In it for the long haul, we dutifully take care of our investment while taking advantage of principal reduction, appreciation, and depreciation for the scheduled twenty years. Add $360,000 in payments made over time to the initial investment of $17,500 and, for a total of $378,000 we now have at least one asset that can be used to fund retirement, pay for college education or whatever else is important. Can you imagine if this process is repeated once every few years, each acquisition becoming your primary residence and the last one a rental? How will your balance sheet look after slowly adding five, ten of these in your portfolio?
Not to mention, the further you can buy the real estate from its market value, the easier it is to finance. For example, what if you learned there was a way to borrow the money to finance and rehab real estate with no money out-of-pocket?
What do you think? Is it worth it?
Norberto Villanueva is a licensed REALTOR and investment specialist with Atlas Real Estate Group, a real estate investment and brokerage focused on financial autonomy. In addition, he brokers private and institutional capital for non-owner occupants and is an active real estate investor.
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Meeting about an assisted living facility we have under contract with a potential investor who has "8 million" currently earning a "guaranteed 5%", the inevitable subject of overvaluation came up, to which my response was, not quite.
Buoyed by many positive trends, such as the nation's first Olympic museum, projections of our being the nation's cyber security capital, expansion of direct flights to and from the Colorado Springs airport and more, there's also this:
Historically just a few years behind the Denver MSA, which may have plateaued as of this writing, it seems the Colorado Springs market has up to 5 years of upswing left.
Specializing in locating, analyzing, acquiring and management of quality rental assets, we are standing by and have significant experience helping investors build long-term wealth with real estate. Please contact us at 866-6REALTY or 303-242-2980 for the personalized attention you deserve.
No one has a crystal ball. However, to "make your money when you buy", real estate investment analysis requires a careful look at variables, perhaps most important being projected gross income, at the time of purchase.
Net Operating Income
The amount left over after subtracting expenses from gross income, Net Operating Income (NOI) is crucial. Using a formula known as IRV with the income capitalization approach, NOI helps us to find value as follows:
Net operating income (I) ÷ capitalization rate (R) = value (V)
To find NOI, use income and expense statements for the subject and similar properties to first estimate the potential gross income, then subtract vacancy and collection loss. From this, estimate expenses and subtract them from the effective gross income.
Cap (Capitalization) Rate
Similar to a rate of return, the capitalization rate is the percentage investors hope to get from an investment. With as little information as recent sales data for comparable properties, the formula used to find Cap Rate is as follows:
Net operating income (I) ÷ Sales price (V) = Cap rate (R)
Together with expert market knowledge, this analysis helps us make reasonable projections that help our clients make informed purchase decisions every time.
Reach out to us for a consultation, we look forward to serving you.