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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.
Specializing in helping clients build rental portfolio's, at Atlas Real Estate Group we like to change the heading to "...Hello to Building Long Term Wealth".
With a clear understanding the money is made when you buy, we use market knowledge to analyze pricing and project cash flow so that our valued clients make informed decisions going in.
From single family to large apartment buildings, our in-house experts have devised a formula to success over the last decade that works and look forward to serving you.
A mortgage loan professional starting in 1997 and a licensed real estate broker today, it should come as no surprise I am a huge proponent of real estate. Using lease options, land contracts and traditional financing, I have personally experienced the joys of home ownership, building (and losing) equity and, in inaugurating many into the club, have also shared this joy with others.
For many others, getting started is no easy undertaking, starting with financing, especially when it comes to using conventional, FHA/VA or similar institutional financing. The three C's of credit (character, capital and capacity, not necessarily in that order) requires would be home owners (investors) submit to an increasingly thorough examination of DTI, employment history, credit use...that read like lions, tigers and bears, right? Yes, not only can it be brutal, but also an exercise in futility for many, especially the non-owner occupied type.
Enter hard (and private) money, which mostly and sometimes only cares about the property...what it is or will be worth in the future in comparison to how much it's selling for today, that is. They don't call it hard money for nothing, as the cost and fees (double-digit interest rates when owner-occupied is in the low single digits, 4% of the loan amount, application fees) associated with this strategy can hurt yet, so can a vaccine when you tense up in anticipation. Right? But when in the hands of a learned professional, look away and, not only do you barely feel a thing, it's all better in no time, except for when you get sick from it, but I digress.
Take the median home, $240k in the Colorado Springs market. Being short-term financing (3 - 12 months, max), held for 12 months the total interest at 14% is $33,600. Add 4% in points and 10% in holding costs, and the cost is an admittedly hurtful $100,800 AKA a real kick in the pants. You might ask, what logical investor would want to pay $100,800 in fees and costs to acquire a $240,000 asset? One who understands the time value of money, that's who.
You'll need to look at this differently to understand. But first, let me take this opportunity to mention the most important factor here is the need to be working with a motivated (unemployed, bank, divorced, estate, probate) seller because it won't work otherwise. What hasn't been mentioned is this asset was purchased for say, 70 cents on the dollar ($156k) or less. I also left out the part that factors a shorter holding time, say 3 months or just enough time to rehab the property at a cost of about 10% of purchase price say, $16k. Effectively cutting time and fees by 75%, we now have a cost of funds equal to roughly $41,200 including rehab. Get the picture? We "just purchased" a $240,ooo asset for $156,000, added $41,200 in costs and fees and came up with an "investment" of $197k, theoretically netting $43,000 in three months. What's so hard about that? By the way, and where the intrinsic value is different from that of a non-owner occupied investor, any home owner who has looked at a truth in lending statement as they were called will say, "what a deal" as they look at the total interest paid during the life of a 30 year loan, even at 4%!
Of course, the process, including costs and fees has been simplified tremendously but the scenario is real and it works.
Interested in getting started? With our experience and relationship with lenders at every spectrum, including hard money financing at up to 100% of ARV (after repaired value), we are uniquely qualified to you invest in real estate. Just use the contact form in the lower right to get started.