Posted by camgere on February 28, 2011 at 20:45:40:
So one student was awake during my lecture I should have mentioned that NOI includes all expenses except mortgage payments. You may already know this, but the lurkers may not.
In trying to come up with a good CAP given a mortgage rate, the most ambitious case is 0% downpayment.
What is break even cash flow with 0% downpayment?
This occurs when you use all the NOI for the mortgage payment. So NOI = Annual Loan Amount. Starting Loan Principle = (Full) Price. CAP = NOI/Price = ALM/SLP
Of course if you are above this CAP rate you cash flow positive with 100% financing. Whenever I see a 10% CAP rate, or more, where 30 year fixed rate loans are available at 7% (ALM/SLP = 7.98%) it is kind of like free money (if you included property management in the expenses or are willing to do it yourself).
Hi, I live with my husband and retired mother-in-law. We
donāt have aspirations of being self employed investors.
However, Iād like to start something on a small scale.
I was thinking about buying a four-plex. If we can buy it
so that it pays for itself and maybe a little extra cash, is
it worth the headache and hard work?
We would be able to pay if things break and ride out
vacancies and make sure we screen and wait for the best
tenants possible. Do I need a course for this, or can I
just use some general knowledge and common sense?
Re: Should I play real estate investor? - Posted by Andrew
Posted by Andrew on February 17, 2011 at 14:57:41:
Maria, starting out with a multi-unit is an invitation to disaster. Too hands on for the new investor.
Start with options and lease options. Safe and fairly easy. Look at Carbonareās site over at The Naked Investor.
Re: Should I play real estate investor? - Posted by Phil-TX
Posted by Phil-TX on February 17, 2011 at 14:12:29:
Maria,
Try to find an Apartment Owners Association near you.
If there is one, it could be a great opportunity to
become a member and learn the local customs, laws etc.
at a low cost before you jump in.
Re: Should I play real estate investor? - Posted by camgere
Posted by camgere on February 17, 2011 at 12:34:12:
No I donāt think you need a course. Experience will teach you what is important and not important. Tenant selection is critical. There are hundreds of potential problems, but you will have to use your common sense if there are any actual problems. Some people are OK with risk and some arenāt. Real Estate investing is risky.
Learn to calculate CAP rate (CAP = NOI/Price). NOI is Net Operating Income. This includes all expenses and income (usually just rent factored for vacancy). Technically you arenāt supposed to put capitalized expenses in that add to your basis, but for ease of calculation I throw it in anyway.
If your CAP rate is above the Annual Loan Amount divided by the Starting Loan Principle you are cash flow positive and can use any (upto infinity) leverage.
E.g. 20 year fixed rate loan at 7%, ALM/SLP = 9.3%, so this would be a great CAP rate. Of course, higher is better (but usually has more risk).
CAP rate is often inverted to figure out price.
Price = NOI/CAP
Buyers want to see a high CAP rate that lowers Price. Sellers want to see a low CAP rate that raises price.
Of course, whole books are written on real estate investing.
General knowledge and common sense is a recipe for disaster. You better take some time to learn something about this business before diving into it. Real estate investing is not something you dabble in, nor just decide to go ābuy a propertyā. Like any other business it must be taken seriously. Being unprepared which it sounds like you are at this state is not good. Take some time to learn the business, read some books from your local library, invest some time and/or money in own knowledge first.
This is good. I will definitely follow the advice of
analyzing the property for cap rate and cash flow. I
found a lot more info about it on the net. I will make
out some sheets and put some honest thought into
expenses. I have relatives who own property and they
never sound like they are doing very well and are
always āworkingā with it. Iām not afraid of āworkingā
but I want to try to be as smart as a lay person can.
Thanks for all your help.
I should have mentioned that NOI includes all expenses except mortgage payments. You may already know this, but the lurkers may not.