Investors -In this global economic recession, real estate investors have been left with the ultimate question: Is it time to buy? Our answer, and what we feel is extremely accurate, is: It depends. There are a variety of factors when considering purchasing an investment property, some of which are:
1) What kind of return are your investments currently generating?
2) Is a substantial amount of your assets in real estate?
3) Is your goal to generate short term cash flow or increase long term equity?
4) What rate or return are you anticipating? Can it be delivered?
5) What are the downside risks? Can these be quantified?
6) What are the tax advantages/disadvantages?
The Advani Real Estate Group is the leading provider or sophisticated real estate consulting. This is an excellent tool for our investor clients as we are able to quantify the quality of any real estate investment and provide the correct set of questions and answers to make an informed decision. While most real estate agents will help you find an investment property, only the Advani Real Estate Group can help you find the right one.
An investment property, regardless of it’s type (residential, commercial, multi-family, retail, office space, etc.) has a number of ways which it can be valued, sometimes referred to as an appraisal or appraised (verb.) .In investments, these appraisal methods are extremely important and we have provided an in-depth analysis as to the major appraisal methods and even some tools to allow you to appraise a properties value to see if it may be considered a suitable investment property. Click on the following link to see how the different Valuation Methods can affect the type of investment you wish to make. (The Valuation for real property is significant in determining a variety of information in addition to its value. Through the valuation method, you can learn what a property may gross and net in rental income, whether it costs more to develop a specific piece of real estate than the asking price, or even what other buyers and sellers have agreed to on similar properties.
Capitalization Rate of Income (The Capitalization of Income approach is one of several different methods for valuing real property. Arguably, and deeply rooted in the principles of the Advani Real Estate Group, the CAP Rate Analysis is almost a necessity for every real estate transaction, especially on those properties that will be investment properties.
One of the distinct advantages of using the CAP Rate Analysis is that it is an apples to apples comparison of any 2 properties. Since it does not take into account mortgage debt, which may vary from property to property, the CAP rate analysis provides a clear picture of the return on an investment on a very basic level. Formula: CAP RATE = NET INCOME / LIST OR SALES PRICE
Example: A residential property has an asking price of $450,000, the property is located in a gated community and has an home owners association fee of $276 per month. The property is located in Mission Hills and has a tax rate of 1.25%, with an 8% overall vacancy factor. Nearby homes rent for about $3,200 per month and property is currently leased for $3,100 per month. To calculate the CAP Rate, you would plug in the numbers as follows:
Net Income = Gross Rent x Occupancy Factor- HOA Dues – Property Management Fees – Taxes – Insurance
Net Income = ($3,100 x 12) x (100% – 8%) – $276 – (8% x $3,100) – (1.25% x $450,000) – $2,000 (estimated)
Net Income = $37,200 x 92% – ($276 x 12) – ($248x 12) – $5,625 – $2,000
Net Income = $34,224 – $3,312 – $2,976 – $5,625 – $2,000 = $20,311
CAP RATE = $20,311 / $450,000 = 4.51%