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Real Estate Investment

by Steve Westmark
Video Video

STEVE:  Hi.  This is Steve Westmark.  Thanks again for watching my video blog for this week.  This week I’m going to be beginning a series on real estate investment.  In the fall of 2010, I took coursework called the Certified Investor Agent Specialist.  Over the years, I’ve taking CCIM coursework and CRS coursework that’s helped me in understanding investment.  But this coursework I believe will help you in understanding the simplicity of buying real estate as an investment.

There are five types of real estate investors.  First, there’s the first-time home investor where you have never owned or rented a house before in your lifetime.  The second is a move-up home investor where maybe you’re living in a townhouse or a single-family home that would be a great unit as an investment and then you can move on to a second house.  The third one is a portfolio investor, and that’s the type of person that may buy an investment house once every year or two or three and is looking at creating a portfolio.

The fourth one is a performance investor, and that’s the type that goes out and buys a lot of real estate property, maybe buying one or two a year even and is looking for a performance and looking for real estate as its main investment.  And the fifth type of investor is the rehab and resale investor where they go and buy a distressed property, fix it up, and then sell it for profit.  I’m going to show you four different things that will help you in buying your first investment property or what other investors look at.

The first simple one is called the 1% rule.  The 1% rule is you take the purchase price of the property you buy and take 1% to determine can the property make money.  So for instance, in this illustration, if you bought a $100,000 property and it can make 1% or $1,000 a month rent, I can show you how it will be a cash flow property and make money for you.  The second one that you look at is what’s called a cap rate.  As you look at this chart, it shows that you take the gross rent minus the gross expense, which will give you a number, divided by the purchase cost, which equals a cap rate.

So if you were renting for $1,000 a month a property, that equals $12,000 in a year, and your expenses of a real property I looked at is $5,000.  It leaves you with a cash flow of $7,000.  And for this $100,000 property, it means a 7% cap rate.  If you can buy properties at a cap rate of 7% or more, you can make money buying real estate.  The third one is the debt service ratio.  The debt service ratio is taking the gross rent minus the gross expense divided by the mortgage payment and that gives you the debt service ratio.  So if you had rent of $12,000, expenses of $5,000 for $7,000 on a 20% down mortgage, the payment would be annually about $5,760.

That turns out to be a debt ratio of 1.22.  Any time you can have a debt ratio of 1.2 or better, the property is a good investment.  The last one I’m going to talk to you about is cash flow, and I really do believe though there’s three things that you look in real estate.  One is depreciation and what it can do for sheltering your own personal income.  Second, appreciation of property.  But what I really want investors to look at is will this property cash flow even if I didn’t have a tax write-off and even if I didn’t have appreciation.

And so the importance here is to take the cash flow against the total cash investment to give you the cash on cash return.  And so I took one illustration where you had the $7,000 remember of cash flow and if you paid cash for the property of $100,000, you’d have a 7% return.  The second illustration I have here is where you put 20% down.  Your cash flow is then reduced to $1,240, but your down payment was only $20,000.  So you have a 6% cash return on your money.

All four of these things can help you in maximizing your money in today’s marketplace.  In the year 2010, we had a million foreclosures nationwide, and they expect 1.1 in 2011.  There are great real estate opportunities out there.  I know of 30 or 40 right now that can make you money in real estate where you can buy below market and have cash flow.  I look forward in the coming weeks to introduce you to different people that can help you understand more about real estate investment.  Have a great day!

Proper Home Repairs Before Selling Your Home

by Steve Westmark
Video Video

STEVE:  Welcome!  Steve Westmark. Thanks for watching my video blog again this week.  I’ve decided to bring in a professional in the area of home repairs, and it’s Tim Oberg with Homecraft Services.  So welcome, Tim.

TIM:  Good morning, Steve.  It’s good to be here.

STEVE:  Great.  The vast majority of my sellers when I meet with them about putting their home on the market I recommend they get a home inspection.  So Tim, when inspections come back to sellers, what do you help them with in repairs on their inspections?

TIM:  Well, Steve, when an inspector presents a homeowner with an inspection list, normally, the homeowner will go through and say well, a lot of these little items I can take care of.  There’s a light bulb out here.  There’s maybe a little bit of minor painting needs to be done in this area.  And typically there may be a handful of things that they do not want to do on their own, and a lot of times they’ll call in a contractor like myself to come in and say we need to check for this plumbing leak or we need to repair some stained ceilings or something like that.

A lot of potential homebuyers like to come in and they’ll look around and if they see some problems with the ceilings in particular, it can indicate a problem with leaking above in a bathroom or something upstairs, and that can be a quick turnoff.  So some of those things need to be addressed.  A lot of homeowners aren’t comfortable dealing with that much of a repair, scraping, filling, sanding a ceiling, that kind of thing.  So that’s where we can help them out in a lot of those different areas.

STEVE:  Well, sometimes, Tim, also we run into lots of different things, and I know I’ve had you do multiple types of things.  What are some of the things that you do to help sellers with their properties getting them prepared?

TIM:  Well, Steve, a lot of times we see that it’s the details that count.  You come in and there’s some trim that needs to be finished.  I’ve done a lot of that.  Kitchen cabinets.  Kitchen is a real important area.  So a kitchen cabinet door faces sometimes can be redone.  Countertops, you don’t necessarily have to go with a full new marble countertop or full kitchen remodel.  But just addressing the details. 

I did one recently here where just the wooden cabinet faces needed to be restained and retouched up.  Give them a whole new look and then repaint some trim around a window that had flaked off and it just addressed those details.  It’s the details that count.  The other thing, windows can fog up.  You don’t need to replace the whole window.

Being a licensed contractor, I work with a number of subs so I can kind of be a one-stop shop.  I can have my glass guy come in and just replace just the glass panel that is fogged up and you get a brand new clean window without having to tear out and replace a whole window for a thousand dollars or more.  So that helps the homeowners quite a bit.

STEVE:  Many times, as I work with buyers walking through properties, no matter where they’re at, they’ll horriblize an issue.  And what I find by bringing Tim in to work on these issues is he takes the problem that seems so big and brings it down to a smaller solution that can save money.  So with all that in mind, Tim, what would you do that would be the three biggest returns on investments that you could help a client with off the top of your head?

TIM:  Well, I would say, Steve, that the top three or four would be investing in your kitchen.  It’s the first room that a lot of buyers will look at when they come in.  Some of the details like we talked about before—kitchens, bathrooms are another good place where you can get most if not maybe sometimes more of your investment back in what you put into touching up or remodeling your kitchen or bathroom .

The other big plus you can gain some value is maybe you’ve got a den or an office room in your basement that you could convert to another bedroom.  You could put an egress window in.  All of a sudden, you’ve added another bedroom without major add-on to the house.  So that’s a good way to gain some value and make it more inviting to a potential buyer.

STEVE:  Well, Tim, thanks for coming in today.  It’s great to have a guy on my team that can help my sellers and even my buyers as they have inspections.  And Tim, thanks so much for coming today.

TIM:  It’s been great to be here.  Thanks, Steve.

Video Video

STEVE:  Steve Westmark.  Thanks again for watching my video blog this week.  I’ve brought in another real estate professional this week, and her name is Lori Weaver, and she’s with Title Smart.  And she does the vast majority of my closings.  Welcome, Lori 

LORI:  Thank you, Steve for having me.

STEVE:  Well, Lori, in the transaction there’s two people that are involved.  One is the seller and one is the buyer.  And starting with the buyer, what are the things that you need to deal with to help the buyer through the transaction?

LORI:  Steve, that’s a really great question.  It’s always exciting buying a new home for any buyer, whether it’s your first home or a second, third, fourth home.  The best thing that I can say for that is to ensure you free and clear title to that property.  So we work closely with Steve as well as your loan officer to ensure that all your costs are disclosed to you as well as making sure all items are cleared from the title in order to present you with a clear title to your home.

 STEVE:  And I know in the area of dealing with sellers the biggest problem I do have to deal with and have you help me with is the area of the seller.  What are the things you help the seller with through the process of getting their home closed?

 LORI:  Well, Steve, with the sellers, again, we’re still trying to make sure that title is clear for the buyer.  Sometimes I also represent the buyer, but in the buyer’s title company we’ll provide the title work.  And that will show me what I need to clear off and provide the buyer the free and clear title.  So I work with the seller to get their payoff information, maybe help clear old mortgages, anything that might show up on title work that would prevent the closing, we work with the seller to make sure that’s done and expedite closing.

 STEVE:  A couple of new areas in our marketplace over the last three or four years is the areas of bank owned and short sales.  So Lori, what things do you do to help people through those types of transactions?

 LORI:  Steve, in today’s market, as you said, that is a really, really great question.  And I do actually do a lot of work with clients who are in a short sale situation or perhaps purchasing a bank-owned property.  They do require a little bit more detail work.  There are trying times and there’s patience required, and we work really closely with both buyers and sellers in that instance to make sure everything goes according to plan. 

 STEVE:  Well, Lori, thanks so much for coming in today, and I couldn’t do what I do in real estate if it wasn’t for Lori helping me getting through the transactions.  So thanks so much for coming in today, Lori.

LORI:  Thank you so much, Steve, for having me.

 

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Photo of The Steve Westmark Team Real Estate
The Steve Westmark Team
RE/MAX Advantage Plus
14451 Highway 7 Suite 100
Minnetonka MN 55345
612-978-7777
877-SOLDING
Fax: 952-241-1600