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!