Condition, area, cap rate and Cash-on-Cash (CCR) will be primary considerations for the first time real estate investor.

Risk Tolerance

As a first time investor, you will most likely want to take less risk, so providing you with well-constructed property options that have low vacancy rates in desirable areas may provide you with smaller income margins. Because these properties in more desirable areas, they may cost more. As an investment agent specialist, I have the experience needed to remain diligent in finding good opportunitieis in high demand areas. The better the property, the higher the returns.. What should be called out here, is that getting good deals in high demand areas requires speed. The better prepared the first time investor is in terms of expectations and execution, the faster I can act on those “once in a lifetime” deals.

Property Considerations

Options to take under consideration when looking for properties include:

• Tenant Restrictions
• Condos/HOA with no lease restrictions or seasoning
• Limited or very low association fees
• application and/or approval interviews
• proximity to parks, schools, shopping, public transportation, major employer centers
• property condition and updates
• Property maintenance fees (I.E. pool, hot tub, extensive “green” space requiring expert care.

As part of the representation I offer first time investors, it is my mission to keep in touch, particularly after the purchase. Constant follow-up makes sure the investment continues to work for the investor as anticipated, and assistance will be offered as required. First time investors should know that owning an investment property comes with a learning curve, and it is my duty to guide you through the first time investment process. in order to ensure success.

If you have thought about investment real estate as part of your retirment or college savings strategy, please contact me. I can work with you to ensure you make the decision that is right for you, and work to build generational wealth for you and your family.

Oftentimes is nearly impossible to secure a loan for the extensive repairs on a property. If the repairs required are extensive and require hefty amounts of cash to complete, it is difficult if not impossible for the average buyer to close. Also, conventional financing specifically prohibits a buyer from closing on a home that needs repairs. Through the 203k program, and FHA –approved lenders offers loans for purchasing and rehabilitation the properties, and with increased FHA loan limits – a 203k loan up to $729,750 in certain areas of the country — this is no longer an exclusively lower-income loan product.

Eligibility

The following is a list of criteria that must be met in order to qualify for the FHA 203k program. To qualify, a property must:

• Be a one to four unit family dwelling
• Townhouse or condo with less than four units in the building
• Mixed use store front (additional regulation required)
• Be at least one year old (no new construction)
• have the appropriate number of units according to local zoning provisions.
• Be attached to the existing dwelling (if newly constructed)
• Maximum FHA mortgage amount can not exceed 100% of the After Repaired Value (ARV)

 The property cannot be:

• A cooperative unit, but can be mixed use (depending on what percentage is used for commercial purposes), and can be converted into more or fewer dwellings (between one and four)
• An investment property (due to an ongoing moratorium)
• A condo or townhouse with more than 4 units per building.

Benefits and Drawbacks

Benefits

• Helps with properties otherwise difficult to finance
• Funds for rehabilitation included.

Drawbacks

• Time limits
• Plans must be approved by HUD
• Funds in escrow
• Currently unavailable to investors

There is a multi-step process for acquiring a property with a 203k rehabilitation loan. It starts with identifying the property and writing the sales contract, closing, rehabbing and ultimately finishing the work and passing a  HUD inspection and approval.

For more information regarding 203k loans and investment properties, contact me. I’d be more than happy to explain the process in greater detail and help you understand how real estate makes sense for you.

Joe Capote, expert in real estate investments and properties.

1. Rising Rents. According to NAR chief economist Lawrence Yun, rents are expected to rise 7% or more this year. This is due to the influx of renters into the marketplace, thanks to distressed properties.
2. Attractive Sales Prices. Nationwide, home prices are lower than they have been in the past twenty years. This has resulted in excellent cash flow and cash-on-cash return for real estate investors.
3. Real Estate is Appreciating. Real estate prices have bottomed out. In fact, there has been appreciation in price in certain areas. The amount of inventory is low, but the amount of buyers is stable and increasing. This has resulted in greater competition for homes and sales prices are increasing as a result.
4. Distressed Properties. Distresses properties, such as short sales and REO’s, continue to make up a large percentage of the housing inventory. These properties can make good investments, as cash heavy investors get first crack at well priced foreclosures and short sales.
5. Increased Lending. Lenders have started to lend money again. Leverage is a key component of real estate investing and lenders are making loans. The days of the no-cash down, no income verification may be over, but loans are being made on properties that produce good income.
6. Good Returns. Investing at any level is about getting good returns. Median home prices have consistently beaten the S&P 500 average, even with the recession. Cash flow and tax benefits have given real estate investors a better return than stocks, bonds, CD’s and mutual funds.

 Joe Capote specializes in real estate investments and properties. He can be reached at jcapote@apr.com.

Emotion vs. Logic

Pitfall: Buying on emotion, not math.

Solution: Always to the math before buying, and have a definition and expectation of minimum returns.

Home buying as an investment should be solely based on logic. The investor should be reminded that it is not them living in the house, but someone else.  A property, if the math is good, will always be the right property for someone. Investors who buy on feeling are speculators, not investors.

Dealitis

Pitfall: Thinking that every property is a good deal, and that buying properties Just Because they are a good deal.

Solution: Know how to increase returns and have an exit strategy.

Just because a property is inexpensive does not mean it is bound to collect handsome returns. If the area value is low, the house is unrentable or the repairs are prohibitive, the property is not a good deal, no matter what the price.

Analysis Paralysis

Pitfall: Spending too much time analyzing and not enough time acting.

Solution: know that offers are not binding, set expectations and find a property that meets your needs and close on that property.

Investors need to be reminded that there should always be time to back out of a transaction with a properly written contract if it doesn’t seem right. This is what inspection periods are for. Too much hesitation can lead to missed opportunities.

Overpaying

Pitfall: Unwittingly spending too much time on a property.

Solution: Always know the cap rate and cash-on-cash return, along with local market values.

The cap rate lets investors know the expected return on the property relative to the value of the property. Properly evaluating the cap rate and cash-on-cash return will help ensure a good investment purchase.

Overleveraging

Pitfall: using too much leverage when buying.

Solution: Avoid risky loans and never buy for appreciation. Always purchase for cash flow; appreciation is a bonus.

Overleveraging will decrease cash flow and substantially increase interest payments over time. Risky loans cannot always be refinanced. Some markets don’t always appreciate. Take advantage of leverage, but beware of overleveraging. I can definitely help you determine the amount of leverage that is right for you!

Management Problems

Pitfall: buying a property that is difficult to manage.

Solution: Be aware of limitations and regulations.

The last thing any investor wants is to lose money managing an investment. Knowing the limitations of a property, neighborhood, and investors can prevent too much money diverting from NOI to operating expenses. It’s easy to get in over one’s head, and proper management of the property is a key aspect of a successful investment. I will work to help you understand your management options during the initial consultation to determine what is right for you.

Not using an Agent’s Investment Team

Pitfall: Getting advice from the agent only.

Solution: Work only with agents who have a qualified investment team.

As a Certified investment Agent specialist, I certainly have the knowledge and vocabulary to communicate with real estate investors of all types. However, the professionals on my investment team are professionals for a reason. They have years of education and experience under their belts towards their areas of expertise. Beware of any agent who does not have an investment team in place, or does not want to refer you to the proper professionals for advice.

Contact Me today for a consultation on your investment strategies, or sign up for one of my upcoming investment seminars!

Example:

1. A property generates $1000 in rent.
2. Expenses for the property are $400.
3. The net operating income is $600.

$1,000 – $400 = $600 (net operating income).

$600 (NOI) / $400 (Expenses) = 1.5

The Debt Service Ratio, in this case, is 1.5.

This means that for every $1 spent on a mortgage payment, $1.50 is being generated in post-expense cash flow.

This example is extremely simplistic. It assumes that the mortgage payment includes taxes and insurance, two monthly costs that every investor must incur. Let’s take a look at a much more realistic calculation for San Mateo County real estate.

This San Bruno Park home is on the market for $315,000. It is a 2br/2ba home that will command (as of today’s market rents) $2,200 per month in rent.

Assume a down payment of 50%. That leaves a loan amount of $157,500. At the current rates of 4.625% for non-owner occupied financing, the mortgage payment (principal and interest) is $809.55. Taxes are 1.255 of the purchase price, or a monthly cost of $398. Let’s assume $100 per month in insurance, and another $50 for maintenance.

1. Property generates $2200 in rent
2. Expenses for the property are 1357.55 (Principal, interest, taxes, insurance, other expenses).
3. Net operating income is $842.45.

$842.45 (NOI) / $1357.55 (PITI + expenses) = .62

The Debt Service Ratio, in this case, is .62.

So in this example, every dollar spend on PITI/expenses generates $.62 cents in post-expense cash flow.

San Mateo County real estate investments are what I do. If you would like to understand more about how real estate investing plays a part in your retirement portfolio, contact me.

As a Certified Investment Agent Specialist, I understand that investing in real estate is one possible way to increase the rate of return on a smaller investment for their retirement through leverage and cash flow.  Increased cash flow for savings is one method of increasing a retirment fund. Leveraging retirment funds for greater return on invesment is another.

Another option for retirment investing in real estate is the self-directed IRA (SDIRA). A SDIRA allows investors to specifically choose the types of investments for their retirment, including real estate. The benefit of the SDIRA is having control over your financial future, AND being able to invest with tax deferred income.

The main difference between a tradtional IRA and a SD IRA is that while both are managed by the investor, only the SD IRA gives the investor the full range of investment choices allowed by the IRS, including real estate.

Here are the simple, straightforward facts about SD IRAs:

• A SD IRA is an individual retirement account through which yuo make the investment decisions.
• You can invest in anything using an SD IRA, except life insurance, S-corporations and collectibles.
• You can roll over funds from your ther retirment accounts into an SD IRA.
• You can use your SD IRA to purchase real estate.
• The SD IRA acts as a trust when it purchases real estate: all funds must go through the SD IRA.
• A SD IRA usually protects your retirment funds as a traditional IRA would.
• Profits from properties purchases bya an SD IRA ususally have the same exemptions a regular IRA has.
• The same rules gnerally apply to SD IRAs as to regular IRAs.
• There are restrictions to buying real estate with a SD IRA

Is the SD IRA a possible way for investors to leverage retirement savings to invest in real estate? Yes. Am I advising anybody to run out and roll over all your funds into an SD IRA? No, I cannot advise anybody to do that.

Here comes the disclaimer: This article is intended to explain what a SD IRA is, but I do not give specific advice as to whether or not investors should use their SD IRA’s to purchase real estate, nor am I advising investors as to how to set up SD IRAs using other funds. It is important to remember that I am a real estate agent, and not a financial advisor. I strongly encourage you seek professional advice from an accountant or an SD IRA representative for more specific information as to how an SD IRA might benefit you.

Here is a good resource on SD IRA administration.

Real estate investments in San Mateo County is what I do. If you would like to learn more or talk to a SD IRA representative that is part of my team, Contact me for more information.

The CCR is calculated by taking the cash flow generated by a property over a year and dividing it by the initial investment (down payment plus closing costs).

Example:

1. An investor puts $20,000 on a property, plus $3000 in closing costs.
2. The total initial investment is $23,000

$20,000 + $3000 = $23,000

1. After expenses and mortgage payments, the property cash flows for $4000 for the year.

$14,000 (rent) – $6000 (mortgage) – $4000 (Expenses) = $4000 (Cash Flow)

The cash-on-cash return is 17.4%

$4000/$23,000 = .174 (17.4%)

This figure let’s the investor know how well the investment is performing.

San Mateo County / San Francisco real estate investments is what I do. Contact me for more information or to receive my weekly “Hot Deals” sheet.

A lot has been made out of short sales over the past couple years. With the federal government’s implementation of the HAFA (Home Affordable Foreclosure Alternatives) program, short sales have become more streamlined, adhering to a federally regulated process, procedures and timeline. This has made them easier to close.

Sellers and buyers are more familiar with the concepts of the Short Sale, perceiving the short sale as less a less risky and better understood transaction.

And investors have seen them as good options for possible long and short-term investments. First time and rehab/resell investors have seen short sales as a boon to their investment portfolios, identifying them as good opportunities and moving on them.

Most primary residence homebuyers in today’s market are looking for perfection, or as close to it as possible. Falling real estate prices and good inventory have given qualified and motivated homebuyers the ability to pick and choose the homes in the best condition with best upgrades at a fair price. Homebuyers are willing to entertain the idea of a short sale, given they are getting better value for their dollar than they would in a regular sale.

For the rehab/resell investor, a short sale can present an opportunity that wouldn’t otherwise be seen on other markets. For example, the majority of short sales require some level of work in order to prepare the house for market for the resell. This allows the rehab/resell investor a good opportunity to find a home needing rehab at a good price. It also means the competition to buy the home is low.

The first time investor may find a short sale in good condition, requiring only minimal work. Depending on the neighborhood, rental market and other factors, short sales offer a good way avenue for first time investors to add a real estate investment to their overall portfolio while finding good value on the market.

As with all real estate investments, the overall investment package must make sense. For the first time investor who is planning on holding on to the property, the market rent and cash flow must justify the initial investments in acquisition and rehabilitation of the property. The investor needs to understand how long it will take to recoup the initial upfront cost and be comfortable with it.

For the rehab/resell investor, the acquisition costs and the rehabilitation costs are a key element to determining if the investment is a good choice. Both acquisition and rehabilitation must be factored into the purchase price. Also, the rehab/resell investor must understand the current market enough to know what the home will sell for after rehabilitation. Finally, the investor must be able to factor in the off market costs – how much is costs, per day, to own the property while renovating and selling. All these factors weigh heavily into the choice, as the investors generally would like to see a 15% return at the end of the transaction.

There are downsides to short sales. First, there is nothing short about a short sale. A short sale can add an additional 45-90 days to the transaction, depending on the lenders, any liens, and whether or not it qualifies for government programs such as HAFA. Secondly, short sale transactions are more likely to fall though, as they require lender and lienholder approval. The offer price of the short sale may not be the actual sale price, when all is said and done.

Short sales can be a good opportunity for real estate investors. But,with all investment packages, must make sense for the investor in terms of price, initial cost and return.

Are you interested in learning more about San Mateo County /San Francisco real estate and investments?  Contact me for more information.

It’s important for all potential and current investors to know the benefits of real estate over other investments.

Stocks

Stocks are similar to real estate in that they both appreciate in value, and can pay dividends (called cash flow in real estate). However, the stock market can be a volatile asset because of its daily appreciation and depreciation of values.

The stock market’s volatility can be seen with its performance in the last decade. At the beginning of 2000, the S&P index was at 1469.25. By July of 2000, the index had dropped to 1027.37. That is a decrease of 30.08%.

As far as cash flow, some stocks do pay dividends. Stocks in the S&P index have averages a 1,82% yield since 2000. Real estate offers a distinct advantage with cash flow because the investor is able to make decisions. impacting net income. With stocks, the operations decisions affecting cash flow are delegated to the company officers, whereas with the real estate investor is in control.

Bonds

Bonds function differently than stocks. Rates of return on bonds are fixed because a bond is not a stake in a company like stock. Bonds function as a loan a company will pay back over time with interest. While bonds can be more stable than stocks, they are not liquid, they do not appreciate in value, and the returns are lower compared to other assets, such as real estate. In the last few years, the 10-year Treasury Note, the most frequently quoted government bond, has averaged a 4.46% return.

Mutual Funds

A mutual fund is money pooled together and invested into a variety of asset types, such as stocks, bonds, other mutual funds, and commodities such as precious metals. Placing money in a mutual fund is essentially giving one’s investment decisions over to a professional money manager. Often times, professional money management underperform the general market. The value of a mutual fund’s shares appreciates and depreciates in value; however, cash flow is not paid to the investor.

Certificates of Deposit

Certificates of Deposit, or CD’s, are similar to savings accounts in that they are insured and thus virtually risk free; they are ‘money in the bank’. However, the differ from savings accounts in that the CD has a specific, fixed term (often three months six months or one to five years) and a typically fixed interest rate. CDs are intended to be held to maturity, at which time the money may be withdrawn together with the accrued interest. Unlike real estate, CD’s do not appreciate in value, and they’ve had a historical average return of 3.32% in the last decade.

Real Estate

So how does real estate compare to the other investment vehicles and asset types?

The average sales price for a single-family residence at the beginning of 2000 was $138,000 according to the National Association of Realtors. Over the last 10 years, the average sales price for a single family residence has risen to $179,600. Despite the recent housing crash, the value of the initial investment added $41,600 in value – a 30.14% INCREASE. This means that $100,000 invested in real estate in 2000 would be worth $130,100 today.

It is important to understand that the value of a property is not the only source of income from real estate investments. The cash flow provided by rent is also part of the real estate equation.

If you were to purchase an income property all cash and charged average rent (base on the Censue Bureau averages), the cash flow generated would be $77,755. this means the total value of that initial $100,000 investment in real estate today is $207,855 – a total return of 200.8% – compared to the negative 30.08% return from the stock investment over the same period.

The housing crash has given many investors pause of the last few years, and with good reason. However real estate is a continues to be a key to any balanced investment portfolio. Evaluating real estate investments in San Mateo and San Francisco counties for investors is what I do. Contact me today for more information.

• Advertising
• Cleaning and maintenance
• Commissions
• Depreciation
• Employers, contractors, non-employed staff (all wages related to rental properties, including property managers, repairmen, etc.)
• Insurance (Including fire, flood, landlord liability, and employee health)
• Interest (including mortgage interest, interest on loans used for improvements, etc.)
• Legal Fees
• Local transportation expenses
• Long distance travel (including driving, airfare, hotels and meal costs related to a rental activity)
• Loss (due to destruction, theft, etc)
• Professional services (including attorneys, accountants, real estate advisors, etc.)
• Repairs
• Utilities

You are able to deduct these expenses in the year you pay them. For the most current information on expenses for tax deductions, go to www.irs.gov or consult a tax accountant.

You can deduct the cost of repairs to your rental property; however, you CANNOT deduct improvments. Improvements add to the value of the property and increase the tax basis. They are not recovered by taking depreciation. Consult your tax professional for more information.

For more information regarding real estate as an investment in San Mateo/San Francisco counties, contact me today!

Joe Capote is a real estate professional and not a certified accountant or tax professional. The information in this article was gathered using the following resources:
http://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html
http://www.irs.gov/publications/p527/ch01.html#en_US_pub-link1000218984
http://www.irs.gov/businesses/small/industries/article/0,,id=98921,00.html
Joe Capote makes no warranties, express or implied, from this information. Each individual tax situation is different, and all buyers/investors should consult with a certified tax professional or CPA to assess their particular tax situation.