How To Invest In Real Estate

With all the recent positive press for Fort Collins about being one of the best places to live and invest, I thought I’d share some valuable points every real estate investor should know. 

1) Do your homework.  Make sure to perform a thorough due diligence including but not limited to: the last 3 years tax statements for property income and expenses, utility bills, current leases, zoning, vacancy rates, target market, and appreciation rates.

2) Estimate the value of the income property.  From the net operating income (NOI) found in due diligence, use a capitalization rate found from comparable properties to determine the value.  NOI/Cap Rate = Value; NOI = Income – expenses.

3) Determine your cash flow.  Cash flow = NOI – debt service.

4) Determine your tax shelter benefit which will either be an income gain or loss.  Income gain results in a tax obligation but an income loss results in a tax savings.  Income (gain or loss) = NOI – Interest paid on mortgage – depreciation.

5)  Calculate the equity build up.  I typically evaluate the first 10 years to determine the amount of equity.  Equity is simply the difference between the purchase price and what is owed on the property.

6)  Calculate the appreciation.  I will look at various sources for projections - the Fort Collins projection is 28% over the next 5 years so using 5% is probably a realistic value to use.  Appreciation is the difference between the purchase price and what the property can sell for.

7)  Determine the return on your investment.  This is your cash on cash return or return on investment (ROI) = Annual cash flow/Cash invested.

These are just a handful of the more important areas that need to be addressed before making an offer on any real estate investment whether it is residential, commercial or land.

And just as important as the above numbers are to your investment decision, an exit strategy should be put in place BEFORE you purchase a property.

I can provide a very detailed analysis of any property and I am willing to meet and discuss how to properly invest in real estate so feel free to contact me with any questions or analysis.

To borrow a phrase from one of my investor peers/mentors: If the property is not worth more the day after you buy it, then you shouldn’t buy it.  And if the property is not going to make you money, then don’t buy it.

I would love to hear your comments!

Visit www.MikeMalvey.com for more investment information.