Category: Investment (page 16 of 20)

by Cooksquared

Real Estate Investor

Author website

Interest rates and the small investor, is there really an effect? Beyond the obvious cost of borrowing, I have wondered if the small investor really notices a change in the Fed Funds rate. While I am not going to make the same mistake of asking you all to humor me, I am going to try to show that the small investor is less sensitive to smaller changes in rates. I am also starting with the assumption that smaller investors tend to invest in markets with higher cap rates.

First, let’s get some things clear so we are starting from the same page. If we consider the value of commercial real estate, we can approximate it with a simple formula, Net Operating Income (NOI) divided by the cap rate. Additionally, let’s assume that the cap rate acts as a proxy for investor demand. This makes sense because NOI is simply based the rents collected, while cap rate is the return investors will accept for those rents. In markets with very low cap rates, investors are willing to pay more for rents now because they expect a higher rate of future rent growth than lower cap rate properties and/or they expect lower volatility in those rents or they expect even lower cap rates in the future (appreciation).

Next, let’s think about investing. Most investors try to leverage their properties as much as possible. Banks understand this, so they enforce strict standards. Typically investors can get 80% Loan to Value terms, as long as Debt Service Coverage Ratios (DSCR) comes in at 1.2. The DSCR is simply NOI/Debt Payments. In markets with lower cap rates, this becomes more important because the higher value creates higher debt payments. This situation creates a cap rate floor for smaller investors, who have less financing options. Investors who focus on $1 Million and under properties do not have the same access to financing because their loans are not as profitable and harder to move in the securitization market.

Then, we have to analyze the effect of a 1% change in interest rates on loan terms. Looking at a $500,000 loan with Read more

by Cooksquared

Real Estate Investor

Author website

Value may be easier to find than you think. A few days ago I read this article about Florida Mobile home buyers and thought, man; I need to get into mobile homes. To be fair, I am probably not going to get into mobile homes (certainly not because of this article), but it is clear there is value everywhere. This off the wall scenario happens all the time, heck; it’s what makes real estate an exciting business to be in. So if value is easier to find than you think, where do you start looking?
First, start in your own backyard. I have shared my views on out of state investing in a previous post, so it should not come as a surprise when I say that value can be found close to home. I say this because the small investor knows this environment best. Investing at home is a lot more feel, than numbers because an investor has developed a great sense of the market. As investors move further and further away, information gathering and financial modeling become the chief tool. Of course, this is not to say that you should not use these tools in local investing, however; it is to say you have other tools that may be more valuable (intuition and market knowledge).
Second, find the crowd and look to the peripherals. If you see an area that has grown rapidly, go another half a mile or mile out. If this area is still lying fallow, it might be a good place to invest. This takes a small bit of market timing because you don’t want to be on the very back end of a trend. However, this kind of investing can net significant gains for those of you who buy and hold. There will always be buyers who want to live in the mix, but can only afford to live close to it.
Third, buy the worst of the best. If you can afford the worst house in the best neighborhood, you can usually find great value there. In good markets, great neighborhoods tend to get hot fast. Read more

by Cooksquared

Real Estate Investor

Author website

Partnerships can be disastrous, but they can also open the doors to investing for many individuals, who could not otherwise invest. Personally, I think many investors are too eager or not eager enough to partner with like minded individuals. On one hand, everyone has a friend who always has that “great idea” (you know the liquor store across from the church or the ice cream store in Antarctica). These people should clearly be avoided. But what about people who actually have good ideas or have found good investment properties?

A good partnership begins with common goals. Each partner should have a clear expectation of the investment type, expected return, and reinvestment rate. If the goal is to get a better understanding of the real estate investment process, the partnership should focus on smaller, easier to manage properties. If maximizing return is the goal, everyone should be clear about their risk tolerance. Partnering on a land development deal might not be appropriate for someone with a lower risk preference. More importantly, everyone should understand the risk of every investment. This is easier said than done. Many real estate deals seem simple, but can get very complicated very fast. Keeping everyone well informed of the details is a must.

After common goals have been established, a clear investment strategy should be laid out in writing. It is important this is in writing because it should be referred back to as each investment is considered by the group. It is very dangerous for the group to stray away from their investment philosophy. When things go well this is typically not an issue, but when things go poorly this can be an issue of contention (outside and inside the courtroom). Additionally, by putting the investment strategy in writing, the group is forced to flesh it out. This process will often eliminate extraneous ideas or bring out ideas that people may not have been comfortable with. Either way, it puts everyone on the same page.

Next, bring in the legal and the accounting team. For smaller, less complicated partnerships this step is as simple as paying a Read more

by Cooksquared

Real Estate Investor

Author website

If you have been reading my posts, it may seem like I am all over the board. One day I am talking about mortgages, the next I am talking about agents, and today I am talking about landlords. The coherent theme behind all of these things is smart real estate investing. Commercial investors must have a strong skill set across areas because they represent the cog that brings different real estate functions together. Today, I want to talk about one of the most value jobs a residential (commercial and non-commercial) investor will have to do. This job is that of being a landlord.

People have typically had one of two experiences with landlords. First, they may have rented an apartment growing up, in college, after college, etc. Second, they may have seen one of the many comical landlords on television (Mr. Roper from Three’s Company for example). Regardless of where your experience comes from, being a landlord is never as easy (or as comical) as it appears. This is especially important for the first-time investor, who has no idea what to expect from tenants.

First and most importantly, new landlords must understand that people will not treat their property like it is their own. This is true with just about anything that is rented. Everyone remembers how much more recklessly they drove their rental cars or how poorly they treat their hotel rooms. It’s just a simple fact of life; ownership creates a sense of pride, while rentership (not really a word, but you get the point) creates a sense of carelessness.

Once that very important lesson has been absorbed, investors should go into the process well informed. This means finding every book, article, blog, and person you can to help you gain a better understanding of what it really means to be a landlord. Don’t just listen to the people that say it’s easy. Look for the horror stories. Watch one of the many day time Judge Shows. Ask yourself if you could handle the worst of the worst. Once you feel fully informed, you are ready to begin the process of becoming Read more