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real estate investing

6 Encouraging Reasons to Invest in Real Estate During COVID-19

1000 500 Sam Radbil

While many people think that the stock market has been the only investment game in town during COVID-19, savvy investors are looking for real estate opportunities. While the current set of economic conditions is certainly unique, there are six great reasons to invest in real estate during the pandemic.

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Interest Rates

Mortgage interest rates are at record lows, and buyers with good credit can get a rate below three percent. Rates of six percent or more were not unheard of before the Great Recession that began in 2008, and the difference between a $250,000 loan at six percent and one at three percent is a healthy $400 monthly.

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While it’s true that rates for investors may be a bit higher than those for would-be homeowners, the purchase of a duplex is a great way to capitalize on these low rates since a duplex would be owner-occupied and therefore more easily qualify for better loan terms.

The Rental Market is Stable

Top apartment rental site ABODO reported in September, “Last month we said, until there is a therapeutic treatment or a proven COVID-19 vaccine, we’re predicting a stable rental market at best, and that is what we saw in September. There are some hopeful signs that the pandemic is easing in some parts of the country, and the much-anticipated vaccine seems to be moving to fruition. That said, even if the virus disappeared tomorrow, we still see a stable apartment rental market because we just do not foresee things returning to normal for a while.”

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A stable market means that investors can get the rents they need to cash flow their units. And if you’re prudent and careful as you screen tenants, you can help avoid the perils of the eviction process.

There Are Good Deals Out There

If you live in Austin, TX where Tesla just announced that it is building a new plant, you can forget about finding bargains. We found the following in a recent Boston Globe article, however, and this is beginning to ring true in some areas.

“As sales slump, home prices will fall later this year and early next in the ‘low single digits’’ nationwide, according to Mark Zandi, chief economist at Moody’s Analytics. The declines may be more pronounced in West Coast markets, which were already overvalued relative to incomes, he said.”

Buyers need to be patient, but anyone that is selling their home during the pandemic probably has to sell it, so discounted properties can be found.

Values are Values – No Matter What

An investor who wants to cash flow $400 per month on a four-family and is able to find the property that makes that happen should pull the trigger regardless of the state of the housing market. If a low-interest rate can be locked in, and if property tax rates look stable, there’s no reason to wait.

The Worst May Be Over

At this writing, it doesn’t look like there will be mass lockdowns again in the U.S. The idea behind the first wave of lockdowns was to flatten the virus’ curve thereby not overwhelming the hospitals. While the site of refrigerated trucks commandeered to hold dead bodies was chilling both literally and figuratively, the health care system has been able to back off from that Armageddon-like scenario, and hospitals seem to be handling their COVID-19 patient load. Even if the pandemic trudges along, the economy may have seen its lows and things may just stay stagnant until a vaccine, therapeutic treatment and/or true herd immunity crowds out the pathogen.

Real Estate is Adapting

Some industries like restaurants, bars and caterers have been severely injured by the pandemic. In fact, the bedrock of many catering operations–the buffet–has been altered, transformed and may no longer be viable as a method to serve food.

The real estate industry, however, has stepped up to their own plate with an array of technological innovations like virtual tours. Landlords, for example, can rent apartments without having to physically show them, and that adds a sense of security to prospective tenants. The real estate industry has found a way to thrive even during this crippling pandemic.

Investing in real estate shouldn’t only be reserved for good times. And as shown above, there are many solid reasons to become a real estate investor even during COVID-19.

how to analyze real estate deals

How To Analyze Real Estate Deals

1000 500 Sam Radbil

How to analyze real estate deals?

That question is asked by millions of Americans every single year.

While investing in real estate is a goal shared by many Americans, it is a stable asset class that has the potential to produce life-changing wealth, provided you know how to analyze real estate deals and take action when the opportunity arises. 

white and brown concrete building under blue sky during daytime

If you harbor ambitions of taking your first steps in real estate investment, you’re in luck. The objective of this post is to provide a high-level overview of what you need to know to analyze fix and flip projects and investment properties. Let’s get started. 

How To Analyze Fix and Flip Deals

You Need To Know the Expected Return On Investment

There are a large number of variables that you need to consider when analyzing a fix and flip deal. Of these variables, Return On Investment (ROI) is arguably the most important.

Here is a simple way to analyze the ROI of a fix and flip property. For every dollar that you spend on the project, how many dollars do you expect to get back? The actual formula for ROI is relatively simple. You take the net profit, divide it by the total amount invested, and multiply that number by 100.

To help solidify the importance of ROI, it’s worth using an example, based on actual property flipping stats. According to Attom Data Solutions, it is common for property flippers to achieve an ROI of 40% (the average ROI from US property flips ranged from 38-42% in each quarter during 2019). 

In other words, if you were to invest $200,000, it is conceivable to make $80,000 dollars in the process, based on the 40% ROI figure taken from Attom. 

In this example, it is worth demonstrating the ROI formula in action. 

  • ROI = Net Profit / Total Amount Invested * 100
  • ROI = $80,000/$200,000*100 
  • ROI = 40%

At this point, it should be clear that flipping properties can be a powerful way to build wealth, whether you pursue it full time or as a secondary income source. However, in order to gain a more concrete understanding of the potential ROI, you need to factor in all the projected expenses.

Fortunately, a hard money loan calculator can make this reasonably simple to do. The calculator will help you understand the expected loan costs, broker fees and property taxes that will ultimately form part of your final ROI calculation. 

You Must Be Able To Identify, Acquire & Improve Undervalued Properties

Of all the skills that a property flipper needs to possess, the ability to identify undervalued homes sits right at the top of the list. When analyzing a potential flip, you need to have a firm grasp of how you can dramatically improve the selling price. 

For instance, modern homes with premium finishes leave very little room for improvement. While some interior design changes could create a small lift in property value, the reality is that it would be difficult to sell a property of this nature for more than the original purchase price, in a short space of time (naturally the property value could appreciate significantly over a number of years). 

white and brown house during daytime

However, older homes with outdated finishes, ugly exteriors and isolated kitchens can be a dream come true for property flippers. In such cases, there is potential to improve the exterior and the interior components of the property, which can result in a dramatic increase in property value. 

Knowing the After Repair Value Is Super Important

It is common for property flippers to refer to the ‘After Repair Value’ or ARV for short. This represents the expected value of the property after all the renovations have been completed. 

While there are a few ways to calculate the ARV, assessing similar properties in the area is by far the most common. 

Comparable properties are often called ‘comps’ for short and they can make or break a property deal. The basic premise is fairly simple. If a medium size 3 bedroom 3 bathroom house in a particular suburb of Dallas Texas is worth $300,000, there’s a good chance that a house with similar features will be worth roughly the same price. 

To learn more, this guide provides a fairly detailed overview of how to calculate ARV

Remember To Use The 70% Rule To Calculate The Maximum Purchase Price

This is a rule that many property investors use to quickly assess if a property flip is likely to be profitable. Once you have established the expected after repair value of the property, you simply multiply that amount by 70%. This gives you a fairly reliable maximum purchase price to work with.

When you are ready to enter negotiations with the seller, you can approach them with a concrete understanding of what you can afford. Pre-calculating the maximum purchase price is a safety mechanism that you can and should build into the deal. Fortunately, this doesn’t take very long to do, and it is something you will become increasingly familiar with as your experience with property flipping grows. 

How To Analyze Rental Property Deals

Investing in rental properties presents a different set of challenges to a typical fix and flip. Where property flipping requires you to have a discerning eye for a property’s true potential, rental property investing is less demanding in this respect.

man climbing on ladder inside room

For instance, it is entirely possible to buy a turnkey property that requires absolutely no improvements before your first tenant moves in. This increases the pool of potential properties to choose from and it also introduces a series of relatively simple mathematical tools that you can use to analyze the deal.

We will now take a look at 3 very useful tools for analyzing rental properties specifically.  

Tool 1 – Cash Flow: 

A basic estimate of potential cash flow is a good place to start when analyzing a rental property. This basic summary from sums it up quite nicely:

  • Determine the gross income from the property.
  • Deduct all expenses relating to the property.
  • Subtract any debt service relating to the property (ie the cost of the loan)
  • The difference is the property’s cash flow.

In other words, to work out the cash flow of the property, you simply need to calculate the gross income, subtract all the expenses, and then subtract the mortgage payments. Once you’ve calculated the cash flow, you can turn your attention to the expected cash-on-cash return. 

Tool 2 – Cash on Cash Return: 

The point of calculating the cash-on-cash return is to figure out how much money you are likely to make from the money you have invested into a rental property. It is calculated on a pre-tax basis, which helps reduce the complexity of the calculation, and it relies on a 1-year time horizon. 

The Cash on Cash Formula is straight-forward: Cash-on-cash Return = Annual Pre Tax Cash Flow / Total Cash Invested * 100

Crucially, the ‘Total Cash Invested’ is the total amount that you have invested into property, excluding the mortgage repayments. Usually, this would be the down payment, closing costs and repair costs, plus any other administrative fees that you may incur. 

The main benefit of calculating the Cash-on-cash return is that it allows you to compare the expected return against other investment opportunities, be it another rental property or even stock and bonds. 

Let’s say you’ve identified two similar properties, and the one is expected to produce a cash on cash return of 4%, while the other is likely to produce a cash-on-cash return of 6%. If all else is equal, you now have a solid platform from which to make a decision. 

Tool 3 – Cap Rate: 

This is another relatively simple formula that can help you assess the profitability of two competing properties. 

The actual formula is pretty straightforward: Cap Rate = Net Operating Income/Property Value

It might be worth clarifying that net operating income is simply the annual rental income, minus the annual property expenses. Also, the net operating income excludes the bond costs, so there is no need to factor these into the calculation. 

Like cash-on-cash return, Cap Rate can be very useful for comparing two properties. You are essentially just using the projected rental income, property expenses and property price to gain a basic understanding of the returns you can expect with a rental property. Because it is so quick and simple, you can analyze a large number of properties in a short period of time.

How To Analyze Real Estate Deals in Your Preferred Area

When analyzing any property, ‘Location, Location, Location’ is often touted as the most important consideration, and not without reason. Area analysis plays an important role in any real estate investment deal. For this reason, we are now going to highlight 8 things to consider when analyzing the overarching area. 

  1. Schools – Good schools and universities can be a huge drawcard for investors. It means more families and businesses are likely to settle in the area.
  2. Proximity To Parks – Quick access to parks can increase the desirability of an area.
  3. Scenery – There’s a reason houses with sea views and mountainous backdrops tend to increase in value over time. Stunning scenery can have a huge impact on property price.
  4. Transportation Facilities – Suburbs and cities with good transportation systems help improve the economic output of the area, while increasing the convenience of living there.
  5. Entertainment Features – Exciting entertainment features can be a big drawcard for tourism and residents alike.
  6. Job Opportunities – Assessing unemployment rates is always a good call when analyzing an area. If the unemployment rate is slowly increasing, you may need to extend your property research period before making a long term commitment to the area.
  7. Are Grocery Stores Investing In the area – You might be surprised by just how meaningful this is. If retail stores like Trader Joes, Whole Foods or Aldi have established themselves in the area, it can act as a green flag, indicating potential for an aspiring property investor.
  8. Are Property Prices Going Up or Down – You can easily assess the property prices of an area using Zillow or Trulia. If property prices are stable or increasing. However, if property prices are declining steadily, it might indicate a red flag that you should steer clear of.

Of course, these are not the only factors to consider when analyzing an area, but it should be enough to get you started. 

Final Thoughts 

Although the process of investing in real estate can be complex (keep in mind there are many books you can read to get started), there are ways to filter through all the available options and make a good decision. 

When looking at a fix and flip, place ROI at the forefront of your thought process. If you’re considering a rental property, be sure to use all the mathematical tools at your disposal to help make a good choice. And always remember to conduct a thorough area analysis before you make your final decision. Choosing the right location is a skill that you need to hone in order to become a successful real estate investor