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Not Sure if a Property is a Good Investment? Fill out a Pro Forma Sheet

April 28, 2014 | By | No Comments

Investing in Real Estate is no rocket science; it just requires an understanding of some real estate financial jargon and the audacity to make a move.  As someone who is in the beginning stages of my investment career I find that the ladder is often the hardest part.  While it may not be possible to completely rid yourself of apprehension you can mitigate some risk through sound financial numbers.

Learning to fill out and read a Pro Forma sheet may seem intimidating at first but once you get the hang of it you can start determining whether a property fits your investment needs. In this post I am going to take you step by step through the process of setting up a simple pro forma sheet. For this example I will be using a single-family rental home but the process is fairly similar for multi-family properties. Let’s take a look at the first step.

 

STEP 1 – Fill out Property Details

Let’s say that we will be analyzing a property in Roseville, Ca. First, enter in the homes address, offering price and details about rent. In this example, we are using a single family home that’s 1,151 Sq. Ft and will be renting it out for $1,000 a month ($12,000 a year).

STEP 1

STEP 2 – Determine Gross Revenue

Gross revenue is the amount of income the property will make without factoring in expenses. Assuming we have someone to rent the property for the whole year, our Gross Revenue will be $12,000.

Less Vacancy is used to give an estimate of the loss of rental income from property vacancies. There will be no less vacancy in our example because with single-family properties the vacancy rate is either 0% or 100% and having a vacancy would greatly throw off the numbers. Less vacancy is a great tool for investors who are looking into Multi-family properties. 5% less vacancy rate is usually used however for the conservative investor it is always a good idea to budget an even higher number, say 10%.

STEP 2

STEP 3 – Calculate Operating Expenses to Determine Net Operating Income

The Net Operating Income of a property is the gross income minus the operating expenses. In order to find NOI we must determine what the operating expenses are.

These will include items such as, but not limited to:

-Utilities (Electric/Gas, Water, Gardening, etc.)

-Maintenance (in home repairs)

-Reserves (money set aside in case of repairs)

– Management (paid to someone to manage the property)

-Property Taxes (approx. 1.25% of home value)

-Insurance (approx. 0.25% of home value)

Once we have the Operating expenses accounted for then we can subtract this number from our Gross Revenue to determine our NOI. In our example it looks like this:

Net Operating Income = Gross Income – Operating Expenses

=($12,000) –($4,410)

= $7,590

STEP 3

 

 

Capitalization Rate

The CAP rate of a property is a measure of the potential return of the investment. The higher the CAP rate the higher the return. You will often see this term on investment properties and while a higher number is better I suggest investing in properties that have a positive cash flow.

=Net Operating Income/Property Price

=($7590) / ($150,000)

=.051 or 5.1%

 

STEP 4 – Understand the Loan

In this example we have put a 20% down payment on the house. This means that we need a loan for 80% of the purchase price. In typical Real Estate financing you will find that loans will run for 15 or 30-year terms at fixed rates. To be conservative, I used a 30-year fixed term with a 4% interest rate. Therefore, our mortgage payment for the year would be $7,042.

step 4 

 

STEP 5 – Determine Cash Flow

Cash Flow is the annual income obtained from subtracting mortgage payments from the Net Operating Income. Now that we have our Net Operating Income we can determine what our cash flow will be for the year.

Cash Flow = NOI – Mortgage payments (Interest + Principle)

=($7,590) – ($5,001 + $2,041)

= $548.16

 

STEP 6 – Year 1 Summary

While cash flow is important (and the higher the better), we must factor in appreciation because that’s where the bulk of the money as an investor is going to come from. To be conservative, I gave this property a 6% appreciation rate per year. This would go up if you were to invest in areas, such as ones documented here on Housing Rebound. Assuming this 6% appreciation and adding in the cash flow, this property is now worth $159,548 as compared to the $150,000 we bought it at a year ago. That’s not a bad investment and assuming the market continues to grow this investment will continue be worth even more.

step 6

Conclusion

Investing in Real Estate is a great way to grow wealth and it’s not all too difficult. If you can master the Pro Forma sheet then you will have the confidence to pull the trigger on a deal. Whether you are looking into buying Real Estate with your own money or an investors I hope this simple overview on the Pro Forma will help you feel more confident. If you are would like an Excel Pro Forma template or have any other questions please feel free to email me at aaron.d.mack@gmail.com.

13 Feb

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Top 5 Rebounding Real Estate Neighborhoods in California

February 13, 2014 | By | No Comments

At Housing Rebound, we are always crunching numbers and analyzing data in order to determine the best neighborhoods to invest in. As previously discussed, these are a number of factors when analyzing neighborhoods from a real estate investment perspective. These factors include: Median Value, $ / sqft, YoY, % Fall from Peak, Price to Rent Ratio, Average GreatSchools Rating and Size Rank.

Based on all of these factors, we have determined the top 5 rebounding real estate neighborhoods in California.

Modesto

1. Modesto, CA 95355 – Strong YoY, Great Schools

Median Value: $221,100
YoY: 33%
$ / sqft: $127.24
Peak Month: 2006-01
% Fall from Peak: -45%
Price to Rent Ratio: 14.79
GreatSchools Rating: 7.4

Zillow Search

2. Hesperia, CA 92345 – Great $ / sqft price

Median Value: $152,000
YoY: 35%
$ / sqft: $94.64
Peak Month: 2006-07
% Fall from Peak: -53%
Price to Rent Ratio: 11.37
GreatSchools Rating: 5.4

Zillow Search

3. Fresno, CA 93722 – Great overall mix

Median Value: $174,400
YoY: 25%
$ / sqft: $112.41
Peak Month: 2006-04
% Fall from Peak: -44%
Price to Rent Ratio: 11.64<
GreatSchools Rating: 5.9

Zillow Search

4. Stockton, CA 95207 – Great $ / sqft price

Median Value: $160,700
YoY: 30%
$ / sqft: $94.49
Peak Month: 2006-02
% Fall from Peak: -55%
Price to Rent Ratio: 11.76
GreatSchools Rating: 4.25

Zillow Search

5. Cathedral City, CA 92234 – Great overall mix

Median Value: $209,700
YoY: 30%
$ / sqft: $126.85
Peak Month: 2006-05
% Fall from Peak: -43%
Price to Rent Ratio: 11.55
GreatSchools Rating: 5.0

Zillow Search

27 Jan

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Discover rebounding real estate

January 27, 2014 | By | 2 Comments

When my father and I started investing in real estate in Modesto nearly two years ago, the market just started to see prices firming up.  Homes would go from active to pending quickly but not rapidly as what it has become today. Now you are competing with multiple cash offers. With such demand, there is surely some validity that values have appreciated more than 25 to 30% annually for the last two years, and with strong expectations of continued appreciation of 25% next year.

As it started to become more and more difficult to acquire homes, we started to look for other areas and neighborhoods where we can invest. The key was to find areas where values had significantly fallen after the 2006 collapse and were on the path to rapid recovery. Home values had fallen so low that from a cost per square foot perspective, it would be cheaper to buy a house rather to construct it on your own.  For example, two years ago many properties were selling for $75 per square foot, and even now they are around $125 per square foot.  Not only were these homes great investments from a rental income perspective but more importantly from an appreciation perspective.

We ended up coming across tons of data from Zillow and GreatSchools on important metrics relevant to finding regions that were expected to have a high level of growth. With this data, we created a spreadsheet and are sharing it today in order to connect with others also interested in investing in rebounding real estate.

In order to evaluate regions, we considered the following key pieces of information:

  • Median Value: As investors, we are primarily looking for single-family homes (3 bd/2 ba) between $100K – $250K. Homes in this range are typically strong candidates for long-term growth and are ideal in terms of capital required and return on investment.
  • $ / sqft: Ideally, we would like this price to be below the construction cost. This metric is important to consider when looking at newly developed areas as homes are still not being built because home values from a $ / sqft perspective are lower than the construction cost. For us, we have put a cap of $150 / sqft in order to have room to grow and appreciate in value.
  • YoY: We are looking for significant year over year growth. Ex. Modesto area is seeing +30% YoY growth. Ideal regions will be at least growing more than 20% year over year.
  • % Fall from Peak: Our focus is to primarily find regions where there has been a significant decline in home values in the past five years with strong indications of growth. We are focused on the rebound as appreciation is where the more significant return lies. Ex. Regions like Modesto are still around -50% from their peak despite strong YoY growth.
  • Price to Rent Ratio: How quickly can we get a return on our investment if we just considered rental income? Ex. Rent Ratio = Home Value / Annual Rent. Rent Ratio = $120K / (Monthly Rent $1K * 12 months) = 10. We want to look for rent ratios around the range of 10 – 15. This would allow ideal return from a rental income and appreciation perspective.
  • Average GreatSchools Rating: We’ve taken a very rough average of the ten nearest schools    in the neighborhood to get a general understanding of the area. Schools are fundamental to highly appreciating areas and provide strong indications of growth for neighborhoods as well as parallel metrics such as crime.
  • Size Rank: How large is the city? The smaller the number, the larger the city is in size. Size Rank gives us better insight on the long-term growth and the future of the neighborhood.

These seven metrics are the core to understanding what regions are rebounding. With it, we are able to dive deeper on the most lucrative regions to invest in and understand the strong foundation that would allow home values in the respective regions to appreciate.

I’m looking forward to hearing from you whether you are an investor, realtor or simply just interested in learning more. My goal is to connect with those who have similar interests in order to create the building blocks to further develop and expand this opportunity.

If you are interested in a one-page report and grade for your potential investment, please fill out the form here.

Be sure to download the market analysis on neighborhoods here.

Looking forward to hearing from you,

Safeer