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Playing The Real Estate Rental Game

Posted by jfortunes on May 31, 2014


Real estate investing is a game. To play it well you must understand the four financial benefits of real estate and how to maximize them. Those benefits are:

1. Cash flow
2. Equity build up (the payoff of your loan)
3. Tax benefits
4. Potential appreciation

In this article we are going to look at benefit number one.

Benefit number one – Cash Flow (cash flow before tax).

Investing in real state is game of numbers. To play the game well you must understand how to manipulate the numbers to get the end results you want. The result being positive cash flow.

The formula to calculate the cash flow is listed below:

Gross Rental Income
Minus: Vacancy
Equals: Adjusted Gross Income
Minus: Operating Expenses
Equals: Net Operating Income
Minus: Debt Service Payments
Equals: Cash Flow Before Taxes

Here is an explanation of each of the factors in the formula above.

Gross rental income is the first number that you need. It includes all the rents and any other miscellaneous income from garage rents, laundry machines or vending machine. This number is that total income that we expect to get during the year.

Vacancy is a percentage of the gross rental income. It is based on that you won’t collect from of the rent that is expected because of bounced checks, evictions and vacant units during the year. This percentage will vary depending on the supply and demand for rental in your area. I commonly use a 5% vacancy factor when I don’t have any data to determine this. It is important to ALWAYS have a vacancy percentage. Many times the seller will tell you that they have had no vacancy. It is just not true because people’s lives change. They get divorced; lose their jobs and other changes. This causes them not to have the money to pay rent and creates vacancies.

Adjusted Gross Income is the actual money that you are going to receive.

Operating expense are all the costs that apply to the property each and every year other than the loan payments. It includes things like taxes, insurance, repairs, utilities that you pay and any other expenses.

Net Operating Income is that amount of money that the property produces after all operating expenses. This is the most important number because this is the number use to pay any loan payments. This is also the number that we use to determine the value of the property (more about this later).

Debt Service Payments is the amount of payments that you spend per year for any loan that you have on the property.

Cash Flow Before Tax is the amount of money that is left over after you have paid EVERYTHING. This is the amount of money that is you get to keep for your self.

Ok, now that I explained what all the numbers are, here are the keys to creating more cash flow. There is only basically two ways to do it. You have to get more income by increasing the rents and/or reducing vacancies losses or you need to reduce your operating expenses and /or your loan payments.

If you are buying, it obvious that by paying less for the property would mean that your loan should be less, therefore your loan payments should be less and should give you more cash flow.

It is extremely important that before you every buy any rental real estate that you look at the cash flow and you should run the numbers using three different scenarios. The best case where you rents are high and expenses are low, the worst-case scenario where the rents are low and the expenses are high and then a middle scenario. If the worst-case scenario still makes sense then the property should be a no-brainer and you should go ahead and buy.

For more information, do not hesitate to contact us or call James directly at 562-746-7263

Things to Avoid When Flipping Real Estate

Posted by jfortunes on May 31, 2014


Flipping property is rising in popularity as a form of real estate investing. The truth of the matter is that this is one of the more entertaining methods for many investors that are simply ‘itching’ to get their hands a little dirty. The sweat equity involved in these transactions, while attractive, can also be daunting when skills are inadequate and out and out dangerous in some situations.

If you are one of the many around the world who consider the appeal of flipping property with huge dollar signs in your eyes, you should take care to avoid the following things in order to minimize your risks while maximizing your potential for success.

1) Do not fail to have a qualified inspection of the property before any money changes hands. If you do not have any idea of the types of work that needs to be done then you cannot possibly make an educated estimate of the costs involved in rehabbing the property.

2) Do not underestimate the budget for repairs on the flip. This is one of the most common mistakes that even seasoned professionals make and it can mean the difference between a profit and a loss on the property if you aren’t careful and do not stick to the planned budget.

3) Do not overestimate your abilities. This is another common mistake. The fact that you’ve seen something done on television doesn’t mean that it is something you can do on your own. It costs more money and time to have someone come in and repair your mistakes than to have had a professional do the work from the beginning. This doesn’t mean that you can’t learn how to do some of the work or that doing so would be cost effective. The trick lies in determining where your skills and abilities can really take you rather than where you hope they will take you. Plumbing, electrical, and structural work are generally best left to the professionals unless you have specific experience or training in these fields.

4) Do not fail to hold yourself accountable to your timetable and your budget. Real estate investing puts you in the bosses seat and while that is often simple when it comes to driving others, we often have a bit of difficulty when it comes to holding ourselves accountable for time and money along the way. Unfortunately, failing to do so can be a very costly blunder.

5) Do not forget to keep up with receipts, bills, etc. and reconcile the facts and figures daily. It is far too simple to allow a couple of trips to the local home improvement center escape careful scrutiny. Add a couple of these trips per day and you could easily find thousands of dollars missing from your budget with no paper trail to explain the transactions. You could also find that some tools will not work or be needed for the project. Those items cannot typically be returned without the original receipts.

6) Avoid having too many chiefs on the project. If this is your ball game then you need to run with it rather than having 10 people giving contradictory orders. Schedule meetings regularly to discuss progress and any adjustments or changes that may need to be made.

7) Avoid poor planning. This is one step that is the difference for many would be house flippers between success and failure. Plan out every step of the project in an order that makes sense. You do not want to paint the ceilings or walls after you’ve installed new floors. Nor do you want to rip out walls in order to replace plumbing after you’ve painted them. Plan things out in the proper order and allow a day or two between subsequent projects in case extra time is needed. The last thing you want to do is pay a group of contractors to stand around waiting for the paint to dry so they can begin the next step in the process.

There are risks involved in any type of investment. While real estate is one of the greatest things in the world in which people can invest, there are still risks involved. Following the advice above however can significantly lower those risks and give investors the opportunity to have great expectations when all is said and done. Whether this will be your first flip or your fortieth flip there is much that can be reviewed in the steps above that will reaffirm many of the things you’ve learned along the way.

For more information, do not hesitate to contact us or call James directly at 562-746-7263

 

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