REAL ESTATE INVESTING
Reasons why I should invest in real estate:
Passive income (mailbox money)
Appreciating assets (equity build-up)
Diversification of investment portfolio (tangible assets)
Tax advantages (1031 exchange treatment and tax code write offs for non-cash expenses such as depreciation & interest)
What investment strategy is best for me?
Buy & Hold (long-term rentals, vacation rentals, and short-term rentals)
Holding residential rental property is an excellent way to build up equity in a home while having your renters pay down the mortgage for you, essentially this is a great way to build wealth with other people’s money. Each property is unique and therefore must be evaluated for its highest and best use, here are a few questions to ask yourself when considering a residential investment:
Do I prefer cash flow over appreciation?
Duplexes and fourplexes typically generate a greater cash flow, however, single family homes tend to appreciate greater over time.
How do I evaluate rental investment opportunities?
A basic tool to help assess a residential rental property opportunity is the gross rent multiplier (GRM). The gross rent multiplier is a quick and easy calculation to measure the performance and revenue of rental real estate. The gross rent multiplier formula is calculated as follows:
Gross Rent Multiplier = Price / Gross Monthly Rental Income
As shown in the formula above, the gross rent multiplier is calculated by taking the price of the property and dividing it by the gross monthly rental income of the property. This formula can also be used to help quickly evaluate pricing of potential rental property if we rearrange the above formula to solve for the price of the property:
Price = Gross Monthly Rental Income x Gross Rent Multiplier
A good rule of thumb most investors seek when evaluating rental property is a 100x’s gross rent multiplier. Below are examples of calculating GRM:
Ex. 1.) New home purchase price $200,000 / $1,650 estimated rental income = GRM of 121.21
Ex. 2.) New home purchase price $150,000 / $1,650 estimated rental income = GRM of 90.91
Since this method only accounts for revenues and does not include expenses, this tool should only be used for a quick analysis to gauge viability in potential properties. Buyers due diligence should always be performed to evaluate property’s operating expenses, appreciation or depreciation of future market value, financing options, return on investment, and other market factors. As your experienced and trusted real estate advisor, I am here to help you evaluate all of these factors.
Please note that Austin and surrounding areas are currently experiencing a high-demand real estate market, during this time many investors go beyond 100x’s GRM looking to achieve appreciation, long term cash flow, & the tax benefits of owning a rental home.
Fix & Flip
Buying a dilapidated home can be a good way to pick up property at a good value price, however, there are often greater risks involved when buying such properties. A fixer upper is generally a lot more hands on work than a turnkey investment property, you should ask yourself the following questions before pursuing this option:
How can I add value? In other words, if I buy a $100,000 home at a 20% discount because of needed repairs, will I be able to complete these repairs for less than $20,000? Can I do the improvements myself or will I need a professional contractor?
If financing, what are my financing options for a flip? You should discuss your goals and obtain a pre-approval from your financial institution to ensure your buying capacity.
How about building a “spec” home? New construction in a rising market can be a great investment opportunity, however, there are more risks involved as this process generally takes far greater time to complete, I would recommend partnering with a professional builder for this strategy.
What is your exit strategy? Working with your real estate advisor to evaluate current comparable sales of “as completed” homes to determine your ROI prior to investing.
Contact us to discuss these and many other investment strategies!