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Real Estate Investing Planning, Goals, and Crucial Formulas

Real Estate Investing Planning, Goals, and Crucial Formulas

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Published by James R Kobzeff
Discover a wide-range of helpful real estate investing tips including formulas for several crucial rate of returns.
Discover a wide-range of helpful real estate investing tips including formulas for several crucial rate of returns.

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Categories:Business/Law, Finance
Published by: James R Kobzeff on Oct 15, 2008
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11/27/2013

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PROAPOD
®Real Estate Investment Softwarewww.proapod.com
Real Estate Investing Planning, Goals, and Crucial Formulas
 James R Kobzeff 
I'm mostly opposed to get-rich-quick methods for real estate investment for a couple of reasons.They often assume that you self-manage the property while, at the same time, they ignore your costof time. Plus, they like to bloviate about "no money down" yet fail to warn you about the high risk associated with high leverage. Besides, it's difficult to trust someone claiming to have uncovered agoldmine yet anxious to peddle a map so it can be found. If they really discovered the road to realestate investment riches, why would they share it?Actually, there is no secret way to attain real estate investing success. In real life, you must work hard with good research and a commitment to a sound and systematic analysis. Pathways leadingfrom get-rich-quick seminars are littered with disappointment; the key is to take as much time asnecessary for you to prepare properly. Time is in the side of the prudent real estate investor.In this article, we want to help you better understand some of the nuances associated with realestate investing. We would like to discuss the importance of building a sound investment plan withmeaningful goals and then cover the formulas of four popular financial analysis models usedregularly in real estate investing.
Sound Investment Requires a Sound Plan
Having a plan with stated goals is one of the most important foundations of successful investing.However, it's not about lofty intentions like declaring, "I want to be worth a million dollars oneday." No, there is nothing wrong with desiring better things in life, the problem is that simplydeclaring something doesn't bring you any closer to achieving it. The idea is to develop a general plan with stated goals and a method on how to get there.
Goals Must be Meaningful
Goals are the shortcuts to your desired destinations. Goals are not essential to life, many people do just fine without any kind of goal at all, but goals are essential to successful real estate investing.For a goal to work for you, however, it must be attainable, measurable, tied to a timetable, andclearly defined.Moreover, divide long-range goals (say further out than one year) into intermediate goals, and your investment plan into subsections such as "cash flow requirements," "net worth projections," "tax
©2008 James R Kobzeff. All rights reserved.
 
shelter benefits required," "cash withdrawal from plan," and so on.Start here. How much cash do you have available to invest comfortably? What length of time doyou plan to stay invested? How much of your own effort do you plan to contribute?Define a general plan. You plan to develop or own only the highest quality properties in prestigelocations. You plan to own the largest market share of duplexes or perhaps freestanding retail buildings in a local market. You plan to maximize your tax benefits on purchases and use tax-deferred exchanges and installment sales when available.Define a detailed plan. How much cash do you want to collect each year beginning in the 10thyear? What net worth do you want to attain by investing in rental properties after the 15th year?You plan to withdraw $5,000 in two years to visit Europe, or generate $30,000 by the 5th year to pay for an additional house, or withdraw $20,000 over years 7-10 for your daughters collegetuition. And so on.The idea is to create a target and then monitor your progress continually against that target toinsure that you're on the right course. A written plan with stated goals that projects where you'reheaded and then reviewed regularly is critical to successful investing.
Financial Analysis Models
Okay, let's switch gears and summarize four very popular investment value measures usedregularly by investors and real estate analysts.
1) Cash on Cash Return
Cash on cash measures the initial profitability of a rental property. Thehigher the better, and typically a first-year cash on cash return ranges from about 4% to 10%.Formula: Cash on Cash = Before Tax Cash Flow / Cash Equity (Initial Investment)
2) Gross Rent Multiplier
Gross rent multiplier measures the ratio between annual gross rentalincome and sale price. Think of it as an indication of the number of years it takes the annual rentalincome to equal the price, so the lower the better. It is good for simple comparisons to other rental property opportunities but insufficient as a stand-alone number.Formula: Gross Rent Multiplier = Purchase Price / Gross Rent
3) Capitalization Rate
"Cap Rate" is essentially a return on asset indicator of how much debt anincome property can carry. The higher the return rate, the more debt a property can support, andhence the better the investment opportunity for the real estate investor. Sellers of income property,of course, prefer to sell at lower cap rates. Local markets dictate capitalization rate (there is no one-size-fits-all) but they typically run from about 5% to 12%
©2008 James R Kobzeff. All rights reserved.

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