Mar 282014
 

Value creators are always searching for mispriced real estate assets where the intrinsic valuations are below current valuations creating inefficient markets. When searching for investment opportunities make sure you are doing these three things to uncover and see value that others don’t see.

When deciding to invest in real estate, make it professional by setting up an LLC. This will allow you to be protected as you may make. It will also give you tax issues.

1. Know current, intrinsic and future market values

You’ve got to have a very good understanding and grasp for valuations – many types of valuations. What’s the REAL value of an asset versus the perceived value?

If you’re trading baseball cards or basketball cards, and you are confronted by a seller of a card, you better know what that cards worth. If you’re an art dealer where you are buying and selling paintings, you better have a good understanding of painting valuations. If you buy and sell cars, you need to have a good understanding of car values.

Always get a good feel of the local values are like. Finding out who the average rental rates and whether they rent or own can tell you more about a home’s value than the neighborhood.

It’s the same thing with real estate – to see value, you must have a good understanding of what a properties currently worth based upon sound underwriting fundamentals.

Then, you need to understand the relationship between current value and intrinsic value so that you can forecast future values based on the gap in the valuation you uncover – real versus perceived value.

2. Know the trends

Stick with what you’re comfortable dealing with. You can have much more success at real estate investing if you focus on that market niche. Whether you specialize in flipping homes, only working with starters, or dealing in properties that cost low in the down payment department, stick with the things you are familiar with.

What’s going on in your marketplace? What’s going on with the local government? What businesses are coming and going? What stage is the economy in? What does your product type’s industry fundamentals look like? You need to have answers to these questions.

Having a good understanding of where things are now and where they are going will help you spot gaps in the market that offer value. Start reading local magazines and newspapers, regularly meet with real estate professionals such as brokers, property managers, lenders, and construction people and get their perspective on what’s going on and how they see things.

3. Know your investment strategy

Get to know others in real estate market. It’s a good idea to talk to other people and get advice they can give you if they are more experienced than you. It can be helpful to have contacts who know a lot about real estate. You can easily find like-minded people by looking online. Join a few forums and make an effort to meet some of the users.

Picking and becoming an expert at executing an investment strategy will help you see value and find gaps that offer value creation potential. Too many investors are chasing rabbits all over the place trying to find deals without having a strategy to follow.

Value investors have an investment strategy that they use, and look for deals that fit their strategy. Value investors know what they’re looking for. Knowing the type of rabbit you’re chasing will help you see value.

Researching and better learning valuations, your marketplace and your investment strategy will help you uncover and see value that other’s stumble by. These 3 things take time to learn and to become an expert, so be patient, but dig deep into these areas so that you become an expert at uncovering and seeing value.

Mar 182014
 

Understanding the Concept to Value so That You Make More Money with Your Real Estate Investments

When you’ve made the decision to invest in real estate, form an LLC or a similar entity. This will make sure that you to be protected along with any investment you move forward. There are also great tax benefits to incorporating your business as well.

I am going to expose the concept of value. What is value? How should you look at value? If you have been searching for investments, what types of things should you look for when seeing value? If you’re trying to create value and make money with your investments, then pay attention to today’s tip on understanding value so that you learn the fundamentals to real estate value investing.

Always try to find out what the local values.Finding out the neighbors are and mortgage values in a particular area can provide an idea of the financial statements.

Understanding the very basics of value will give you a leg up on most investors so that you make smarter investments whether it’s stocks, bonds, collectibles, or real estate.

Be sure that you spend enough time on the business and also learning about how it works. You might have to give up some leisure activities in order to make more money over the long haul. Ditch poker night or softball league that you have more time to hone your investing skills.

There are two types of value:

Tenant issues can really kill your schedule.

1. CURRENT VALUE

Do not assume that real estate will go up in value. This assumption is dangerous in this market and for any one piece of property. Your best bet is to invest in properties that provide a nearly immediate positive cash flow. Property value appreciation will then add to your income.

2. INTRINSIC VALUE

Properties near business districts or waterfronts are likely to increase in value.

Current value is market price or current worth

Don’t invest a huge amount of money on real estate without researching the field first. Errors in this field can generate some major losses if you don’t watch out.

The highest price a buyer will pay – the bid price

If you buy a property and you intend to rent it out, use caution when selecting a tenant. The person will need to be able to give you money for the first month as well as a deposit. If they can’t get that kind of money together at the start, there is a high chance that they will end up falling behind on their monthly rent as well. Keep on looking for better tenets.

The lowest price a seller will accept – the asking price

Understand the value of your time is valuable. You could love rehabbing, however is the amount of labor required worth your time? Or is it better suited to looking for another great opportunity? It’s okay to make time for focusing on other important aspects of the business you have.

In essence, it’s the marketplace where buyer and seller meet a point called market value.

Be very patient when you are first starting out. Your initial real estate may take a lot longer than anticipated. Don’t become impatient and the perfect scenarios. That is not a wise use your money. Wait until a great investment comes along.

In markets where there’s a big transition – like at market tops and bottoms, there is a huge bid / ask spread or gap. A few years ago, we went through a huge transition where buyers were afraid to bid too high and sellers weren’t realistic about the big drop in real estate prices so they were asking too much – hence, there was a huge bid / ask gap. That gap has been slowly narrowing.

Think about employing a company that specializes in property management firm. The company will screen your potential renters and handles repairs. This leaves you more time to find other lucrative real estate opportunities.

Intrinsic value is the underlying value in a perfect world. Intrinsic value is not influenced by the market or economy.

Location truly is the most important factor when buying real estate investment. Think about the area you are choosing to invest in and the future.

Intrinsic value is what’s real.

Look at what the economy is expected to progress in the region. High unemployment rates and a shortage of decent jobs keep property prices down. This means that in the end you may not get small returns on your investment. A large city that is robust will have higher property values.

It’s the natural and essential value.

Make sure that you inspect the property inspected before purchase and plan on investing money into those repairs. Repairs need to be made before selling the property.Factor in a maintenance into your budget if you plan on renting out any piece of property.

It’s the real value with everything stripped away.

Start slowly with just one property. You may want to start big, but that can have drastic consequences when you’re a beginner. Begin with one and learn more about the strategy you want to use. This will benefit you to learn the game without many distractions.

Feb 252012
 

How do you establish the value of a property?  By comparing it to similar comparable properties that have sold in the same area.  These “comps” are they are called, should be as similar as possible to the subject property.  The building should be about the same size as your “subject” property and they should have similar size lots and similar features.

The best comps also come as near as possible the subject property.  Try to restrict your comps to those that sold most recently, but certainly not more than 6-9 months ago.  Also, be very sure you pay close attention and consider heavily on properties that actually sold and not those that are just listed or available for sale.  The price people ask for their properties often have little to do with the actual value of those properties.

Pay close attention to the  information of properties that actually sold.  The type of deed used, also indicates to a great degree, the situation surrounding the sale.  For comps, you want to know sales transactions that took place between a willing seller and a willing buyer.  That is a sale at full market price from an owner.  Of course, we only can make some guesses as to the real circumstance surrounding the sale, but here are some clues we can watch for.

1. Type of deed was used to transfer ownership

2. Finance used for the transaction

3. How do the prices of comps compare to their tax assessed value-relation to the market value

 

Dec 092011
 

The value of an income stream is evaluated subject to 5 factors:

1. Total Capital Required- The more capital required to purchase or produce the income, the less valuable the income is.

2. Risk-An income stream that has a greater chance of diminishing or completely disappearing is not as valuable as one which is more reliable and probable.

3. Effort- An income stream which requires more effort such as management, maintenance, upgrades, to achieve it is less valuable.

4. Time- The more time it takes to achieve the income, the less valuable the income is.

5. Opportunity Costs- The higher the opportunity costs of foregoing an alternative investment, the less valuable the income stream from the realized investment.

In a commercial real estate discussion you often hear the term Capitalization Rate (Cap Rate).  You will see that buyers,  sellers and lenders use this term to determine the value of a property. You need to know that making an investment decision solely on Cap Rate well may lead to bad investment decision.

Cap Rate is the ratio between the net operating income produced by an asset (property) and its original price paid to buy the asset.  Cap Rate can be considered the percentage return earned on your real estate investment during the first year of operations.

Take note of the limitations of Cap Rate.   It assumes that the investment will be paid for in cash because Net Operating Income does NOT take Debt Service (Mortgage Payment) into account and that it is only as accurate as the numbers used in the calculations. (Based on actual operating number, NOT Proforma Number)

The real question in valuation is not how much someone else thinks a property is worth, or the value estimated from a cap rate or other market measure of value, but rather the value at which you can attain your investment goals and which reflective of borrowing power at least.  In order to find the value at which the funds are available to pay the debt service and the investor’s required return on equity, we must derive a capitalization rate from the terms of both. This is known as Derivative Capitalization Rate; also know as the Band of investment method of calculating value.  We must determine as follows:

ETV x equity constant (required return) + LTV x Loan Constant (Annual Debt Service/Principal) =Derivative Cap Rate      NOI/Derivative Cap Rate= Max Price to the property.

Realistically however, the seller may have different ideas about what his/her property is worth and may decide not to sell to any particular investor if the price and the term of the sales don’t meet his/her needs.  The ability to strike a deal obviously depends on the ability of the buyer and seller to agree to terms of which price is one component of negotiation between them.   Based on other investment opportunities available to a particular investor at that particular time, investors decide how much return is required from any particular investment in order to deploy capital.  The real estate is really the conduit of the income stream.   It is the business of the real estate that investors are buying to earn the income stream.   Therefore, investors need to analyze and protect income stream by understanding the factors that affect it during the acquisition, the holding period and disposition. We want to focus on the market where our investment criteria and return can be achieved.