You are here: Home / 2008 / Archives for February 2008

How to Market Rental Income Property Like a Pro

February 28, 2008

I applaud any residential real estate agent that has the grit to list and sell rental income property. Having been a real estate professional myself for the past thirty years, I understand the challenge of meeting with real estate investors and therein gaining the loyalty and trust required to service their investing needs, whether they are selling or buying income-producing properties.

Nonetheless, I also have a complaint against residential agents that sell rental property. Maybe it’s professional pride, even intolerance, but it exasperates me when real estate professionals who do market income-producing property do not include basic elements about the rental property others as myself can use to sell that property.

In the MLS listing, for instance, residential agents typically do not include essential income and expense data. This is annoying because it means a call to that agent. This would not have been necessary if the agent merely took a few minutes to present the income property properly.

In addition to the obvious data about the income property such as price, address, and number of units, it would be helpful (and more professional) for the residential agent to always include the following in the MLS listing

  1. Unit Mix – What are the unit configurations? Are the units two bedroom one bath, three bedroom two bath, and so on? How many units are there for each configuration?
  2. Gross Scheduled Income – What is the annual gross rental income? The potential annual income if all units were occupied and collecting realistic (current, not pie-in-the-sky) rents.
  3. Operating Expenses – The annual dollar amount spent for property tax, liability insurance, utilities, trash collection, maintenance and repairs, and so on.
  4. Rent Per Unit – The current rent charged for each unit.
  5. Capitalization Rate – This is optional in the MLS listing, but it can help generate interest. Simply divide the property’s net operating income by the asking price.

After all, the goal is to sell your income property listing. Why not present it in a way that satisfies every inquiry, perhaps peaks interest in the investment property, and at the same time make you look more professional. Moreover, you can show your seller how proactive you are about marketing their rental property.

You can go to ProAPOD Real Estate Investment Software to preview a marketing package. Simply follow Software Reports.

Filed Under: other

Using Cash-on-Cash (CoC) to Measure Income Property Profitability

February 25, 2008

Cash-on-cash return (CoC) measures the ratio between a rental income property’s anticipated first-year cash flow to the amount of cash real estate investors invest to purchase the real estate investment property.

Popular But Not Particularly Powerful

Real estate investors typically use the cash on cash return in two instances: To gauge the profitability of real estate investments against other investment opportunities, and to compare the profitability of similar real estate income-producing properties. To discover the return an investor might receive investing in T-bill compared to investing in real estate, for instance, or purchasing an apartment complex compared to a commercial real estate office complex.

Cash on cash is a popular measurement of income property profitability mostly because cash-on-cash is an easy return to compute. Moreover, for this reason, because cash-on-cash return is popular amongst real estate analysts, many real estate investment software programs include the cash-on-cash return in their software solutions.

Despite its popularity, however, cash on cash (CoC) is not a particularly powerful tool for measuring the profitability of rental income property. This is mostly due to the fact that cash on cash doesn’t take into account time value of money, and as a result must be restricted to measuring a property’s first year (not its future year’s) cash flow.

Calculating Cash-on-Cash (CoC)

The cash on cash computation has two parts: Cash invested and the rental property’s annual cash flow.

In this case, “cash invested” meaning the total amount of cash the investor expects to initially invest to purchase the property such as down payment, loan points, escrow and title fees, appraisal, and inspection costs, and “annual cash flow” being the cash flow before tax (CFBT) generated by the investment property in the first year of operation. Here’s the formula:

Annual Cash Flow / Cash Invested = Cash on Cash Return

Don’t Make Investment Decisions Based Solely on Cash on Cash

Real estate investment decisions should never be made solely on cash on cash return; there are better ways to evaluate income-property investments.

Nonetheless, cash on cash return is not without validity. So it helps to be aware of it, to know how to calculate it, and perfectly fine to include it in your cash flow analysis reports.

Filed Under: analysis

Why You Should Inspect Your Rental Income Property Periodically

February 23, 2008

Okay, you just closed escrow on a multifamily apartment building. During escrow, in accordance with prudent real estate investing practice, of course, you did your due diligence. You walked through each apartment unit, had the building inspected for everything from pest and dry rot to electrical, and generally surmised that the rental property would be a good income producer and real estate investment opportunity.

Afterward, over the next several years, you essentially sat back and collected the rent. You made no provision to inspect periodically the units that your tenants occupy. Then you made the decision to exchange your real estate investment for a newer, larger apartment complex, and listed it for sale with a popular real estate agent who understands income-producing property.

To your delight, within just two weeks you get an offer, accept it, and set up a time for the buyer to inspect the apartments. Just the way you did when you purchased the building, with an interior inspection requiring the buyer to walk through each unit.

To your dismay, you discover that your tenants, though careful to make their rent payments on a consistent basis, had little regard to carefully maintain your property. You are as surprised and disgusted as the buyer is to see a stack of tires in one unit, multiple bleach marks on the carpet of another, one unit painted totally in the color pink, and so on.

This does happen. When real estate investors become owners of income property, some get lulled to sleep by tenants who are not disruptive and pay their rent on time, and therefore feel no need inspect the units periodically.

Prudent real estate investing, however, requires you, as the CEO of your investment enterprise, to know what’s going on behind the closed doors of your rental income property. Always schedule a walk through of your income properties maybe twice, but no less than once a year. It might not prevent everything tenants might be prone to do, but it helps.

Filed Under: articles
« Older Posts