Supply & demand cut both ways, my fellow real estate junkies. Demand has plummeted, so what do we do? Swim against the tide and start buying, of course.

The Purchase Plan: Double Distress

Prices are down, but if you’re a real estate investor worth your salt, you still want a killer bargain. So here’s the game plan: where others see distress, you need to see dollars.

The purchase plan involves both distressed sellers and distressed properties. Let’s consider the case of foreclosures for a moment; why does real estate sold through foreclosure auction sell for less? Because investors can’t get inside to see what kind of shape it’s in. But there is no question that buyers at foreclosure auctions, especially in today’s market that’s far oversaturated with them, will score a good deal, provided they know what kind of property they’re buying.

So to take maximum advantage of a distressed seller sale by foreclosure, what safer method is there than to buy a property that you already know needs full renovation? There’s a discount built into properties needing renovation, because of the hassle of renovating them. Those hassles, which you’ll have to be adept at managing, include maintaining relationships with several of each of the following: hard money lenders (for quick settlements and renovation loans), small, local banks (they’re far cheaper than hard money lenders and fill the same niche, but are pickier), licensed contractors, inexpensive handymen, and low-cost permanent lenders if your renovation loan is short-term. A distressed property in shambles, sold through a distressed sale, will effectively give you a double discount, which will in turn create maximum cash flow for the next stage: getting paid.

The Payout Plan: Deferred Gratification

We’ve already established that you have to go against the grain if you want to make money in a slow market like this one. With a depression in demand and an abundance of supply, you don’t want to sell, so what do you do? You build your real estate empire, and watch money flow into your account every month as a landlord. When the market shifts in a few years, you’ll be poised to sell all those distressed properties bought for a steal, and make a fortune.

There are some challenges involved in being a landlord, so be prepared. First, your money is not liquid; these investments, by their very nature, are long-term and you will have to wait for the market to turn before you can sell. Second, you’ll need to be capitalized, both because your other money isn’t available and because rental properties will always throw surprise expenses your way in the form of maintenance, repairs, vacancies, and lawsuits. As a final note, it is a wise and happy landlord who hires a property management firm to assume the headaches for them.

Remember the first thing you learned about money: buy low, sell high. The real estate market can and should be your ally, not your enemy; ride the highs and lows alike, and right now that means buying as cheaply as you can and holding the properties as a landlord. Good luck!

Read more articles for landlords and real estate investors at EZ Landlord Forms, along with free real estate forms and real estate investing tips and resources.

Article Source: ArticleSpan

This article was written to acquaint anyone who has an interest in real estate investing with the most popular and commonly used reports, terms, and rates of return associated with real estate investing and investment analysis.

Reports

APOD – an APOD (an acronym for annual property operating data) gives a snapshot of a rental property’s income, expenses, and cash flow for one year. It is regularly used by analysts as a first-glance look at the financial performance of investment property without including the elements of tax shelter.

Proforma Income Statement – this report provides a useful way for agents and individual investors to evaluate the future cash flow performance of rental properties. It generally includes calculations for tax shelter so investors can evaluate such things as cash flow after taxes, depreciation, tax benefit or loss, and various rates of return on a year-by-year basis for up to any number of years.

Comparable Sales Report – this report surveys what other similar property has recently sold for and helps someone investing in rental property to evaluate whether a seller’s asking price is in line with realistic property value.

Marketing Package/Executive Summary – these reports are used to provide an overview of income properties currently listed for sale. Listing agents typically prepare one or the other so when you call an agent about a property just ask them to send you the one that they’ve created for marketing the property.

Terms

Gross Scheduled Income – also known as potential gross income, this is the total annual rental income a property would generate if all the units were occupied and all rent collected. Its purpose is to estimate the maximum potential income the investment real estate would generate without regard to any vacancy or credit losses.

Operating Expenses – these are costs associated with keeping a property in service such as routine maintenance and repair, utilities, property taxes, insurance, and management fees. They do not include the mortgage payment, income taxes owed by the investor resulting from owning the subject investment, or allowances for depreciation.

Net Operating Income – this is the amount of income remaining to pay the mortgage after deductions for vacancy and operating expenses. Think of it this way: If the property was wholly owned and without debt, it would be your cash flow before taxes and depreciation are considered.

Cash Flow After Tax – this is the annual cash flow projection remaining after income taxes and other tax shelter elements.

IRC 1031 Tax-Deferred Exchange – this federal tax code provides investment property owners with a means to dispose of one real property asset in exchange for another without having to pay taxes in the year of the exchange. The tax obligation is not vanquished, but Section 1031 permits the investor to defer federal tax until an actual sale of the rental property occurs. It is strongly advised that a tax exchange professional be consulted before you sell any investment property.

Depreciation and Recapture Tax – depreciation is a noncash tax shelter deduction in full compliance with the tax code based upon the type of investment property owned (i.e., residential or commercial). On the flip side, however, because the depreciation taken reduces your investment property’s tax basis and effectively increases your tax gain when you later sell the property, the IRS assumes that any gain you make in part may have resulted from the depreciation taken and in turn imposes a recapture tax on the gain attributable to depreciation taken. Always consult your tax advisor before you sell your rental property.

Measures/Rates of Return

Gross Rent Multiplier – this is used to measure the ratio between annual gross rental income and sale price. It is computed by dividing the property’s price by its gross scheduled income and is commonly used in real estate investing for simple, rule-of-thumb comparisons to other rental property opportunities. As a buyer, the lower the gross rent multiplier is the better.

Cap Rate – this is by far the most popular financial measurement you will encounter in real estate investing because cap rate (unlike gross rent multiplier) accounts for the property’s operating expenses. It is computed by dividing a rental property’s net operating income by its price. As a buyer, the higher the cap rate is the better.

Cash on Cash Return – this is the return on your initial investment based upon the cash flow generated by the property during the first year. It is computed by dividing the first year’s annual cash flow before taxes by the investor’s initial investment.

Internal Rate of Return – this return reveals in mathematical terms what an investor’s initial cash investment will yield based on an expected stream of future cash flows discounted to equal today’s dollars. Because it calculates for time value of money, thereby allowing analysts to take into account both the timing and the scale of cash flows generated by the investment property, it is one of the more popular rates of return used in real estate investing. You will need a financial calculator or appropriate real estate investment software solution to make this and other time value calculations, however.

It should be noted that ProAPOD Real Estate Investment Software creates these reports and rates of return and more.