90% of all millionaires became so through owning real estate

Andrew Carnegie
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investment real estate

Investment Real Estate is the most lucrative place you can put your money. After placing your down payment the property should maintain itself. Therefor you need to do research into what all the costs will be. Main source of income is going to be rent. What is the market rent for the property you are looking at? General rule is 10%, meaning you can collect 10% in rent of what your loan is. You can achieve this by putting more down on a property or finding real good deals. In a high appreciating market 10% is very rare and most will settle for less.

Gross Rent Multiplier (GRM)

Gross Rent Multiplier is the first level of qualifier to tell if a property is worth taking a deeper look into. This is a very simple formula taking the List Price or Fair Market Value of a property divided by the Annual Income. ex. $1,000,000 ÷ $100,000 = 10. You are buying an income stream in an investment property. The lower the GRM the less you are paying for that income stream. This can help you eliminate properties fairly quickly. Let’s say you are looking at 20 properties and they range from a GRM of 7 – 12. Maybe you know you can only make the numbers work with a GRM of 9 or lower. Now you can eliminate several candidates and move forward with a deeper look.

Capitalization Rate (Cap Rate)

Capitalization Rate is going to be your next level of information. To calculate this we need to know the Gross Scheduled Income (the theoretical maximum rent). Less Vacancy and Bad Debt (typically 5%), which gives you the Gross Operating Income (GOI), less all Operating Expenses (management, insurance, maintenance, utilities, property taxes, legal and accounting fees, etc…) Which gives you your Net Operating Income (NOI). Cap Rate is the NOI ÷ Purchase Price. ex. $65,000 ÷ $1,000,000 = 6.5% Cap Rate.

The lower the Cap Rate the lower the returns on investment. So we want to find as high a Cap Rate as possible. Your own investment strategies will tell you at what rates you are willing to invest. Lower Cap Rates tend to be A Class properties. More amenities in nicer areas, with generally less issues. Higher Cap Rates tend to be found in C Class properties. So these may come with more issues than you want to take on.

Before Tax Cash Flow (BTCF)

If you are taking out a loan you need to find what your Debt Service is per month. Take your Net Operating Income (NOI) less the Debt Service and this gives you Net Spendable Income (NSI). NSI ÷ Down Payment = Cash-on-Cash Return, or $24,324 ÷ $453,250 = 5.4% of the Buyer’s Investment.

After Tax Cash Flow (ATCF)

Now we are really diving deep and you will need help from your lender and tax professionals most likely. We are now taking depreciation on the property. Lets assume an 80% depreciation rate on a $1,295,000 property. Residential properties are depreciated over 27.5 years and commercial over 39 years. ($1,295,000 x 0.8) ÷ 27.5 yrs. = $37,673/yr. = $3,139/mo. At a 37% combined Fed/State tax bracket, this is $1,162/mo. So the ATCF is approximately your NSI of $2,027 in this example + $1,162 = $3,189/mo. = $38,268/yr. Effectively taking the Buyers cash on cash return from 5.4% before tax to 8.4% after tax!

You gain value in multiple ways, which is why investment real estate is so sought after. The market will continue to appreciate. On average Northern Colorado experiences 4-5% growth each year. Your renter is paying your mortgage and you can take tax deductions. (I am not a tax professional, please seek one for any tax advice) This can add up to over 30% in gains year after year! The stock market cant even come close to that with averages around 10-12%.

The search below are not necessarily great deals, these are purely properties the listing agents have market as investment properties. They are not vetted by me. You need to research each individual deal to see if it is a good fit for what your needs are. Buy and hold is a great way to go. An occasional fix and flip deal may present itself. If you have any questions regarding any property please don’t hesitate to Contact Me.