1 Information You Need Before Investing in Income Properties

2 Information You Need Before Investing in Income Properties

Table of Contents

Introduction ........................................................................................................... 3

Chapter 1 – Employment Numbers ....................................................................... 4

Chapter 2 – Housing Affordability ........................................................................... 7

Chapter 3 – Cash on Cash Return and Total Rate of Return ............................... 9

Chapter 4 – Useful Analysis Tool .......................................................................... 10

Chapter 5 – Further Insights ....... ...........................................................................17

Conclusion ........................................................................................................... 20

3 Information You Need Before Investing in Income Properties

There are several ways by which you could invest in Real Estate. You can buy

properties in the hope of flipping them for a profit. You can also purchase properties in

the hope of creating a passive income stream. For many, the thought of creating a

dependable income stream during retirement is very attractive. Some of the best

investment opportunities in the market right now are offered in Rental Income

Property. Perhaps you haven’t thought about investing in rental real estate since the

bursting of the housing bubble, but now is the right time. This is because this market is

characterized by the following:

Motivated sellers

Properties that were overvalued during the recent bubble are now undervalued in

most markets

Many available financing options

Government assistance

Tax benefits

Positive monthly cash flow

Yes, investing in rental real estate income property could be the best type of investment

within the next 10 years. Unlike the case during the bubble years, income property

bought at the right price can now generate positive monthly cash flows for the

investor. However, real estate requires a major investment of time and money. Investors

should analyze cash flows and rates of return before buying a property, which may

simply be the cause of a headache.

Instead of buying based on hope, you should KNOW your rates of return, tax benefits,

and cash flows BEFORE you buy. Calculate the optimal offer price. Analyze several

loan options. See how different assumptions of vacancy rate and price appreciation,

among others, affect the rate of return. Compare different rental investment

opportunities.

However, the question is: How exactly do you scoop up the rental real estate bargains?

I am writing this short booklet to talk about four numbers that you must know before you

buy any property. As for finding the bargains, that’s what I and my team do. Visit our

website, www.palmsassetmanagment.com, and see how we can use our many

resources to get you the best deals.

INTRODUCTION

4 Information You Need Before Investing in Income Properties

The first numbers that you need are employment numbers. One of the first pieces of

data you should have is the employment data for the market that you are interested in

investing in. What is the unemployment rate? Is it above or below the national average?

Is it rising or falling? What are the major industries in the region? These data will help

determine the economic stability of the city you are looking at. You want to invest in a

city or region that is vibrant, not in an area that is in decline. The employment numbers

vs. the national average would be a very good indicator.

The good news is that these data can be easily accessed for free!

Here’s how you get the data:

Go to the Bureau of Labor Statistics web site www.bls.gov

Click on the tab labeled “Subjects”

When you get a list of subjects, go to the bottom of the page, and look for “

Regional Resources”

Choose your region

You will see a map of your region, and from here, choose the state you are

interested in

Once you choose a state, you will get a list of cities in this state. Chose the city you are

interested in, and you will get a table like the one shown on the next few pages.

EMPLOYMENT NUMBERS

Chapter 1

5 Information You Need Before Investing in Income Properties

West Palm Beach-Boca Raton-Delray Beach, FL Economy at a Glance:

Data Series Back

Data

Oct

2014

Nov

2014

Dec

2014

Jan

2015

Feb

2015

Mar

2015

Labor Force Data

Civilian Labor Force

691.5 691.4 685.3 688.8 (P) 685.8

Employment

654.1 655.4 652.5 652.5 (P) 651.3

Unemployment

37.5 36.0 32.8 36.3 (P) 34.5

Unemployment Rate

5.4 5.2 4.8 5.3 (P) 5.0

Nonfarm Wage and Salary Employment

Total Nonfarm

567.0 576.9 578.5 573.1 579.4 (P) 583.1

12-month % change

4.2 3.6 3.1 3.6 3.7 (P) 3.7

Construction

29.2 29.1 29.2 28.7 29.0 (P) 28.8

12-month % change

5.8 4.7 5.0 7.9 7.8 (P) 6.3

Manufacturing

16.5 16.9 16.9 16.5 16.6 (P) 16.5

12-month % change

5.1 4.3 4.3 2.5 1.8 (P) 1.9

Trade, Transportation,

and Utilities

108.2 110.6 111.4 109.7 109.9 (P) 109.6

12-month % change

4.6 2.7 1.7 3.5 2.9 (P) 2.1

Information

10.1 10.2 10.2 10.1 10.2 (P) 10.2

12-month % change

-1.9 -1.0 -1.9 -3.8 -2.9 (P) 1.0

Financial Activities

39.0 39.7 39.7 39.4 39.1 (P) 39.0

12-month % change

1.3 3.4 2.3 3.7 2.6 (P) 2.1

Professional and

Business Services

103.8 104.3 104.7 102.7 105.0 (P) 106.6

12-month % change

7.5 5.7 6.1 5.9 7.3 (P) 7.8

Education and Health

Services

90.3 91.0 91.3 89.7 91.5 (P) 91.1

12-month % change

4.5 4.4 4.2 3.0 3.6 (P) 2.8

Leisure and Hospitality

76.4 80.0 81.2 81.2 82.7 (P) 84.3

6 Information You Need Before Investing in Income Properties

12-month % change

3.4 3.1 2.7 2.1 2.1 (P) 1.8

Other Services

30.4 31.6 31.7 32.1 31.9 (P) 33.1

12-month % change

3.4 5.7 5.0 7.0 4.9 (P) 8.2

Government

63.0 63.4 62.1 62.9 63.4 (P) 63.8

12-month % change

0.8 1.0 -1.1 1.0 1.3 (P) 1.9

Footnotes

7 Information You Need Before Investing in Income Properties

The second number you need to know is related to housing affordability. The housing

affordability index looks at average salaries vs. average home prices and mortgage

interest rates. With these data, you can determine what percentage of a person’s

paycheck will go to the mortgage payment. When you look at the index, always

remember that higher is better. If the number is too low, it means that few people can

afford to buy a home.

The good news is that these data are also available for free!

Here’s how you get the data:

Go to the National Association of Realtors website at www.realtor.org

Look for tab that says “Research and Statistics”

Under this tab, you will see “Housing Affordability Index”

You will also see a tab for “Metropolitan Index”

This index will give you a printable report with housing affordability for over 150

cities around the U.S.

I have attached a small sample of the report on the next page.

HOUSING AFFORDABILITY

Chapter 2

8 Information You Need Before Investing in Income Properties

National Association of REALTORS®

Affordability Index of Existing Single-Family Homes for Metropolitan Areas

CBSA Metropolitan Area 2012 2013 2014 p 2013 2014 p

Code

10180 Abilene, TX 248.0 210.7 223.9 -15.0% 6.2%

10420 Akron, OH 326.0 273.0 304.0 -16.2% 11.3%

10580 Albany-Schenectady-Troy, NY 221.0 201.2 213.4 -9.0% 6.1%

10740 Albuquerque, NM 186.7 172.7 182.3 -7.5% 5.6%

10900 Allentown-Bethlehem-Easton, PA-NJ 201.1 199.5 208.2 -0.8% 4.4%

11100 Amarillo, TX 237.6 238.4 230.2 0.3% -3.5%

31100 Anaheim-Santa Ana-Irvine, CA 84.8 67.9 65.0 -20.0% -4.2%

11540 Appleton, WI 320.7 261.0 269.8 -18.6% 3.4%

12060 Atlanta-Sandy Springs-Marietta, GA 360.6 240.2 221.7 -33.4% -7.7%

12100 Atlantic City, NJ 163.6 162.3 157.6 -0.8% -2.9%

12420 Austin-Round Rock, TX 199.7 176.0 169.9 -11.8% -3.5%

12580 Baltimore-Towson, MD 233.0 172.7 185.1 -25.9% 7.2%

12700 Barnstable Town, MA 134.2 116.3 116.4 -13.3% 0.0%

12940 Baton Rouge, LA 213.7 203.4 194.7 -4.8% -4.3%

13140 Beaumont-Port Arthur, TX 245.9 207.1 222.0 -15.8% 7.2%

13780 Binghamton, NY 324.5 293.5 298.9 -9.6% 1.9%

13820 Birmingham-Hoover, AL 221.5 192.3 194.8 -13.2% 1.3%

9 Information You Need Before Investing in Income Properties

The last two numbers you need to know are interrelated and are thus jointly presented

in this chapter. These numbers are Cash on Cash Return and Total Rate of Return on

your investment.

I have found a tool that generates these data in a usable format with a 10 year

projection. This tool is, by far, the best one that I have found to date. The best part is

that this tool is very inexpensive.

The tool is a real estate Excel spreadsheet that you can use to analyze rental property

cash flow, rate of return, and profitability quickly and easily. All you need to do is fill in a

couple of blanks

The tool was developed by Healthy Wise Project at

http://healthywealthywiseproject.com/. I use it to analyze all of my deals. In the

following pages, I will walk you through some screen shots of the spreadsheet and how

each tab can be used.

The spreadsheet has multiple tabs. Some require you to provide information, whereas

the others provide you with data.

Remember that the numbers in red require data input. The next chapter has all the

details.

CASH ON CASH RETURN AND TOTAL RATE OF RETURN

Chapter 3

10 Information You Need Before Investing in Income Properties

First Tab (as shown below): Property Information

USEFUL ANALYSIS TOOL

Chapter 4

11 Information You Need Before Investing in Income Properties

Second Tab: Loan and Tax Information for the Investment Property

12 Information You Need Before Investing in Income Properties

Third Tab: Rental Income Information

Note that the spreadsheet can account for multiple unit types, such as apartment

buildings, duplexes, and so on. Rental income assumptions are also entered here. This

sheet calculates gross scheduled income and gross operating income, as well as

provides assumptions for rent increase and property price appreciation.

13 Information You Need Before Investing in Income Properties

Fourth Tab: Annual Real Estate Operating Expenses

Common items, such as property tax, insurance, and utilities, as well as rental items,

including replacement reserve, advertising, and property management fees, are

accounted for.

14 Information You Need Before Investing in Income Properties

Fifth Tab: The Payoff

The tool analyzes the first year of rental real estate investment returns and includes

such data as cap rate, cash-on-cash returns, gross rent multiplier, and return on equity.

Both before- and after-tax cash flows are included as well as the tax benefit/loss

15 Information You Need Before Investing in Income Properties

The best part is the 10-year projection and operating income, as shown below.

© 2012, 2013, 2014 www.HealthWealthyWiseProject.com

www.HealthyWealthyWiseProject.com

10 Year Returns

EFFECTIVE GROSS INCOME (EGI)Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Increase in Rental Income 2.0% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Gross Scheduled Income 26,400 26,928 27,467 28,016 28,576 29,148 29,731 30,325 30,932 31,550

less Vacancy/Collection losses 5.0% 1,320 1,346 1,373 1,401 1,429 1,457 1,487 1,516 1,547 1,578

EFFECTIVE GROSS INCOME 25,080$ 25,582$ 26,093$ 26,615$ 27,147$ 27,690$ 28,244$ 28,809$ 29,385$ 29,973$

GROSS OPERATING INCOME (GOI)Effective Gross Income 25,080 25,582 26,093 26,615 27,147 27,690 28,244 28,809 29,385 29,973

Other Income 0 0 0 0 0 0 0 0 0 0

Increase of 'Other Income' 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GROSS OPERATING INCOME 25,080$ 25,582$ 26,093$ 26,615$ 27,147$ 27,690$ 28,244$ 28,809$ 29,385$ 29,973$

NET OPERATING INCOMEYear 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Gross Operating Income 25,080 25,582 26,093 26,615 27,147 27,690 28,244 28,809 29,385 29,973

(Increase in expenses) 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

TOTAL OPERATING EXPENSES 9,460 9,650 9,843 10,039 10,240 10,445 10,654 10,867 11,084 11,306

Op. Expenses as %age of income 37.7% 37.7% 37.7% 37.7% 37.7% 37.7% 37.7% 37.7% 37.7% 37.7%

NET OPERATING INCOME 15,620$ 15,932$ 16,251$ 16,576$ 16,907$ 17,245$ 17,590$ 17,942$ 18,301$ 18,667$

CASH FLOW (BEFORE TAXES)Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Net Operating Income 15,620 15,932 16,251 16,576 16,907 17,245 17,590 17,942 18,301 18,667

-Yrly. P & I 8,232 8,232 8,232 8,232 8,232 8,232 8,232 8,232 8,232 8,232

- Upgrades 2,000

CASH FLOW (BEFORE TAXES) 5,388$ 7,700$ 8,019$ 8,344$ 8,675$ 9,013$ 9,358$ 9,710$ 10,069$ 10,435$

CASH ON CASH RETURN 9.0% 12.8% 13.4% 13.9% 14.5% 15.0% 15.6% 16.2% 16.8% 17.4%

*Cash on Cash computes from Initial Investment

16 Information You Need Before Investing in Income Properties

There is a lot of other good stuff to know, including things like mortgage principal

reduction, property appreciation, debt-coverage ratio, as well as the estimated sale

proceeds after taxes and expenses.

17 Information You Need Before Investing in Income Properties

Mark Ford, editor of The Palm Beach Letter investment newsletter, adds the following:

Buying rental properties is a great opportunity for anyone who has some cash

and is interested in turning it into a lucrative, income-producing business. There

are three reasons why now is the best time to buy.

Most of the houses we are buying are inexpensive. The best properties to buy are

single-family, three-bedroom, two-bath houses. However, we do not limit ourselves to

those properties. Sometimes, an ugly duckling like a three-bedroom one-bath house

comes on the market at a price that is just too good to pass up. Of course, if you can get

a good deal on a duplex, triplex, or quad, the cash flow can be excellent. We are always

on the lookout for these. There is always a big market for these properties because they

are perfect for young families in “B” neighbourhoods. We buy on the wholesale market,

such that we save a lot of money. We also do complete rehab so you don’t have to. This

will actually be less than the cost of building the house. In other words, you are buying a

house at a discount and getting the property for free.

The second reason why now is the best time to invest is that mortgage rates are at all-

time lows. You can get a 30-year, fixed-term mortgage for less than 4.5%. You can get

a 15-year mortgage for less than 3.5%. CNN recently reported that mortgage rates are

at 60-year lows.

Third, because so many people have gotten into financial trouble, the number of people

renting homes today is greater than ever. Banks have tightened their lending policies,

which is something they never should have loosened in the first place. Many people

who earn good incomes can’t get mortgages. Thus, the market is now flush with people

looking to rent.

These three factors have created a terrific opportunity for prudent investors.

Today, if you took out a 4.5% mortgage on 80% of a $120,000 house, you’d be paying

about $5,800 a year in mortgage payments. With taxes at, say, $2,000 and expenses

at, say, another $2,000, your total cost for owning the house would be about $9,800 a

year. That translates into approximately $800 a month.

You could rent out a house like the one I’m describing for between $1,300 and $1500 a

month. Subtracting $800 (your monthly expenses) from, say, $1,400 (a conservative

FURTHER INSIGHTS

Chapter 5

18 Information You Need Before Investing in Income Properties

estimate of the monthly rent you’d be getting) will net you $600 a month. That’s a profit

of $7,200 a year!

If your down payment for the house was $24,000 (20% of $120,000), there will be no

out-of-pocket expense other than closing costs because we handle the rehab. Your

cash flow would be over 20%, and your total return would be over 40% per year

depending on appreciation.

There is another major benefit to owning a rental property. With all the money the

Federal Reserve has printed, the decline of the dollar and high inflation are all but

inevitable in the years ahead. Thus, the $5,800 a year you will be paying for principal,

interest, and expenses toward your home will become easier to pay because your

income, through inflation, will almost certainly go up.

In other words, the weakening of the dollar will make your debt less expensive in real

terms.

If that’s not incentive enough, consider this: as inflation increases, so will the market

value of your home. It is quite possible that you could see your $120,000 be worth over

$200,000 in 10 years. And even if that doesn’t happen, it’s almost certain to double,

triple, or quadruple by the time you pay off your mortgage. That translates into an extra

$180,000 to $360,000 you can put toward retirement.

Where do we find the income property bargains?

We use many sources. We have extensive relationships with many wholesalers in

Southeastern Florida. We go to many auction web sites. We search through thousands

of foreclosed homes to find you the best deals online.

With the real estate rental software spreadsheet I shared, you can take charge of your

rental properties in the following ways:

Analyze one unit (i.e., single-family residential) or multi-unit apartment buildings

with ease

Work with any-size income property

Include up to three loans

Obtain the rates of return effortlessly

You don’t have to be a financial wizard. You simply need to enter basic financial data

into a user-friendly form, and the program will automatically calculate the results.

The spreadsheet is recommended for real estate investors who plan to buy and hold

rental property. It provides a deep level of analysis with first year and 10-year holding

period considerations.

19 Information You Need Before Investing in Income Properties

The spreadsheet gives novice investors an easy and affordable way to know whether a

real estate rental investment income property will be profitable before they put their

money in.

The tool will enable you to see the following:

Cash flow projections

How changes in rents or expenses affect your profitability

Discover your tax benefit or loss

Determine your return on equity

Determine whether your investment goals are met

Calculate an optimal offer price

Compare several investing opportunities

You can further see reliable estimations of:

Rates of Return

Cap Rate

Gross Rent Multiplier

Cash on Cash Returns

Return on Equity

Tax Liability (or loss)

20 Information You Need Before Investing in Income Properties

In closing, I would like to say that it is our goal to educate investors as much as

possible. We believe that more you know, the more likely you will come to appreciate

the hassle-free, safe, and high returns that we offer to our clients.

For more information, please feel free to contact us at gz@pbforrent.com.

Thank you for your interest.

George Zweifler

CONCLUSION