It never ceases to amaze me that business men and women alike can sometimes forget the very basic rules of investing when it comes to investing in real estate. Real estate investing is no different than investing in traditional stocks, bonds, funds or CD's when it comes to looking for value and return. Often times, the real value of an investment can be determined quickly and easily
and it has nothing to do with how steep the discount is! It seems that today, many in the investment real estate business want to confuse complication with innovation!
Even companies who specialize in cash flow properties can muck up the process of analyzing a property by trying to make it easier and only creating a bigger more confusing mouse trap! Real estate investors, especially those investing in hot real estate markets like Memphis, TN. need to realizing that the simple basics to investing have not changed, just the delivery of the information to the investors. In the end, a Memphis real estate investor only needs to focus on a few key elements of the deal to determine if it fits their criteria.
1. What is your immediate exit strategy?
Some companies will assist you with determining exit strategy before you get started. If you are not dealing with a company that gives you a little direction, then make sure you have thoroughly considered what your immediate and long-term strategies are for investing.
When investing in a city like Memphis, TN., the long-term benefits of investment property ownership is a major factor in exit strategies. Today, a majority of investors are purchasing investment real estate in Memphis for monthly cash flow and long-term appreciation while a renter reduces their principle. This allows an investor to capture long-term tax benefits, appreciation and monthly cash flow.
2. Determining Cash Flow
If you are purchasing your property for all cash and holding for a return on investment, then skip directly to #3. However, since most of us purchase properties with some sort of financing attached, this is where you want to slow down and really pay attention. This step refers directly to those who are putting a long-term mortgage on their property and having a renter make the monthly payment. Passive monthly cash flow in its simplest form is the amount of rent received minus the monthly note. As an investor you need to take into consideration certain costs that you will most likely incur. Property management fees, taxes, mortgage interest, rainy-day funds, etc... There are many places to look online for copies of sample cash flow calculators which help you to breakdown cash flow after PITI (Principle, Interest, Taxes, Insurance) and property management fees. Be aware what monthly cash flow really means and how much to put away for future needs such as vacancy and maintenance.
3. Cash on Cash ROI
Again, try to keep this calculation very simple. You divide net rental income (rents minus taxes, insurance and set% for vacancy & maintenance) by total investment (purchase price, rehab costs, closing costs). Most savvy investors understand this NET Cash on Cash Return On Investment and recognize that a property with a double digit return after expenses is much better than the 2% return from the local bank CD. Every investor is different and every investor has different criteria for location, size & amenities that they want their properties to include. As long as the property meets those criteria and you are happy with its location, don't allow a lot of calculations and fancy looking spreadsheets to confuse or impress you. Stick with the basics and keep it simple. Calculate your cash flow or return on investment and purchase properties that give you the return you are looking for!