I am continually amazed at the lack of understanding some businesses and business owners show when it comes to this one simple rule. It seems that today, many in business confuse complication with innovation!
I recently reviewed the financial analysis, or "cash flow analyzer" as some call it, that other companies use to showcase their properties and the financial advantages of the properties. I give most everyone the benefit of the doubt here and believe that the best interest of the individual investor is always the end game. But when you look at the complexity of some of these "analyzers", it raises the question of whose best interest is really being looked after. It's easy to try and confuse buyers with quick talk, lots of numbers and calculations and ultimately a positive conclusion that the property is a great buy.
I will confess that in the past, even MemphisInvest.com has mucked up the process of analyzing a property by trying to make it easier and only creating a bigger more confusing mouse trap!. We had to realize that the simple basics to investing hadn't 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.
For the purposes here, we are going to assume that an investor has already determined that a property is located in and area they want to invest and that is has the proper number of bedrooms & baths and other amenities. Once that is determined:
1. What is your immediate exit strategy?
If you are dealing with MemphisInvest.com this should already have been determined. We strongly believe in the long-term benefits of Memphis investment property ownership. A majority of our clients are purchasing for monthly cash flow and long-term appreciation while a renter reduces your principle.
2. Determining Cash Flow
If you are purchasing your property for all cash and holding for a return on investment, then #2 is for you. This tip refers only to those who are putting a long-term mortgage on their property and having a renter make the monthly payment. 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... As a client of MemphisInvest.com, you receive a cash flow breakdown which calculates cash flow after PITI and property management. As a client, we then advise you as to what that monthly cash flow really means and how much to put away for future needs such as vacancy and maintenance. (Being actual investors in Memphis really helps here because we can tell you exactly what we do and how we operate our own properties).
3. Cash on Cash ROI
Again we 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!
But hey - what do I know!
Chris
