Analyzing Small Investment PropertiesInvestors interested in small income property would benefit from viewing my sequential tips for completing a typical property analysis based on a Standard Cash Flow model. Quick Search links are provided above to current income properties posted on the MLS. If you are new investor to income property, then let me be the first to welcome you to the field. You might want to review the information provided below as a starting point.
Understanding the Basic Cash Flow Model
Investor financing for 1-4 units is typically based upon the individual buyer's credit capacity; however, for income property of 5 units or more lenders typically require that your particular investment generate a positive Debt Coverage Ratio as their litmus test. Regardless of the number of units in consideration, it is important that you as an investor have at minimum a basic understanding the Standard Cash Flow Model and related analytical terms required for meaningful conversation with an income property lender, Familiarity with terms such as Gross Scheduled Income, Vacancy Factor, Effective Rental Income, Other Income, Gross Operating Income, Annual Operating Expenses, Net Operating Income, Annual Debt Service, and Pre Tax Cash Flow are essential to understanding the the Standard Cash Flow Model used for assessing the effective operation and value of income property. Equally important to grasp are the tax aspects of cash flow such as Cost Recovery (Depreciation), Mortgage Interest & Points, Tax Liability or Savings, Passive Income including Exceptions to Passive Income IRS rules that may well apply to you, and your actual After Tax Cash Flow realized from your investment.
Valuation of Income Property
Common methods for determining the value of income property such as Gross Rent Multiplier, Cap Rates, Cash on Cash, and Debt Coverage Ratios are essential income property investor tools. All of these terms are all related to an understanding of the Standard Cash Flow Model and it's application for determining both the current actual and future potential market value of a property based on income capable of being generated by that same property.
Investor Software
Third party investor software is recommended for a sophisticated analysis of your potential Return on Investments and your project's cash flow, pre and post tax, over an extended time period. Realtors® familiar with income property typically prepare an Annual Property Operating Data Sheet (APOD) for each listing. However, a free, down-loadable Excel Cash flow calculator is also available for my registered web site users wishing to experiment with plugging in their own investment numbers prior to purchasing more sophisticated software.
1031 Tax Deferred Exchange Transactions
1031 tax deferred exchange transactions, if structured properly offer a variety of options and benefits to the real estate investor. 1031 exchanges require the services of a licensed accommodator, a properly constructed 1031 purchase offer, and strict compliance with corresponding IRS rules, sequence of steps, and boot requirements. Related terminology, 1031 FAQs , and exchange guidelines are available for Reverse Exchanges, Multiple Property Exchanges, Property Improvement Exchanges, and the more traditional Trade Up for Like Kind Property. Most importantly, examples of mistakes others have made is presented as a practical consideration and lessons in what not to do. Information regarding typical exchange cost, low risk Tenants in Common (TICs) exchanges are introduced. Two of the largest and most reputable 1031 exchange accommodators, First American Exchange and Asset Preservation Inc, are linked.
Structuring Your Investment AssetsInvestors and home buyers alike should also carefully consider how to structure their acquisitions and assume title in a manner providing optimum protections of their assets. This is an often overlooked consideration until it is too late, a devastating liability is incurred, and the financial damage is irreversible. The most common considerations in this regard involve simply determining how to take title, and how to structure assets within Trust, Corporations, Partnerships, and Limited Liability Company's such as those frequently established in Nevada. As a Realtor® I can advise buyers only that their structuring of real estate assets is an important consideration often having potentially significant legal and tax implications. As time permits I will revisit this concept in the near future, however for now, it is important to understand that Realtors® can raise the question, but are prohibited from providing specific legal and/or tax advice since that is the proper domain of your attorney and professional tax advisor, and they will be your primary consultants when structuring your investments to best protect your assets.
Loan Calculator and Cash Flow Excel ToolFor home buyers and real estate investors alike there is also an interactive Java loan calculator linked to each detailed property search that projects a full loan amortization schedule supported by a visual graph clearly showing you the interest and principle that would be paid for the duration of the loan given the interest rates and terms that you enter.
Lon Underwood © 2006
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