Portland Real Estate Investment & Property Guide
The old way of selecting a real estate investment by just looking at "location, location, location" is NOT a secured way to ensure profits. What needs to be done is to analyze the RETURN ON INVESTMENT to ensure a fantastic and profitable buy. Your decision must include the RISKS involved (borrowing), and measure against alternative properties or investments.
The level of investment return you receive is dictated by both its cash-flow, and its ability to generate a capital gain over the period that you own it. With various tax deductibility and tax deferral plans like 1031 Exchange, it makes property investment all the more profitable for investors.
However, the key question is: what is an acceptable level of cashflow. Some investors insist on it being positive. Well, they're not wrong; but they're not totally right either. As an investor, you need to look at 4 major factors:
- Cash flow
- Tax savings
- Amortization of mortgage
Only by balancing these factors can you see the total picture of the viability of a real estate investment.
Investment Analytical Tools for
One of the most basic and yet reliable ways to determine the viability of your real estate investment is using the concept of Capitalization Rate. The CAP rate represents your return on investment (ROI). It takes into account the net income (after all the expense deduction) of the property you're purchasing to determine the yield relative to the purchase price. To learn more about the CAP rate formula, click here.
As a rule of thumb, if your CAP rate is higher than your annual mortgage rate, you'll enjoy positive cashflow. For instance, if the CAP rate of a particular property is 7% and your mortgage rate is 6%, the 1% difference is your cashflow return.
CAP rates vary according to time and place. Give us a call at 1-877-629-5825 ext. 7 or local (503) 789-7633 or email to find out what makes sense for you.
Here's a note about operating expenses since it is such a crucial element in determining the CAP rate. For a residential property, you'll see a lot of investments with the expense ratio hovering at around 25% to 30% (including maintenance, tax, and insurance). A word of caution: this may not be a true representation of the total picture. What you need to do is to apply a hypothetical vacancy rate, the deferred maintenance cost (if any), and in many cases, the property management fees on top of the expenses (most property companies charge about 8% of the annual lease). As a result, a 40% to 45% expense ratio is likely. So when you're analyzing the CAP rates and the expenses, make sure that you have factored those numbers in.
Positive or Negative Cashflow
It is true that it is difficult, if not impossible, to obtain positive cashflow in today's income property market. Just think about this: in order for a rental property to generate positive cashflow, the rental income must be higher than the cost of the mortgage. Now if that's the case, why would a renter want to rent? They might as well "buy" their own property. That's why obtaining positive cashflow is not an easy investment maneuver.
If you're only concerned about having positive cashflow, the only way out is to buy in a severly depressed market. Only in those places, you'll find tenants willing to pay more for rent because people believe that the real estate market is so depressed that it makes no sense owning your own property. As such, you'll also need to ask yourself the question: is the risk of owning a property in a depressed market acceptable? Note that there'll be little or no appreciation in that scenario.
To balance the overall investment picture, cashflow analysis is not the only factor. As mentioned at the top of this article, you do need to consider appreciation, tax deduction on interest payable, and the amortization of the mortgage (if you have a fixed conventional loan). This analysis should be spread out on a short (2 - 4 years), mid (5 to 7 years) and long term (8 years or more) basis. The net result will help you paint a more complete picture of your real estate investment.
For more information about the various Portland real estate investment opportunities, click here.
Many of our clients are successful investors because they take all these factors into account.
There're two ways to yield positive cashflow from a real estate investment: 1. a CAP rate that's higher than your annual borrowing / mortgage rate. 2. a low loan to value ratio (in other words, a high down payment, say, 40% down or more). Different investment situation calls for different strategy and analytical tools. Sometimes, it's even good to have negative cashflow to offset the tax payable. Talk to us about your investment goal and let us help you find the appropriate real estate investment that 's right for you.
The Rockstar of Real Estate
Contact us to discuss your investment goals today. 503-789-7633 (cell), Toll-Free 1-877-629-5825, or email us below to see how we can help you with your Portland real estate investment needs.
Call us at Toll Free at 1-877-629-5825 or 503-789-7633 (cell) or email us to see how we can help you with your Portland & Lake Oswego property investment needs.