TOM CRONE'S Quick Information on Investment / Income Property Action March, 2005

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Evaluation Supremacy

Bruce Colton has taken the basics and the intricacies of income property analysis, put in countless late, late night hours, and come up with a proprietary program for doing some exciting things.

There’s no lock on the math and the basic formulae for figuring out whether a property will support a certain loan at a certain interest rate, given its income and expenses. There are two perspectives that need to be taken in evaluating an income property.

1. Will the loan be supported by the income / expense ratio?
2. What variables need to be adjusted to achieve desired cash-on-cash returns and/or return on equity? To be able to make instant adjustments to any factor, thereby having the ability to know if these adjustments will make the property viable, is a major advantage for the buyer.

On the one hand, a seller may be asking a certain price, and relative to your particular financial posture, you can determine if the cost is a function of your terms.

On the other, increasing rentals might make the property “profitable” relative to desired cash-on-cash or equity returns, or decreasing operating costs could do so (or, both or other factors might be required). Having instant access to this two-sided approach gives us the ability to take any property of interest and get as close as possible to answering the question, “Is this a good investment?” The answer to that question has always been, “It depends.” Now, we have the ability to create a sophisticated answer to the follow-up, “Depends on what?”

Speculative Real Estate is “Risky Business"

National Association of Realtors second home buying statistics in 2004 are indicating that a large percentage, 23 percent in fact, are purchased for investment purposes.

NAR President, Al Mansell, said, “Real estate simply isn’t the kind of quick-in, quick-out that Wall Street is fond of. It’s a tangible asset that provides solid gains over time and isn’t subject to the kind of volatility that’s common in the stock market.” He went on to say “It’s true that some people have made fast profits, but it’s not to be expected. In fact, it can be risky, and prospective buyers need to be aware of the facts before the think about jumping in.”

“In addition, if the timing of your purchase coincides with the top of local market prices and you’re hoping for quick gains, you’ll be sorely disappointed—and if you’re not prepared to be a landlord, you’ll need to find someone to manage the property for you,” Mansell says.

On the other hand, market rents typically are higher than mortgage payments, but conditions vary widely. “Investment buyers need to study and understand the cash-flow scenario and home-price patterns for the neighborhood where the property is located,” Mansell says. “A good resource would be a real estate professional who specializes in investment property and has experience in the neighborhood or area of interest.”

Too many people have been lured into the real estate game, the expectation of quick turn-around profits in mind, and been spurred on by a combination of low interest rates, high home appreciation and true but exceptional success stories. I believe it’s a good sign when the NAR gets image protective and puts out a general warning.

I like it when caution is advised and realistic approaches are suggested. Why? Aside from the obvious, this is the backbone of Value Investing, all along and regardless of any current marketplace situation. I applaud it.

Rental Market rising Supports Real Estate Investing

"The improving job market is driving a rebound in apartment rentals," David Wilson, NAHB (National Association of Home Builders) president and builder from Ketchum, Idaho, said in a press release at the group's web site. "At the same time, attractive interest rates and strong price appreciation rates continue to spur condo sales."

Like all other real estate factors, rentals are based on supply and demand. The tracking of available apartments for rent fell an astounding 13.2 points from 69.6 in the final quarter of 2003 to 56.4 in the fourth quarter of 2004. At the same time, the MMI (Multifamily Market Index) tracked call volumes from prospective renters on the rise by nearly ten percent, from 45.9 to 50. The current average vacancy rate for rental apartments is 7.8 percent, down from 8.5 percent in the previous quarter.

The MMI is measured on a scale from 1 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses. The 4th quarter report continued the year long upward trend, settling upward eight points to 50.8 for mid-rate apartments.

"These numbers indicate that a healthier multifamily housing market is emerging, one in which demand more clearly aligns with supply," said NAHB Chief Economist David Seiders. "The positive outlook for the economy in general, and for job growth in particular, means that the news for multifamily housing should continue to be good."

My prediction [T. Crone’s] is that as interest rates rise, even if ever so slightly, this will have the greatest effect on the people with the least money. This might seem like a foregone conclusion; however, the subtle secondary effect is of interest to income property investors. Many people who might have moved out of their apartments with the marginal ability to purchase a small starter home will now be stuck in the apartment rental mode. This will begin to create a landlord’s market, as vacancy percentages drop and potential rent increases come with the supply and demand factor.

Sales Pitch

Let’s buy something.

Oh, and if you know anybody who might have an interest in income property investing, forward a copy.

Tom Crone