Real Estate Investment Planning, Goals, and Formulas by toriola1

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Real Estate Investment Planning, Goals, and Formulas By James Kobzeff

I'm mostly opposed to get-rich-quick methods for real estate investment for a couple of reasons. They often assume that you self-manage the property and at the same time ignore your cost of time. Plus, they like to bloviate about "no money down" yet fail to warn you about the high risk associated with high leverage. Besides, it's difficult to trust someone claiming to have uncovered a goldmine yet anxious to peddle a map to it. If they really discovered the road to real estate investment riches, why would they share it? Actually, there is no secret way to attain real estate investing success. In real life, you must work hard with good research and a commitment to a sound and systematic analysis. Pathways leading from get-rich-quick seminars are littered with disappointment; the key to successful investing, however, is to take as much time as necessary for proper preparation. Time is on the side of the prudent real estate investor. In this article, we want to help you better understand some of the nuances associated with real estate investing. We would like to discuss the importance of building a sound investment plan with meaningful goals and then cover the formulas of four popular financial analysis models used regularly in real estate investing. Build a Sound Investment Plan Having a plan with stated goals is one of the most important foundations of successful investing. However, it's not about lofty intentions like declaring, "I want to be worth a million dollars one day." There's nothing wrong with desiring better things in life, the problem is that simply declaring something doesn't bring you any closer to achieving it. The idea is to develop a general plan with stated goals and a method on how to get there. Goals Must be Meaningful Goals are the shortcuts to your desired destinations. Goals are not essential to life, many people do just fine without any kind of goal at all, but goals are essential to successful real estate investing. For a goal to work for you, however, it must be attainable, measurable, tied to a timetable, and clearly defined.
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Moreover, divide long-range goals (say further out than one year) into intermediate goals, and your investment plan into subsections such as "cash flow requirements," "net worth projections," "tax shelter benefits required," "cash withdrawal from plan," and so on. Start here: How much cash do you have available to invest comfortably? What length of time do you plan to stay invested? How much of your own effort do you plan to contribute? Define a general plan: You plan to develop or own only the highest quality properties in prestige locations. You plan to own the largest market share of duplexes or perhaps freestanding retail buildings in a local market. You plan to maximize your tax benefits on purchases and use tax-deferred exchanges and installment sales when available. Define a detailed plan: How much cash do you want to collect each year beginning in the 10th year? What net worth do you want to attain by investing in rental properties after the 15th year? You plan to withdraw $5,000 in two years to visit Europe, or generate $30,000 by the 5th year to pay for an additional house, or withdraw $20,000 over years 7-10 for your daughters college tuition. And so on. The idea is to create a target and then monitor your progress continually against that target to insure that you're on the right course. A written plan with stated goals that projects where you're headed and then reviewed regularly is critical to successful investing. Financial Analysis Models Okay, let's switch gears and summarize four very popular investment value measures used regularly by investors and real estate analysts. 1) Cash on Cash Return - Cash on cash measures the initial profitability of a rental property. The higher the better, and typically a first-year cash on cash return ranges from about 4% to 10%. Formula: Cash on Cash = Before Tax Cash Flow / Cash Equity (Initial Investment) 2) Gross Rent Multiplier - Gross rent multiplier measures the ratio between annual gross rental income and sale price. Think of it as an indication of the number of years it takes the annual rental income to equal the price, so the lower the better. It is good for simple comparisons to other rental property opportunities but insufficient as a stand-alone number. Formula: Gross Rent Multiplier = Purchase Price / Gross Rent 3) Capitalization Rate - Capitalization Rate (cap rate) is essentially a return on asset indicator of how much debt an income property can carry. The higher the return rate, the more debt a property can support, and hence the better the investment opportunity for the real estate investor. Sellers of income property, of course, prefer to sell at lower cap rates. Local markets dictate capitalization rate (there is no one-size-fits-all) but they typically run from about 5% to 12% Formula: Capitalization Rate = Net Operating Income / Purchase Price or Value 4) Internal Rate of Return - The IRR model essentially calculates the average discount rate that equates all future returns over the projected holding period back to the present value of the initial equity investment. It's the most frequently used measurement of projected holding period overall
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returns because IRR delivers in one number an investment return that integrates rental growth rates and property value appreciation. IRR should be used as a comparison to the real estate investor's required rate of return for making capital allocation and initial investment decisions. IRR can be computed for before or after tax cash flows. Formula: To compute IRR you must use Excel or a qualified real estate investment software program.

James Kobzeff is the developer of ProAPOD Real Estate Investment Software. Want to start working with rental property today? Discover how to create cash flow, rate of return, and profitability analysis presentations in minutes at => http://www.proapod.com

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All About Real Estate Investment Trusts (REITs) By Stuart Chng

Real estate is a big business and everyone seems to want to invest in real estate. You keep hearing a lot of stories about how people made a quick buck by investing in real estate. There are stories about people who made $50000 in a fortnight by making the right kind of investment in real estate. Every now and then, newspapers keep coming up with statistics about the appreciation in the real estate prices. There seems a mad rush for investing in real estate (and this gets even bigger when the mortgage interest rates are falling). However, not everyone has the time, money and expertise to be able to profitably invest in real estate. So what does one do? Is there any other option? Yes, there is another way of investing in real estate and that is through Real Estate Investment Trust. Real Estate Investment Trust is an organisation that invests in real estate as a full fledged business. By investing in a Real Estate Investment Trust, you can become part of the real estate investment party and enjoy profits (of course, the assumption here is that the Real Estate Investment Trust is good and professionally managed). Investing in Real Estate Investment Trust is very easy too. You can just buy Real Estate Investment Trust shares which trade on all major exchanges. There are certain laws governing the Real Estate Investment Trusts that help them avoiding the tax at corporate levels e.g. it is mandated that Real Estate Investment Trust’s portfolio has 75 percent of investment in real estate. Moreover, 75% of the income of Real Estate Investment Trust must be from rents or mortgage interest. There are various types of Real Estate Investment Trusts. Some Real Estate Investment Trusts own properties themselves and hence feed on the rental income from those properties. Some others indulge in providing only mortgage loans or go for mortgage backed securities. Then there are Real Estate Investment Trusts which do both i.e. rental focussed investments and mortgage based investments. There are a number of Real Estate Investment Trusts operating in the market and a lot of these Real Estate Investment Trusts are doing good business. By investing in Real Estate Investment Trust you are basically investing in real estate without actually buying a property yourself. This is one easy way of investing in real estate (and much safer too). You must surely evaluate this option for your real estate investments. The writer is the founder of www.EastLiving.com.sg . Having accumulated a wealth of experience in dealing with thousands of private home buyers and sellers, Stuart Chng and his team, has honed their real estate negotiation skills and a thorough understanding of the needs and psychology of home buyers. Sign up for EastLiving's daily Singapore Property News at http://blog.eastliving.com.sg .

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