Real Estate Investment - FAQ
Q: What are the four types of returns available from investment real estate?
A: Spendable (cash flow) income, principal reduction or equity buildup, appreciation and leverage.
Q: Why must you consider the effects of inflation when establishing your investment goals?
A: Most of the people over the age of 65 are practically broke because they failed to consider the effects of inflation on their investment funds. You can plan on needing twice as much in ten years to do what you can today on your present spendable income.
Q: How do you determine if it makes sense to refinance your home to obtain investment capital?
A: Use the formula in Module 3 which tells you how much you must earn on the borrowed cash in order to offset the added mortgage payments on your home.
Q: Why is it extremely important to carefully analyse a property that can be purchased with no money down?
A: Any property that is 100% leveraged will probably be at break-even basis or below. It is important to realise that anything out of your plan will no doubt taking money out of your pocket to keep the investment going.
Q: What are the advantages of a sale/leaseback?
A: Sale/leasebacks offer the investor a management-free investment. The tenant generally pays for everything except mortgage payments.
Q: What are the advantages of vacant land over improved property for investment purposes?
A: Vacant land is usually held for resale profit in the future. Profits will usually be higher than on improved properties. There is no management requirement with vacant land.
Q: What is the primary problem that occurs when property is held by a partnership?
A: Partners tend to have disagreements.
Q: How important is location when selecting investment real estate?
A: Location is always important, but not as much as in selecting a home. Some of the best real estate investments may not be in the prime locations.
Q: What is Net Operating Income (N.O.I)?
A: N.O.I is the income produced by the property after an allowance for vacancies and operating expenses, but before mortgage payments are made.
Q: How can you verify income produced by the property?
A: Check with the tenants. Lease can be altered by unethical sellers.
Q: Which of the appraisal methods is the most reliable for you to evaluate the value of your prospective properties?
A: The income approach establishes value based on the income actually being produced by the investment.
Q: How much leverage should you use when purchasing investment real estate?
A: Buy the largest worth-financing property you can with the maximum leverage and the cash you have available. Use go-financeTM method to determine if a property is worth financing. This must be tempered with how much leverage you are comfortable in having. Some investor could not sleep nights knowing they owned a property that was 90% financed.
Q: When might it be advantageous to refinance, even at a higher rate of interest?
A: When existing mortgage has shorter term (tenure) remaining which its payments for principal greatly reduce cash flow.
Q: How long the term (tenure) should you choose for the mortgage loan of your investment real estate?
A: Try to get the longest tenure available to you. This is to minimise your monthly loan repayment and increase your cash flow or spendable income.
Q: Under what circumstances might it pay for a buyer to offer a price greater than listed price?
A: To obtain better terms for the sale, such as a lower down payment.
Q: Why should security deposit be placed in an account separate from your property operating account?
A: Security deposits belong to the tenant until they are disbursed at the rumination of the lease.
Q: When “posting” your mortgage payments to your ledger, why do you separate the principal portion of the payment from the interest portion?
A: Interest payments are deducted from your income for tax purposes. Principal payments are not.
Q: How do you determine how much rent to charge?
A: Make an survey to determine what your competition is charging.
Q: Should you offer renewal options?
A: Renewal options should be offered only if clause of rent adjustment upon renewal is written in to protect the lessor from the effects of inflation.
Q: What factors enter into determining when to sell?
A: Such factors as: change of goals, incurable problems with property, excess equity in the property and reduced return of your current invested capital, all point to a decision to sell.
Q: What is CAP or capitalisation rate?
A: Capitalisation rate is the ratio between the net operating income and the market value of a property.
Q: Why should you buy the largest number of properties you can with the investment capital you have available?
A: Operating expenses tend to be less, on a per unit basis, in a larger investment portfolio. Vacancies are also less critical in larger investment portfolio.
Q: What is meant by “pyramiding” and how can it work for you?
A: The practice of pyramiding transfers your equity every so many years into a much larger investment. This is repeated several times whenever you can own a property twice the size of your present one, with no additional outlay of capital, until your final investment is capabale of supporting you for the remainder of your life.