Investing 101

by | Jul 30, 2012 | How to Guides, Market Reports

Homeowners aren’t the only people getting a benefit from low interest rates. Investors are looking to real estate in larger numbers with high rents and low interest rates adding up to great cash flow.

Q. We’ve all heard that real estate investing is on the rise but how do you get started?

A. The first step is to decide how much you want to invest and that will tell you what price range to look in. You’ll need about 25% down to get a loan for an investment property. Once you have a price range you can compare properties.

Q. It seems like there are a bunch of different ways to compare different properties but what do you use?

A. The quickest way to compare is the GRM or Gross Rent Multiplier. That looks at gross rents as a multiplier of the sales price. A $200,000 property with $20,000 a year in gross rents would have a 10 GRM. The lower the GRM the better for the buyer.

Q. We’ve heard about CAP rates but what does that really tell you about a property?

A. The CAP rate is based on the NOI or Net Operating Income. You take the Gross rents and subtract the expense and vacancy and management costs to find out what the NOI is as a percentage of the purchase price. You need to know the CAP rate to figure out the Cash on Cash return.

Q. Is the Cash on Cash the same as Cash-Flow?

A. The cash on cash tells you what your return is after everything is taken into account including the loan payments. Cash flow is just the amount of cash that is coming from the property every month wether that is positive or negative. I think getting to an accurate cash on cash is the most important way to pick the right property.

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