September Meeting: Silver Fern Homes Real Estate Investment Group
By all accounts a great group of people attend the Silver Fern Homes real estate investment meetings. From seasoned investors, to those who are just beginning to dabble or are still making plans to, everyone has a place here. Everyone has a voice and we all have something to learn.
Each meeting has a rough agenda. A topic that has been chosen by mutual discussion at the last meeting or via email in between meetings.
Our last Silver Fern Homes real estate investment meeting (September 9th) was focused on the basic calculations we do, in order to get a results which can be used to compare completely different properties, apples to apples. For this exercise in math, you will first need to gather data. Use resources such as your Realtor, Lender, Title Company, Insurance Broker, Accountant, Handyman, Seller and the Homeowners Association to gather information about the costs of buying and owning the property. Gauge rental rates from Craigslist or the Seller… or even the neighbors!
During our meeting, we used a 2 bedroom condo in Gunbarrel as our case study. It recently went under contract and we assumed a sold price of $172,000. After discussion on its condition, we estimated the cost of repairs and maintenance needed prior to renting it out. Some of the data needed, came from the MLS sheet and some was prepared in advance by Dana Briganti, mortgage consultant with Premier Mortgage Group and meeting attendee. (Thanks, Dana!) Below is an example of the calculation we worked though.
Buyers, you may occasionally see the CAP RATE in the MLS sheet for a property categorized as “income property” but for the most part, if the listing agent understands the calculation or has even done it, they appear to keep that information to themselves… So you’ll have to sit down and do the math yourself – or ask your agent to help you! Ask yourself how this property compares to what you are making off your stock portfolio, that CD you have ticking over at the Credit Union or worse… Your pile of cash that is not keeping up with inflation! Sellers, if you are looking to sell your (possibly) income generating property, this is a good way to get information into the hands of an investor. As your listing agent, it would be part of the value I offer, of course.
- GROSS POTENTIAL INCOME (GPI)
Monthly Rental Income X Number of Units X 12 months = GPI
EG: $1500 X 1 units X 12 months = $18,000
- GROSS OPERATING INCOME (GOI)
GPI – (% Loss due to vacancy and non-payment X GPI) = GOI
EG: $18,000 – (0.04 X $18,000) = $17,280
* Use the property history or comps to estimate vacancy and non-payment)
- GROSS RENT MULTIPLIER (GRM)
Market Value/Annual Gross Operating Income = GRM
EG: $172,000/$17,280 = 9.95
* The smaller the GRM is, the better.
* Using this with known GRM of comps and know market rent to calculate your purchase price is useful in narrowing down when you have a lot of purchase options, but it’s not a precise tool.
- NET OPERATING INCOME (NOI)
GPI – Vacancy and Expenses = NOI
EG: $18,000 – $5,114 = $12,885
* The expenses include: Management, HOA ($2,753), Legal and Accounting ($100), Insurance ($360), Cleaning/Yard Care ($120), Maintenance, Repairs ($600), Supplies, Taxes ($1,182), Utilities.
* Use property history and comps to estimate vacancy rate.
- Capitalization Rate (CAP RATE)
NOI/Sold Price = CAP RATE
EG $12,885/$172,000 = .075 or 7.5%
- CASH FLOW BEFORE TAXES (CFBT)
NOI – (Capital cash expenditures + Debt Service) = CFBT
EG: $12,885 – ($4,000 + $7,959) =$926/yr
* Capital Cash Expenditures are what you spent to improve the property.
* Debt Service includes mortgage principle and interest.
- CASH FLOW AFTER TAXES (CFAT)
CFBT – Income tax liability (State and Fed) = CFAT
- BREAK EVEN RATIO
Debt Service + Operating Expenses/GOI = BREAK EVEN RATIO
($7,959 + $5,114)/$17,280 = 0.76 or 76%
<1.0 = Makes money
1.0 = Break even
>1.0 = Loses money
The next Silver Fern Homes investment meeting is in early-mid October. You can expect a topic that might include:
- Home Owner Associations: What info do you need to look at? What is a deal breaker?
- The Colorado contract to buy/sell: An overview with focus on it’s contingencies, 1031-exchanges, timelines etc.
- Your investment and your tax return: Information you can use to determine whether or not to buy a property. Keeping records.
- Selecting a really good tenant. Ads, background checks, credit checks etc. What about students? Non-citizens?
- Rental Property Licensing and Smart Regs. (Boulder)
- Improvements, renovations and repairs.
- Partnership agreements.
Call or email Dallice to RSVP and get details