- Market Update: The Cromford Report 4/28/09
- How to Size Up an Investment Property
CROMFORD REPORT 4/28/09
We have added 392 Pending Listings and lost 1,033 Active Listings in the last seven days. There are 3,432 AWC (active with contingecy) listings among the actives, of which 2,724 are short sales or pre-foreclosures.
The average $/SF (price per square foot) for pending listings is $88.87, which is one cent lower than last week and $1.77 higher than last month. The lowest reading of average $/SF for monthly sales was recorded on April 6. The lowest reading for monthly median sales price was recorded on April 21. Both of these are now moving sideways. We currently see a slower rate of trustee sales than at any time in the last 12 months. The 7,574 REO listings on ARMLS (Arizona Regional Multiple Listing Service) represent just 1.4 months supply at the current monthly REO sales rate.
Activity is increasing in the middle price ranges, but there is still an over-abundance of supply of luxury homes. In the price range under $150,000 demand now comfortably exceeds the supply.
- Mike Orr, The Cromford Report
Remember: GREEN is good!!
If you're thinking about buying your first real estate investment, there's good news. There are lots of good deals out there. But even if a deal looks to good to resist, you need to be sure you have a firm understanding of the two significant elements that determine profitability: cash flow and return on investment (ROI). Otherwise, it's very easy to misjudge just how profitable the property will be.
Expenses vs. Revenues
Cash flow is extremely important because it dictates whether the investment will cost you out-of-pocket money or put money back in your pocket on a monthly basis. To determine monthly cash flow, you must consider all expenses related to the property and then subtract this from the revenue being generated.
Finding the obvious expenses is pretty easy, but you may have to do some digging to uncover the not-so-obvious expenses. These line items are real and can significantly impact your monthly cash flow, so don’t leave anything out. They can include:
- Vacancy-rate impact
- Replacement equipment
- Maintenance
- Advertising
- Tenant repairs
- Payment delinquencies
After you subtract all expenses from the revenue, you’ll know whether you’ll be making money or paying money. You may ask yourself: Why would I involve myself in an investment that is going to cost me out-of-pocket money? This brings us to the next important variable when evaluating your real estate investment decision: return on investment (ROI).
What Is ROI, Anyway?
First, the technical definition: the rate of return based on an initial investment that generates a cash annuity for a specified time period. Now, in plain English: ROI is basically the money going out (including your initial investment) banked against the cash flow that the property will generate in a given amount of time. This creates a net cash flow stream, and your return percent is calculated off of this figure.
Keep in mind that when compiling these cash flows, you must include all expenses related to the property, and the revenue stream must include all monetary benefits derived from it as well. ROI is heavily determined by the initial investment, because that is most likely the largest cash outlay related to the investment. All other variables held constant within the same scenario dictate that the bigger the down payment, the less return you will have on the investment.
So a new question emerges: If my return is less, why would I put a larger amount down? You must consider the trade-off between the amount of the down payment and the monthly cash flow. The more you put down, the more likely you are to have a positive cash flow — the investment paying you dividends. There is a fine balance between cash flow and ROI. Depending on your current and future financial goals, you can determine the best scenario that suits your needs. In order to attain this balance, you must have the knowledge and skills to determine the best scenario.
Whether your goal is to generate an annuity stream, prepare for retirement or create a college fund, real estate investments can be an excellent place for your money, if you do it right. With interest rates at record lows, profitable inventory and opportunities throughout the nation, it may be time for you to invest in property.
Reprinted from REALTOR® Magazine, May 2009 with permission of the
NATIONAL ASSOCIATION OF REALTORS®. Copyright 2009. All rights reserved.
