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If you’re just getting started in the world of income producing property, here are 3 investment concepts you must become familiar with.

The first is NOI or Net Operating Income. NOI is the amount of net income (after expenses) the property is producing on an annual basis. NOI is calculated by taking the gross rental income and subtracting the property’s annual operating cost. The gross income is the total rents collected plus any other income from laundry, parking, storage or other misc. sources. Your expenses are all the cost associated with maintaining the property on an annual basis, including taxes and insurance. Your mortgage payments (principal and interest) are not included as expenses in the NOI formula. Your mortgage payments are known as “debt service” and will change from investor to investor due to differing down payment amounts, interest rates, and loan terms.  

Understanding your property’s NOI is crucial to the calculation of our next investment term,…the “cap rate”.  Cap-rates are used to determine the value of an income producing property and are found by dividing the net operating income by the property’s cost. The cap rate is great for comparing the value of one income property to another.

Typically any cap rate above 7 percent is considered a good investment, but obviously the higher the rate the better. As an interested buyer searching for properties, you should set a cap rate minimum based on what’s typically achieved for your area. Generally, the riskier the investments the higher the expected return …or rate. Higher cap rates are expected on older home and in less desirable areas.

ROI (return on investment) measures the annual return on the initial capital you invested. Your initial investment includes your down payment, closing cost, initial improvements and any other initial out of pocket cost associated with the property purchase. The calculation of ROI is slightly more complex than other financial measures and should be calculated using a reliable computer program or financial calculator.  ROI allows you to compare income producing property to other investment assets (stocks, bond, or alternative investments) and determine whether your money is invested in its highest and best use. 

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When it comes to buying a home, having bad credit is not the end of the world. Whether you have suffered from a bankruptcy, foreclosure or some type of financial hardship that resulted in late or missed payments, there are lenders who specialize in financing for those with less-than-perfect credit. You will likely have to produce a larger down payment and/or pay higher interest rates than someone who has good credit, but the important thing to know is that buying a home is an option for you.

Even if you have bad credit, it’s important to check your credit report from each of the three major credit reporting agencies – TransUnion, Equifax and Experian – before applying for a loan.  If anything is inaccurate, file a dispute with the reporting agency and request a correction.  You can request a free copy of your credit report every 12 months.

In addition to correcting any inaccuracies on your credit report, it’s important that you know what can help or hurt your chances of obtaining a loan.  You can start improving your credit by avoiding the temptation to apply for new credit right before submitting a mortgage application. Multiple inquiries will cause your FICO score to drop, and lenders will rely on this information when deciding whether or not to issue your loan and how to calculate your interest rates. 

If you have any questions or want more information about how to obtain or improve your credit score, please give me a call at 617-297-8641, and I would be happy to work with you. 

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Buying a single family home is about personal preference and necessity more than anything else. You buy based on what you like and what you and your family have a need for. The typical multifamily investor is not concerned personal preference, but more about the return on investment the property will produce. Cash flow investors consider what the property cost versus what the property can produce in rental income. If you are new to multifamily investing, here is a quick overview of what the your average investor considers before making the commitment to purchase.

Evaluate Your Rental Income:

The amount of income you can generate from a particular property should be one of your primary concerns. Whether you are purchasing a 2 family home or a 20 unit apartment building, the total rental income that the property can produce will be a major factor in how that property matches up to others you’ve seen. You will want to have a clear understanding of market rents in your area and if possible, the specific rental history for the property you are buying.

Evaluate Your Rental Expense:

Understanding the expenses of a prospective property is just as important as your knowledge of the income being produced. Your property may be generating a terrific amount of income but actually losing money, due to operating costs that are out of control. When evaluating properties to purchase take note of the operating expenses of each and how they compare to other properties. Insurance, property taxes, utilities, and general maintenance costs are some of the expense items you should become familiar with. You will also want to know whether the utilities are shared throughout the home or if the tenants are responsible for paying their own.

Remember It’s A Business:

The income property business can be a time consuming, but ultimately a very rewarding venture. Whether you plan to buy an income property as an investment or as your primary residence, it is important to recognize that you will be running a business. Tenants, passive income, rental expenses, and certain tax issues are among the concerns of multi-family owners. You should become familiar with your responsibilities as a landlord and business owner if you want your rental business to succeed. Like any business, the effort you put in and the knowledge you obtain will ultimately determine the success you achieve.

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 Knowing the true condition of your investment property can help you make an accurate evaluation of your property’s worth. Home inspections are traditionally done by the buyer once a sales contract is in place, but can also be done by the seller before the property is listed. A professional home inspection can allow the seller to identify and fix any problems before the home is under contract.

Often there certain repairs that may be missed by a homeowner but brought to light during a professional home inspection. There are also some cases where repairs or upgrades must be done according to local laws. This is especially true when dealing with Boston’s older stock of multi-family homes and the city’s landlord–tenant laws, which are always changing. A good home inspector will help you discover these repairs and avoid any them from slowing down or breaking the sale.

It’s always better to know the true condition of your home prior to determining your listing price. If a pre-listing inspection is not done, and an issue arises during a buyer inspection, it can put the sale on hold or at risk if the buyer determines it’s of significance. By taking a proactive approach and getting an inspection, you can identify and make any repairs ahead of time, saving yourself headache and possibly preventing a qualified buyer from walking away during from a contract. You will also make a better first impression with buyers when you have the property in top shape prior to their visiting.

Though making repairs may sometimes seem like an unnecessary expense, these repairs, especially to the kitchens and bathrooms can really help you increase your selling price as well as assist in the speed of the sale. You may be one of many sellers that are very familiar with the needed repairs in their property but have chosen to avoid them for various reasons. Once you’ve made the decision to sell, you can no longer afford to put off these chores.

Take your home inspection report combined with your knowledge of the property, and create a written list of what repairs must be done vs. those that could be done. Preference should obviously be taken to those repairs that must be done and only once those improvements have been made should you consider any other work. Your Realtor can also help you uncover quick and inexpensive improvements that could be done before the home is listed and may also be able to put you in contact with good local contractors.

Not every home needs to be in mint condition to sell, but many times these small improvements will help you justify a higher asking price and gain an edge over the competition. If you are assuming at least one or more units will be owner occupied, be sure that that particular unit is in “move in condition”. For many buyers your multi-family home will be there primary residence as well as an investment. They will look closely at the unit where they are to live and you will want them to like what they see. Buyers will also assume that the others rental units will be in similar condition to the “owner unit”.

Interested in Selling your Property? Just want to know what it’s worth? For a no obligation market analysis, call 617-297-8641 or email Willie@MandrellCo.com

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