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All posts tagged Appreciation

Ten investment terms you must know as a Boston real estate investor

If you want to invest in Boston real estate, or real estate in any part of the country, here are the 10 terms or concepts you must be familiar with. These are the topics of concern and equations that show up in every real estate transaction.

1 Debt to Income Ratio (DTI):

DTI is a financial measure banks and lenders use to determine whether you can afford to purchase a particular property. It measures the amount of monthly liability you have compared to your monthly income. A high debt to income ratio will tell the banks that you cannot, or should not take on any more debt. For example, if you have auto loans, credit cards, school loans, and an existing mortgage that total $3000 per month with a gross monthly income of $4000 per month, you have a 75% DTI. $3000 in expenses divided by $4000 in income equals .75. While this may be perfectly acceptable to most individuals, banks typically do not like to loan to individuals with a DTI above 50%. You can decrease your DTI by consolidating or lowering your expenses, or increasing your income. Rental income does count toward your DTI measure.

2 Loan-to-value (LTV):

 If you own a property that has a market value of $100,000, and the mortgage on that property is $80,000, you have a loan-to-value ratio of 80%. $80,000 divided by $100,000 equals .80, or 80%. This is important to you as an investor because banks often look at this measure to determine their risk before lending you money. The lower the debt compared to the value, the lower your LTV number is. The lower your LTV, the better this loan is for the banks and the more likely you are to get favorable financing. You can lower the properties LTV by placing a larger down payment, or making improvements that increase the property’s value.

3 Equity:

If you have a property valued at 400,000, and a mortgage on that same property of 300,000, you have $100,000 in equity within the property. Your equity is determined simply by the value of the property minus the debt. The equity is yours to do what you wish. You can sell this particular property and walk away with 100,000. You can’t refinance this property and pull out some of your equity. As the property value grows and as you continue to pay down your debt, your equity will continue to increase.

4 Deed:

The deed for the property shows ownership. It is also called the title. When you own property your name is placed on the deed along with any other owners. Here in Boston that deed is recorded at the Suffolk County Registry of Deeds and is a public document.

5 Lien:

 A lien is someone else’s financial claim against your property. If you don’t pay your taxes to the state they will put a municipal lien against your home. If you don’t pay your contractor he or she may put a mechanics lien on your property.

6 Mortgage:

The most common lien against your property is called a mortgage. Most people cannot afford to buy a home in New England without borrowing money from the bank. The bank will lend you money to purchase your home and in exchange they place a lien against your property for the balance due. You will not be able to sell a property and tell all liens have been removed and claims against the property have been settled. While you own the home via the deed, if you do not pay your mortgage the bank could take the property (Collateral) from you.

7 LLC: (Limited Liability Company)

An LLC is an entity in which many investors hold property. An LLC provides these investors with protection against financial claims. When you own investment property in your personal name and there is a claim against that property, your personal assets can also be attacked. Owning a property within an LLC insulates that liability and protects you personally. The individual making the claim can only go after the assets of the LLC.

8 Appreciation:

Appreciation the increase in your property’s value over time. The value of land and real estate can go down but more often than not increases in value as time goes on. The longer you own a piece of property the more likely you are to experience a good amount of appreciation.

9 Net Worth:

Your net worth is the total amount of assets you own, minus your total liabilities. An asset is anything you own that holds value. It could be cash, jewelry, furniture, antiques, real estate or variety of other things. A liability is that that you have someone else. It could be a credit card, student loans, personal loans, a mortgage or various other debts. If you total all of your assets in total all of your liabilities then subtract your liabilities from your assets you will calculate your net worth. As an investor, if your NW number is negative, the goal is to get to a positive position. If the number is already positive your goal should be to grow this number.

10 Cash flow:

When you own rental property you have income via your rents, and expenses like your mortgage, taxes, insurance, water, and repairs. Cash flow is simply your income minus your expenses. For example if you are collecting $1000 a month for each of your for tenants you have a total income of $4000 monthly. If all of your expenses equal $2500 per month, you have a cash flow of $1500 per month (or 4000-2500). If you can increase rents and (or) reduce your expenses, you will ultimately increase your cash flow and the money going into your pocket.

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Cash Flow

Cash Flow by definition is the total amount of money being transferred into and out of a business, especially as affecting liquidity. In real estate investing, what this means is:

Total Income – Total Expenses = Cash Flow

While you would assume total income would consist of just rent, make sure to include other potential sources of income including application fees, late fees and laundry income. If these sources are possible, also make sure to estimate your numbers using a conservative approach. In the long run this will be the most beneficial approach. On the flip side, your total expenses are NOT simply your mortgage, property taxes and insurance. Other expenses that cannot be overstated include utilities, potential flood insurance, repairs, vacancy, property management and capital expenditures. The last three expenses can be used as percentages against your monthly income from the property. Failure to include ALL possible expenses could lead to you purchasing a “deal” that actually turns out to be no deal at all.

Depreciation/Appreciation

Once you have purchased a property and become a landlord, it is to stay up to date with the value of your property and identify whether appreciation or depreciation has taken place. While this is very important post purchase, factoring in appreciation for an investment decision is speculative in nature and brings unneeded risk into the situation. In the event that your property has depreciated over time, there may be significant tax advantages to this and those same advantages may even be available to you if your property has appreciated over time.

Net Operating Income

Net Operating Income by definition equals all revenue from the property minus all reasonably necessary operating expenses. To look at this simply, NOI is calculated on a monthly basis using monthly income and expense data, therefore it can be converted to annual data just by multiplying by 12. The important thing to remember with NOI is that the formula does not include debt service costs, (loan costs) which differs from cash flow. One of the biggest reasons a landlord will want to know this number is because Net Operating Income plays a huge role in determining the value of your property. For this reason, it is in your best interest to work towards maximizing this number using different strategies to accomplish this.

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How Much Equity Will I Have In My Home 10 Years From Now?

Have you ever wished you could take a look into the future and see what things are like? Do you own a home and wish you could estimate the amount of equity you’d have at any given point in the future? If so, we have two videos just for you!

A property’s equity is made of of two simple factors; the value of the home and the amount owed on the mortgage. Simply put, your homes value (the asset) minus the amount of your current mortgage(s) (the liability) = equity. For example, if you own a home worth $500,000 and the current balance of all mortgages is $300,000, you have $200,000 in home equity.

Great! I know both of these numbers today, but how do I determine these two values 10 years from now? Good question! The two short videos below are going to show you just how to do that.

The 1st video takes you through the use of an amortizing mortgage calculator. This calculator will help you determine the principal balance of your mortgage at any point in the future. In addition to the use of this calculator, you should have received a loan amortization schedule with your mortgage documents.

 

The 2nd video is a compounding calculator. A compounding calculator will assist you in estimating the future value of your home. Once you’ve estimated your homes future value, you can simply subtract your future mortgage balance and BAM! There you have it. A quick look into the future!

 

Would you like to view more real estate videos like these? Subscribe to our You tube channel at https://www.youtube.com/user/wmandrell

 

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Your invited to join Boston Wealth Builders at the Quincy Marriott Hotel (September 19th, 2015) as we learn how to intelligently improve our property values. Come get a better understanding of what local appraisers are looking for when determining the values they place on property and how you can ensure your home’s appreciation. This event is free to the public but you must RSVP as seating is limited.

The residential appraisal is an integral part of the real estate transaction since appraisers are the trusted vendor for lenders in the mortgage business.  Whether you’re a real estate homeowner or an investor, understanding the appraisal process is a critical component for increasing your property value for the years ahead.  Danyl Collings, of Forsythe Appraisals, will be addressing the following items in regards to real estate appraisals:

1.)  What are the three main items appraisers are looking for when appraising real estate investment properties?  Why are they important?

2.)  What information can you provide the appraiser to expedite your appraisal process and getting the report into the lender?

3.)  Understanding your improvements to the property relative to the property’s market neighborhood and Town/City.

4.)  Why is rental income important in an investor appraisal?

Since 2009, Danyl has served as branch manager for Forsythe Appraisals, LLC – Boston Branch which provides residential appraisal services in MA, NH and RI.  In this role, he is in charge of the sales, marketing, recruiting, training and report quality and delivery for the Boston Branch.  Forsythe Appraisals, LLC is the largest private appraisal firm in the County with over 250 + appraisers throughout the United States.

To RSVP for this event, please click the link below. You’ll be asked to create a FREE account and join Boston Wealth Builders. Once you’ve become a member you can RSVP and save your seat. Hope to see you there!

http://www.BostonWealthBuilders.com

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There are two very important investment calculators buy and hold investors should pay more attention to. Both of these calculators are forward looking and help investors predict the future of there real estate holdings.

The 1st of these two calculators in what’s called a “compounding calculator”. The compounding feature can help us estimate property values at a given point in the future. Say for instance, we purchased an investment property today at $550,000 and we want to know where we’ll stand in 10 years. Let’s then assumed the value increases at an average of 3% per year (which is a relatively safe assumption for the Boston Market). If our assumption hold true, at the end of year 10 this property would be worth almost $740,000 which is nearly $200,00 more than we paid for the property.

The 2nd of these two is simply a mortgage calculator with an “amortization schedule” attached. Assuming you make all your monthly mortgage payments on time, an amortization schedule will show you what your (principal) mortgage balance will be after every month.

Let’s go back to our investment purchase of $550,000 and assume we purchased this property with a 20% down payment ($110,000). Let’s also assume we financed the remaining balance ($440,000) at a rate of 4%, with a 30 year amortizing loan. If we looked 10 years down the road (payment number 120) we would find a principal balance of roughly $340,000.

We the combination of these two calculators we’ve been able to make some predictions as to what our investment will look like 10 years from now. With the $110,000 down payment we were able to secure this investment property and leverage the remaining balance. At the end of 10 years you will own a property worth $740,000 and have a mortgage balance of $340,00.

$740,000 Value – $340,000 Debt  = $400,000 Your Equity.

If you sold this property after 10 year you would have nearly quadrupled your initial invest $110,000. Your equity position would have grown 400% or an average of 40% annually. This doesn’t include any cash flows you received from the property over this 10 year period.

You can find both of these calculator with the links below!

http://www.amortization-calc.com/

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

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Boston Investment Specialist

 

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Are you an investor or are you in the business of speculation? Investors typically look for a cash flow return on their investment based on a sound cash flow analysis. They purchase a property when the projected ROI make sense compared to other investment options. Buying a property with little to no cash flows and hopes of appreciation is called “speculating”. There are no financial predictions, but rather a hope that the market will continue to rise and you will make a financial gain the in the future. There are two main problems with type of investing which are as follows.

1. What happens when the market goes south? If the economy tanks and your property values decrease will you be forced to sell at a loss? An investor with a cash flowing investment isn’t affected as much by down turns in the market. Despite a loss in value, the investor is still putting cash in her pocket every month when their tenants pay rent.

2. What happens when the property needs repairs? If you’re investment isn’t putting cash in your pocket and you need a new roof where are those funds coming from? You’ll now be forced to dip into your personal funds and make a further investment into the property rather than the investment taking care of itself.

Want to know how to evaluate rental property in Boston? Watch the video above and download our Cash Flow Analysis. If you have questions about the form or the video, please give us a call at 617-297-8641 or email us at contact@mandrellco.com

Download the Cash Flow Analysis here!

 

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Real estate is an excellent investment vehicle for building wealth, especially here in Massachusetts where we have a large number of multifamily buildings. The 3 family home, as an investment tends to make a ton of sense when it comes to the balance between the purchase price of the building and rental income you can achieve from one of these buildings.  Let’s take a quick look at a recent purchase made by one of our clients.

Purchase Price:  $500K    Down Payment: $100K    Mortgage: 15 Fixed @ 4%

Expenses: (Mortgage, Taxes, Insurance, Water, & Misc):  $3,800    Income:  $4500 ($1500 * 3 Units)

Monthly Cash Flow:  $700

$700 monthly cash flow is great, but the real financial benefits come from the long-term effects of this investment on my client’s portfolio. If you noticed above she opted to take a 15 year loan and pay off her debt sooner than the typical 30 year plans. Let’s take a look at where she is financially in 15 years:

Debt Pay Down:

As you make your monthly mortgage payments the principal balance is slowly decreasing. This debt pay down is called the “amortization” of your mortgage. If you look at a mortgage amortization chart (which is usually provided with your loan documents) you can pinpoint what the principal balance on your loan will be at any given point over the term of the loan. This assumes you are making all your payments on time and only paying the minimum amount due each month. As your mortgage balance decreases your net worth increases. With the above scenario my client is done paying or has “fully amortized” this loan in 15 years.  She will receive a discharge notice from the bank and no further payments will be due. Her tenants will have essentially paid off a 400k debt for her and increased her net worth by that much.

Property Appreciation:

Appreciation is the increase in your property’s value year over year.  The rate of appreciation you will receive in future years is impossible to predict but history tells us that property values tend to increase at a rather consistent rate over time. Removing recent market adjustment years (2006-2011), US real estate values have appreciated at a rate of approximately 6% annually, with Massachusetts falling right in line with average rate. If we take our property from above with a current market value of $500k and assume we achieve at least a 5% rate of appreciation over the next 15 years, we would be looking at a property value of $1,039,000.

Rent Appreciation:

Rent prices tend to move upward with inflation. Just like the cost of bread and gas, rent rental values always go up. With that said, the same $4500 per month ($54,000 annually) my client is collecting in rents today will be much higher in the future.  If we assumed rents in her building also increased at a rate of 5% yearly, she will be collecting $9,355 per month after 15 years. That’s over $100K annually in passive income!

Net Worth & Passive Income:

If you take these numbers as a whole, thats when things start to get exciting. 15 years from now this mortgage will be completely paid off and it will have been done by someone other than my client. Her tenants are paying off the debt every month with their rent checks. Not only is she getting the debt paid off but she will be putting $700 (or more) per month back into her pocket over the next 15 years. At the end of the 15 year term her debt will be gone and her rents have now grown to $9355 per month, which she can put in her pocket or use to go out and purchase other investments.  Her property has also appreciated to over 1 million in value which will be a major contribution to her total net worth number!

Building Wealth Takes Time:

My client is not very special …in the sense that anyone can follow this wealth building model and achieve exactly what she has done in the past and is in the process of doing again. Don’t have $100k to invest? You don’t need it. There are ways to achieve the same with a whole lot less. Don’t have time for tenant issues? Hire a property management company! With this model my client is achieving $700 in cash flow. I’m sure for $700 per month you can find a company to manage your tenant issues. Long story short… there is really no reason why this can’t be done by anyone.  15 years is not a walk in the park but the earlier you start the sooner you’ll get there. If you only had this one building and invested in nothing else during the next 15, you would still have a net worth of over a million dollars and earning over a $100k in passive rental income! Imagine if you bought several of these investments!

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