You may have seen a couple of deals that we put through this week, we have had an amazing response of interest in these! It was fantastic to see so many people wanting to get more information. I did get asked a lot, that people wanted to do their due diligence and ensure the deals were good, but were not sure how to go about this.
There are a few key things to look at when analysing a deal to ensure that it would be a good fit for your portfolio. And remember, each of these criteria, and the importance of each is different for ever investor. One of the most important things you need to identify first is your “Risk Profile”. This is what level of risk in any investment are you comfortable with based on the return available. With any form of investing there is always some level of risk and each investor is happy with a particular level. Those that invested in crypto-currencies recently for instance, have a relatively high risk profile (that is they understand the risk is higher, but happy to take on board that risk given the rewards could be very high) and some have done well in this area. Others with lower risk profiles would look more towards blue-chip shares or real estate as lower risk investments. Even within each category there are various levels of risk. There is no “right” or “wrong” answer here, it is simply identifying what your risk profile is, so that you can ensure not to over reach yourself and get involved in a particular investment that is beyond your risk profile. If you want help to determine this, give us a call, we go through all this in our strategy sessions as well!
OK, so once you have determined your risk profile, there are a couple of key areas to analyse and ensure a deal is a “good” one for your risk profile:
1. Actual Return on Investment (ROI) after costs
I think always the first thing we should always look at is what is the estimated return we will get from the deal after costs are taken into account. This is essentially “running the numbers”. Confirming the costs and profits on the deals can be relatively easy, and I will run through a couple of strategies to determine this in the next few points. But we need to ensure that the return we are likely to see, conservatively, matches our risk profile and the risk of the deal. Don’t forget to take into account costs that may not be on any feasibility analysis – like vacancy rates, possible applicable taxes, and interest on loans if you are borrowing money to make the deal happen
2. Determining Comparable Prices
Comparables are one of the most popular way to determine the market value of a property. It is used in most real estate markets world-wide and the process is essentially the same. Look at what other properties are on the market for, and more more importantly, have recently sold for, in the same area of comparable standard (same number of bedrooms, bathrooms, similar size, same neighbourhood etc). In the US though, one other factor plays a huge part in comparables, and that is condition.
In Australia, we would generally see that most properties are of a similar standard, particularly in the cities and metro areas. In a number of areas of the US, the condition of the houses may vary so much as to have a dramatic impact on the price of the home. A particular home might be fully renovated to very high standard and be selling for $125,000.00. Next door the house might be gutted inside and need complete remodelling and be on the market or sold for $12,500.00.
This does not mean that the more expensive home is not worth $125K nor does it mean the “tear-down” is a steal at $12.5K either so be careful to ensure that you are taking into account the “condition” of each of your comparable properties. Websites that can be good for this are Zillow (www.zillow.com) and Trulia (www.trulia.com) but make sure also to look only a properties sold or on the market recently.
It can also be a good idea to look up in google a realtor that works in that area, and have a chat to them about the neighbourhood and get their thoughts on comparables. Bear in mind they may try to sell you other properties though too, so best to keep the discussion general as they may run down your possible purchase to try and sell you one of theirs instead.
3. Region demographics and area
Trulia (web address above) is also a good website as it can also give some regions demographic data. You can look at crime rates of the area relative to the surrounding districts; the median age of the households; average education level; average income level; percentage of owner occupiers vs renters etc.
All good data to review to ensure the area you are investing in, you are comfortable with. Remember, this is a region your are likely never to set foot in, so it it good to be comfortable with the demographics of the area. It can also be a good idea to search the address on Google maps and even scroll right down to street level and “walk” the streets some.
Make sure the property is not across the road from a factory, or refuse centre etc.
4. Rental rates and vacancies
Understanding the rental rates for an area is as important as determining the market value as this is the “profit” that the property will give you as a rental option. There is a website for US property rentals called Rentometer (www.rentometer.com) which is great in helping to determine what a property may rent for and other valuable data. The particular property you might be looking to purchase may already be rented, but its still important to understand the market rental value, in case your tenant was to leave, to make sure you can get the same rent return again, or is it possible to increase the rental return. This website reviews all properties within the neighbourhood of similar size and number of bedrooms, bathrooms etc to give you the average rent. Again you need to take into account condition. If your property is fully renovated to a high standard it is quite likely that you can get higher than average rent.
By also looking at the numbers of property currently available for rent in your area, and the length of time the rentals have been on the market, you can get an idea of vacancy. If the particular area in question has many many properties available and days on market for rent is 30+ or more on average, this can show a poor rental area. If there are only a few available, and days on market is low, this can indicate a better area. You can also look up in google a property manager that works in the area your are looking to purchase in and have a chat to them. They should give you a pretty honest appraisal of the region.
As we discussed earlier, if all these options are still good based on your risk profile, that can indicate it could be a good deal for you. If you are not comfortable with any of these areas, then might be worth looking around for another deal that suits your profile better. Remember, there is no such thing as THE deal. There is always another and never fall in love with any particular one, just analyse the numbers and determine your comfort level.
If your looking at starting or adding to your investment portfolio and would like to discuss options and strategies, or want help to determine your Risk Profile, book a call with us today!
Investing Strategy – Doing Due Diligence on a Prospective Investment
/in Education US Property /by Lindsay StewartYou may have seen a couple of deals that we put through this week, we have had an amazing response of interest in these! It was fantastic to see so many people wanting to get more information. I did get asked a lot, that people wanted to do their due diligence and ensure the deals were good, but were not sure how to go about this.
There are a few key things to look at when analysing a deal to ensure that it would be a good fit for your portfolio. And remember, each of these criteria, and the importance of each is different for ever investor. One of the most important things you need to identify first is your “Risk Profile”. This is what level of risk in any investment are you comfortable with based on the return available. With any form of investing there is always some level of risk and each investor is happy with a particular level. Those that invested in crypto-currencies recently for instance, have a relatively high risk profile (that is they understand the risk is higher, but happy to take on board that risk given the rewards could be very high) and some have done well in this area. Others with lower risk profiles would look more towards blue-chip shares or real estate as lower risk investments. Even within each category there are various levels of risk. There is no “right” or “wrong” answer here, it is simply identifying what your risk profile is, so that you can ensure not to over reach yourself and get involved in a particular investment that is beyond your risk profile. If you want help to determine this, give us a call, we go through all this in our strategy sessions as well!
OK, so once you have determined your risk profile, there are a couple of key areas to analyse and ensure a deal is a “good” one for your risk profile:
1. Actual Return on Investment (ROI) after costs
I think always the first thing we should always look at is what is the estimated return we will get from the deal after costs are taken into account. This is essentially “running the numbers”. Confirming the costs and profits on the deals can be relatively easy, and I will run through a couple of strategies to determine this in the next few points. But we need to ensure that the return we are likely to see, conservatively, matches our risk profile and the risk of the deal. Don’t forget to take into account costs that may not be on any feasibility analysis – like vacancy rates, possible applicable taxes, and interest on loans if you are borrowing money to make the deal happen
2. Determining Comparable Prices
Comparables are one of the most popular way to determine the market value of a property. It is used in most real estate markets world-wide and the process is essentially the same. Look at what other properties are on the market for, and more more importantly, have recently sold for, in the same area of comparable standard (same number of bedrooms, bathrooms, similar size, same neighbourhood etc). In the US though, one other factor plays a huge part in comparables, and that is condition.
In Australia, we would generally see that most properties are of a similar standard, particularly in the cities and metro areas. In a number of areas of the US, the condition of the houses may vary so much as to have a dramatic impact on the price of the home. A particular home might be fully renovated to very high standard and be selling for $125,000.00. Next door the house might be gutted inside and need complete remodelling and be on the market or sold for $12,500.00.
This does not mean that the more expensive home is not worth $125K nor does it mean the “tear-down” is a steal at $12.5K either so be careful to ensure that you are taking into account the “condition” of each of your comparable properties. Websites that can be good for this are Zillow (www.zillow.com) and Trulia (www.trulia.com) but make sure also to look only a properties sold or on the market recently.
It can also be a good idea to look up in google a realtor that works in that area, and have a chat to them about the neighbourhood and get their thoughts on comparables. Bear in mind they may try to sell you other properties though too, so best to keep the discussion general as they may run down your possible purchase to try and sell you one of theirs instead.
3. Region demographics and area
Trulia (web address above) is also a good website as it can also give some regions demographic data. You can look at crime rates of the area relative to the surrounding districts; the median age of the households; average education level; average income level; percentage of owner occupiers vs renters etc.
All good data to review to ensure the area you are investing in, you are comfortable with. Remember, this is a region your are likely never to set foot in, so it it good to be comfortable with the demographics of the area. It can also be a good idea to search the address on Google maps and even scroll right down to street level and “walk” the streets some.
Make sure the property is not across the road from a factory, or refuse centre etc.
4. Rental rates and vacancies
Understanding the rental rates for an area is as important as determining the market value as this is the “profit” that the property will give you as a rental option. There is a website for US property rentals called Rentometer (www.rentometer.com) which is great in helping to determine what a property may rent for and other valuable data. The particular property you might be looking to purchase may already be rented, but its still important to understand the market rental value, in case your tenant was to leave, to make sure you can get the same rent return again, or is it possible to increase the rental return. This website reviews all properties within the neighbourhood of similar size and number of bedrooms, bathrooms etc to give you the average rent. Again you need to take into account condition. If your property is fully renovated to a high standard it is quite likely that you can get higher than average rent.
By also looking at the numbers of property currently available for rent in your area, and the length of time the rentals have been on the market, you can get an idea of vacancy. If the particular area in question has many many properties available and days on market for rent is 30+ or more on average, this can show a poor rental area. If there are only a few available, and days on market is low, this can indicate a better area. You can also look up in google a property manager that works in the area your are looking to purchase in and have a chat to them. They should give you a pretty honest appraisal of the region.
As we discussed earlier, if all these options are still good based on your risk profile, that can indicate it could be a good deal for you. If you are not comfortable with any of these areas, then might be worth looking around for another deal that suits your profile better. Remember, there is no such thing as THE deal. There is always another and never fall in love with any particular one, just analyse the numbers and determine your comfort level.
If your looking at starting or adding to your investment portfolio and would like to discuss options and strategies, or want help to determine your Risk Profile, book a call with us today!
US Property Investing – February 9th, 2019
/in Newsletter /by Lindsay StewartG’day all!
Happy Valentines Day! With February 14th shortly upon us, its always an interesting debate of those who love the day versus those who claims it’s just an excuse to sell chocolates, wine and dinners. I think the concept is great and it does give us an opportunity to stop and appreciate those that we love, whether our partners, family or friends. In our journey through life, we will often need the support of these critical people, and without that support it’s a difficult road for sure. Its nice to stop and say thanks, although we should ensure to do that more than once per year!
In the past two weeks we have covered 2 of the 4-pack of the “traits of the successful”. This week, I want to look at our 3rd – Determination.
Tying in with the support of the people around us, it can often be our determination that keeps us pushing forward even when we do not necessarily have that support. Our friends and family often can see the struggle and want to “help” by telling you to rest up; don’t keep trying for that goal, that job, that business, that investment; “you can’t do that”; “you won’t make it” etc. Its not that they are trying to ensure you fail, is more they see you hurting, they see that its hard and want to help you end the pain. It’s the determination you have that will allow you to say “thanks, but I’m pushing on”; “I’m pushing through this barrier”; “I CAN do it and will”; “i CAN make it, you’ll see”. Determination is also the realisation that the pain or struggle is only temporary and that things do get easier, do get less painful.
A great analogy I read from one of my mentors the other day, was that of a child learning to walk. First few times, they try to stand and take that first step, then fall. They may hurt themselves and cry and Mum or Dad will comfort them. But the child doesn’t think to themselves “this hurts, this is hard, I’m not going to try that again, this walking “thing” is not for me!” A short time later they are back at it again, possibly hurting themselves again; then trying again. Before you know it, your chasing them across the room. Without even realising, the child had the Determination to succeed at walking. Yes it was tough; yes it was hard; yes it hurt sometimes, but they succeeded and their life is never the same again.
As adults, we need to get that “child-like Determination” back! That determination to push through the tough times knowing that its temporary and that once we get through, things get easier, better!
If you want to look into investing, even though it might seem hard, or difficult, reach out! We would love to help. For any more information on what Star Dynamic Property Investments can do for you follow the link below to our website or Facebook page and check us out!
Have a great weekend all and happy investing !!
Cheers,
Lindsay
Investing Exit Strategy – When top Flip and When to Hold?
/in Education US Property, Property Investment Detroit, Think Abroader, US Market /by Lindsay StewartI get asked all the time by investors when looking at property deal feasibility reports as to what is the best exit strategy for US property – flip it (resell) or hold it (rent)? Often though, the answer is not as black and white. One of the most important things I look for in any and every deal we do, or recommend to an investor, is to have TWO exit strategies. Have a plan B. This can be one of the most important parts of analysing any deal. We always want to have the preferred option, but have a backup in case circumstances change.
Now, there are a number of factors you need to take into account when looking at which exit strategy is best for any particular property deal. No one particular point is the most important, I generally look at all aspects and rate them, seeing which way a particular deal leans towards (flip or rental). Particular areas to look at are:
1. ROI – Rental return vs Flip profit
I think always the first thing we should always look at is what is the estimated return we will get from renting the property or selling the property. We also need to take into account when selling costs such as realtor commissions, taxes applicable, title company charges and settlement/closing costs. If a particular property is going to give a high rate of rental return (i.e. over 10% net after costs) then it could be a great addition to your portfolio to keep. If on the other hand, the rental return is down around the 6-7% but the profit from sale (again look at net after costs noted above) is over the 20-25% range, then it’s possible the best strategy may be to flip and invest the money into another deal.
2. Region Demographics & Market Forces
Demographics and market forces of a particular region or neighbourhood can play a role in what is the best exit or outcome for a particular deal as well. Certain areas may be heavily owner occupier properties, often giving higher property prices as it may be a popular area people want to live. This may lean a particular deal towards looking to do a better level or renovation/rehab and plan to flip the property. Other areas might be very strong rental areas; very low vacancy and high rental returns compared to the price of the properties might tend a particular deal to be a good rental. If you have properties in rougher or less affluent areas of a city, it may be best to renovate and sell, with the demographics of the area not conducive to getting good solid tenants. Don’t forget also to check sale prices in the region over the past 3-6 months, to see if the area is getting any capital growth. Maybe a boom in infrastructure or businesses is seeing prices rising, so again, it can lean a deal towards rental, to hold onto while the prices in the area appreciate.
3. Affordability or Price/Cost of the Deal
How much capital you have in the deal (or would have if you were to purchase) and the cost of funding (if applicable) is also a critical factor to look at. If the property cost is relatively affordable then it may be good to hold the property and look to purchase another for flip or hold. If on the other hand, a particular deal will tie up all your available capital, and if returns are such that you are unable to continue investing (stuck so to speak), then getting a chuck profit from sale, to enable you to continue to invest in your strategy might be the best option
4. Type of Property
The type of property you have or are looking at can also play a big part in the favourable exit strategy for the deal. Large 4-5 bedroom properties with 2-3 bathrooms possibly on large blocks, are not as generally favoured by renters, and/or don’t really get the rental return they deserve with rental demand more for the 2-3BR /1BA homes or apartments. Larger two storey properties though, could look to be turned into multi-family residences (MFR) with possibly a 2 BR unit upstairs and 2 BR unit downstairs depending on the layout. This can significantly increase the rental return a property can give. Occasionally, property layouts could even support 3 separate units, vastly increasing return – these would lean strongly to rentals.
Often it is not just one of the these points above that will decide for you the best option for your deal/property. It may be a combination of 2-3 points that gives you that Plan A, but you should always have ready that Plan B in case circumstances change. On the other hand, one particular point might be so strong in one direction, that it is easy to see the best outcome for the deal.
If your looking at starting or adding to your investment portfolio and would like to discuss options and strategies, book a call with us today!
Investing in US Apartments – A Good Strategy?
/in Education US Property, Property Investment Detroit, Think Abroader, US Market /by Lindsay StewartIn my opinion, investing in Apartments in the US has always been a good strategy for cashflow and even growth. Apartments are almost a hybrid of residential and commercial real estate. In the US, anything over 4 apartments in a building is classified as a commercial investment, but still driven by residential trends and demographics. On the other hand growth or appreciation of apartment buildings can be more linked to the Net Operating Income (NOI) of the building, more like the CAP rate of a commercial property. As much as capital growth in residential, particularly in a large number of US markets is not something you bank on, in apartment buildings, it can be something you have more control over.
For instance, if the rental returns in an area are rising or if you are able to rehab/renovate some units to increase the rental return, then the overall value of the apartment building will also increase, regardless of whether residential property is softening in the market or not. Its kind of having the best of both worlds in one investment. If the market in a region is booming and more and more people are buying homes, then house prices appreciate, and often apartments can “rise with the flow”. On the other hand, if markets are softening, becoming more of a buyers market than a sellers market, people get nervous, start selling and renting for a while. Rents can often increase as the demand for rentals rise, which can then increase the NOI of the building and hence, its value. Win – Win!
Now, there is a number of factors though, you need to take into account when looking at apartment buildings as an investment:
1. Management
Firstly, there is much more management involved. Apartment buildings are not necessarily for the “passive” investors, or those that want to sit, and forget their portfolios and just let them be. With the higher number of tenants involved in one building there is always a lot more management needed, even if you have a property manager in place.
2. Vacancy
You always need to factor in a vacancy rate for your portfolio, apartments particularly. Now one of the major advantages of apartments over houses, is that if you own 1 house and the tenant leaves, you now have a 100% vacancy rate on your portfolio until you are able to tenant the property again. If you have a one 7-apartment building for instance and one tenant leaves, that’s only a 14% vacancy rate. But understand, there is a good chance, particularly if you have a couple of apartment blocks that there will always be a couple of units vacant at any one time.
3. Affordability
Apartments can be much more expensive to purchase upfront, and costs such as property management, maintenance, insurance etc can also be higher as these are often treated as commercial investments if 4+ units. Need to ensure you factor in these costs when determining your returns and cash flow. Which brings me to the last point…
4. Returns
Returns on apartments can often be higher than single family or multi-family homes. Given the higher management and increased costs, the returns though can be better. If a particular area is giving 7-8% ROI in Single Family Residences (SFR’s) you may find apartment buildings can be 12%+, sometimes even higher!
If you are looking at a passive rental portfolio, and not afraid of the increase management and costs/affordability of apartment buildings, they can make an excellent addition to a portfolio. We have clients realising returns of over 17% on some apartment buildings and have seen EBIT’s (earnings before Interest and Tax) of over 25% possible – making sure to factor in increases in costs, maintenance and a vacancy rate.
If this is something you are interested in adding to your portfolio, book a call with us today!
Whats in Store for the US Market in 2019?
/in Think Abroader, US Market /by Lindsay StewartLooking back at 2018, we experienced a year of high expectations that largely did not disappoint. Markets continued to stabilise, economic promise grew along with property values, and the revitalisation of cities nationwide provided opportunities and population growth.
It was a good year for investors. But now, we have to ask ourselves: what does 2019 have in store for U.S. real estate? What national trends will shape the markets on the whole, and what do we have to look forward to…or keep an eye on?
This is what you need to know as we look ahead for 2019.
Top Predictions for the U.S. Real Estate Market in 2019
Balance is the word.
As we consider factors like growing inventory and the slowing of appreciation and asking prices, the word that comes to mind is balance. In 2019, we expect to see the return of more traditional housing markets that offer less frenzied, more evenly paced opportunities over the extreme environments we have seen booming in the last decade. These will be the exception. Savvy negotiators may be able to snag a great deal, and some markets are still on that rise – Detroit for example.
If buyers start to slow down, they will rent while waiting for the market conditions to change, thereby strengthening the rental market.
What’s the deal with interest rates?
Interest rates were at their lowest recent point post-recession in 2008. The federal government controls short-term interest rates, while the market dictates long-term rates. When the government changes the rates at which banks are allowed to borrow money, it can take several years to shift the economy on the whole, while the trickle-down affects the average consumer, where it has an almost immediate impact on things like credit cards, student loans, and yes…mortgages.
Interest rates are moving from a decade of being historically low to 5 and 6 percent as we enter 2019. Economists and real estate experts alike are concerned that this could hinder consumer spending power and make the burden of mortgages greater. In regards to housing, it may deter buyers even as housing prices are expected to fall. But most of this is what we would call “Sticker Shock” Its simply that interest rates have been at record lows for so long people lose sight of the fact that 5-6% is still quite cheap (remember the 15-20% of the 80’s and 90’s!)
Good news too though is that if buyers start to slow, the will rent for the mean time while biding time for the market to change, strengthening the rental market for us Aussie investors!
What about the trade war issue?
The global economy has always been a factor in the health of our markets, real estate included. The issue here is that tariffs and trade wars on a broad, global scale, may cause issues in the US domestic economic markets. Economists worry that cold economic relations with allies and a possible trade war with China could cause economic instability by 2020.
However, none of these things are guaranteed or set in stone.
Despite these predictions, good and bad, they are just that: predictions. The best we can do is to plan for the long-term and choose sustainable, smart investments that help you secure your best financial future.