Norada Real Estate Investments

Cap Rate Calculation: How To Use Cap Rate In Real Estate?

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Capitalization Rate or Cap Rate is a term often thrown around in real estate discussions. Yet many people don't really understand what it means. After all, it can be confused with cash-on-cash returns and the rate of return. You will understand what a cap rate is in real estate in this post, from its definition to methods of calculation. When to utilize capitalization rates, how to calculate cap rates, what is a decent cap rate on investment properties, and why determining cap rates is crucial for real estate investors are among the topics covered.

Easy Cap Rate Calculation

What Is The Capitalization Rate?

The ability of a property to repay its initial investment and generate income beyond that is measured by its capitalization rate. It is one of the most fundamental concepts in real estate investing and is mostly referred to in calculations as Cap Rate. Cap Rate is defined as the rate of return on a rental investment property based on its income, according to Investopedia. This determines the investment's potential return.

When you invest in income-producing property, you are looking for cash flow. You also expect to realize a capital gain, selling the property at some time in the future for a profit. When analyzing investment opportunities, real estate investors evaluate a multitude of different factors. But a typical investor will be interested in the income that the property can generate now and into the future. That investor is likely to use capitalization of income as one method of estimating value. The capitalization rate is similar to the rate of return on investment.

It allows you to compare the relative value of real estate investments independent of their dollar value. The standard cap rate formula is net operating income divided by the market value. Cap rate is one of the most important calculations done by real estate investors. The cap rate is ideal for evaluating comparable properties in the same market area. A cap rate calculator is a useful tool as it allows you to quickly get an estimate of how much money the property is expected to make, and how this compares to similar properties in the area.

The two components of a Capitalization Rate are the Net Operating Income (NOI) and the purchase price of the investment property. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property's income and cash flow statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.

In other words, the cap rate measures a property's yield on an annual basis, making it easier for investors to compare the risk and return profiles of different assets. It is an estimation of an investor's potential return on a real estate investment. Several factors can affect the cap rate of a property, such as market demand or interest rates, but one of the most critical factors is its occupancy. A property's occupancy directly affects the amount of NOI it can generate.

A vacancy rate is the opposite of the occupancy rate. It refers to the percentage of units that are vacant or unoccupied in a given property. Vacancy rates play a big part in business and can help investors determine whether they're making a good move by putting their money into certain real estate deals. A fully occupied property will generate a higher NOI and a higher cap rate at a given price than one that is only half occupied.

Cap Rate Calculation

Cap Rate Calculation Example

The Capitalization Rate is the NOI divided by the purchase price and is represented as a percentage.

Cap Rate = NOI / Purchase Price

Now that you know the basic equations used to calculate the cap rate, below is an example to better illustrate how this is used. First, let’s find our values.

  • Property Value (or Purchase Price): $250,000
  • Total Revenue: Four units x $1,000/month in rent = $48,000/year

Total Expenses:

  • Property manager salary – $20,000
  • Cleaning and maintenance – $10,000
  • Inspection and broker fees – $5,000

Next, let’s calculate NOI. $48,000 (revenue) – $35,000 (expenses) = $13,000. Lastly, we can use this number to calculate the cap rate of the property.

$13,000 (NOI)/$250,000 (property value) = .052, or 5.2% Cap Rate.

The same formula can be used to calculate the purchase price if you have the Cap rate and NOI. To solve for the price, just rearrange the original formula to:

Purchase Price = NOI / Cap Rate.

Purchase Price = $13,000 / 5.2% = $250,000

Now, let us suppose that a similar investment property (B) has the same NOI but a higher Cap Rate of 6.5%.

Purchase Price of B = $13,000 / 6.5% = $200,000

Both the properties have the same NOI of $13,000 but a lower Cap produces a higher purchase price and vice-versa. As Cap rate increases to 6.5%, it decreases the property value by $50,000.

Note a very important consideration involving a Cap rate calculation shown above. The purchase price is based on an all-cash purchase. No loans or mortgages were involved or factored into the calculation. The leveraged money that is used to acquire an investment property must be accounted for in any calculation involving a rate of return. Therefore, a Cap based on an all-cash purchase can never equal a rate of return.

Using a Cap Rate Calculator in Real Estate

A cap rate calculator is used in real estate to find the comparative value of a piece of property to determine if it would be a good investment. It’s calculated by balancing the costs of owning and maintaining a property, the property’s market value, and the direct earnings received from that property.

For example, say your client wants to buy a property for $250,000. It currently has four units and receives $1000 in rent from each tenant each month. The current owner paid $35,000/year in inspection fees, maintenance and cleaning fees, and a property manager’s salary. The cap rate calculator takes each of these factors into account to come up with a simple percentage that’s easy to compare across properties.

Cap Rate Calculator Equation

The cap rate calculator equation is pretty straightforward, assuming you have all of the necessary information at hand. To calculate the cap rate, you take the Net Operating Income (NOI)/Property Value. You can typically take the asking price as the property value, or there are plenty of online tools available that can provide property value estimates as well.

How to Calculate Net Operating Income (NOI)

Cap Rate

Coming up with the NOI for a property is a bit trickier, not because the math is complicated, but because it requires a lot of different numbers upfront. The equation for NOI is Total Revenue – Total Expenses. Total revenue is typically the yearly rent collected from tenants and/or the interest gained over the year. Expenses can include any number of factors such as:

  • Broker or inspection fees
  • Pest control
  • Maintenance
  • Property management salary
  • Tenant screening
  • Property taxes

To find NOI, you add together your revenue sources for the year, then subtract the combined expense amount. You can then use this number to calculate the cap rate. It’s important to note that the cap rate does not take the mortgage payments into account, as this is not a factor that affects the value of the property itself.

Benefits of Using a Cap Rate Rental Property Calculator

Understanding Capitalization Rate

There are many ways to use the cap rate when evaluating rental properties. In general, you can think of the cap rate as an estimate that’s used to get the lay of the land for real estate investing. Examples of the different uses for a rental property cap rate calculator include:

  • Understand the value of a property in relation to its neighbors – It stands to reason that properties in similar neighborhoods with similar assets should have similar cap rates. You can use the cap rate to identify if a particular property is priced too high or too low, or if there may be underlying issues contributing to an unusual cap rate.
  • Get a picture of larger market trends in an area – Cap rate is a useful indicator of wider changes in a certain city or area within a city. For example, cap rates changing in a specific neighborhood but staying flat in another similar area can indicate a shift in buyer/renter interest.
  • Provide useful estimates to clients – For agents, the most important use for a cap rate calculator is to be able to provide accurate estimates to clients for the value of the property, an important factor when making a buying decision.
  • Identify under-the-radar opportunities – If a property has a conspicuously high cap rate for the area, this could be an indication of mismanagement and an opportunity for a higher return on investment if operations were to be more streamlined and yearly expenses minimized.

Drawbacks of Using a Cap Rate Rental Property Calculator

Though the cap rate is undoubtedly a useful estimate of a property’s value, there are a few limitations to using this metric.

  • Requires comparisons to be useful – Because cap rates are most often used in comparison to properties of similar sizes, assets, and areas, they require a robust market to be valuable. This limits their usability in both smaller markets and for unique properties like tourist attractions, where there typically aren’t enough similar properties to compare to.
  • Relies on knowing historical costs – Since the cap rate calculation incorporates net operating income, which in turn requires knowing the property’s yearly expenses, it can be difficult to get an accurate estimate without the proper records. For mismanaged properties or even properties that have been owned by a single family for a long time, tracking down this information may not be possible.
  • Only accurate with steady income and expense costs – Like any estimate, the cap rate can be thrown off by any outlying data points in terms of extra income or unexpected costs. Things like flooding damage can skew maintenance cost data for that year or unexpected seasonal business can drastically increase income, causing an inaccurate cap rate that may not actually be the typical amount year to year.

What is Cash-on-Cash Return?

The cash-on-cash return of an investment property is a measurement of its cash flow divided by the amount of capital you initially invested. This is usually calculated on the before-tax cash flow and is typically expressed as a percentage.

Cash-on-cash returns are most accurate when calculated on the first year's expected cash flow. It becomes less accurate and less useful when used in future years because this calculation does not take into account the time value of money (the principle that your money today will be worthless in the future).

Therefore, the cash-on-cash return is not a powerful measurement, but it makes for an easy and popular “quick check” on a property to compare it against other investments. For example, a property might give you a 7% cash return in the first year versus a 2.5% return on a bank CD.

The cash-on-cash return is calculated by dividing the annual cash flow by your cash invested:

Annual Cash Flow / Cash Invested  =  Cash-on-Cash Return

  1. Calculate the annual pre-tax cash flow for the property.
  2. Determine how much you'd put down on the property from the down payment to rehab costs. Total these expenses to find your total cash investment.
  3. Divide the annual pre-tax cash flow by the total cash invested.
  4. The result is the cash-on-cash or CoC return.

Let's make sure we understand the two parts of this equation:

  1. The first-year cash flow (or annual cash flow) is the amount of money we expect the property to generate during its first year of operation. Again, this is usually cash flow before tax.
  2. The initial investment (or cash invested) is generally the down payment. However, some investors include their closing costs such as loan points, escrow and title fees, appraisal, and inspection costs.  The sum of which is also referred to as the cost of acquisition.

Let's look at an example. Let's say that your property's annual cash flow (before tax) is $3,000. And let's say that you made a 20% down payment equal to $30,000 to purchase the property. In this example, your cash-on-cash return would be 10%.

     $3,000 / $30,000  =  10%

Although the cash-on-cash return is quick and easy to calculate, it's not the best way to measure the performance and quality of a real estate investment.

Let's look at one more example taking into account repairs and renovations:

Suppose you want to put 20,000 dollars down on a $100,000 house. This is 20 percent down. You'll have to pay 2,000 dollars in fees. You're renting it out for a thousand dollars a month to a tenant. This yields 12,000 dollars a year in rental income per year. And you've got an ultra-cheap 3000 dollars a year or 250 a month.

The annual cash flow is $12,000 – $3,000 or $9,000.

The total cash invested is the down payment and fees. In this scenario, it is the 20,000 dollar down payment and 2,000 in repairs for a total of 22,000 dollars.

The cash-on-cash return is 9000 divided by 22,000 or 0.41. This translates into a 41 percent return.

What if the property had no additional repairs necessary? Then the total cash invested is 20,000. The cash flow is unchanged at 9,000 dollars.

The cash on cash return is then 9000/20000 or 0.45 or 45%.

If the property needed 10,000 dollars in repairs and renovations, the cash invested hits 30,000 dollars. Divide 9,000 by 30,000 and the cash on cash return is 0.3 or 30%.

You can use the cap rate to estimate the NOI. The NOI is going to be the market value of the property multiplied by the capitalization rate. If they're selling a property for 150,000 dollars and say it has an 8 percent cap rate, then the NOI is 12,000 dollars a year. For comparison, it is reasonable to assume an NOI of roughly one-third of the rental income.

And the fair market value of any property can be estimated using the cap rate. Divide the NOI by the cap rate. A property with a 12,000 dollar NOI and an 8 percent cap rate is worth 150,000 dollars in the scenario above.

You can use the cash on cash return to gauge the return on renovations that allow you to raise the rent. Add the renovation or upgrade costs to the total cash investment number, and determine how much more you could charge in rent for the nicer property.

The ratio compares the total cash earned on an annual basis (pre-tax) to the amount of cash invested. Cash-on-cash ratios are used instead of return on investment since ROI calculations are skewed when you buy a property with a large amount of debt.

Difference Between Cap Rate and Cash-on-Cash Return

The capitalization or cap rate is often confused with the cash on cash or COC return. That problem is compounded by the fact that the cap rate and cash on cash returns are the two main metrics used to assess individual real estate deals. As discussed above, Cash on cash or CoC return calculates the cash income earned on cash returned on investment.

Cash on cash return excludes debt and only looks at the cash amount invested; this is generally the down payment on the property. If you pay all cash for a property, the Cash-on-Cash rate will be the same as the cap rate. However, most property investors don't pay 100 percent of the cash for properties. Yet the cash on cash calculation can still be of benefit to them.

You need the cash-on-cash calculation to properly compare projects that will require significant investment in the form of loan fees, rehab costs, and closing costs in addition to a down payment or cash purchase. Anything you need to pay to get the property ready for tenants falls into this category.

The cap rate can be used to gauge how good of an investment the property is, while cash on cash calculations allow you to determine which deals have the highest returns.

How to Use Cap Rate as a Rental Property Investor?

The cap rate can be used to compare your relative success as a real estate investor or the value of a given property. For example, you can calculate the cap rate for your entire portfolio and identify under-performers. Or you can learn the average cap rate for a given neighborhood and then gauge the value of a property based on its cap rate. If it has a lower cap rate, then it is worth less than a comparable home with a higher cap rate.

Know that you don't have to go into high cap areas to find profitable investments. A low cap area may have room for significant improvement. Look for areas where there are rapidly increasing rental rates because these are the places where the cap rate will be better next year than this year. And that higher cap rate will lead to property values increasing in a year or two.

The ideal properties will have rising rents combined with unchanged expenses. However, if the operating expenses are skyrocketing, NOI will go up and kill that great cap rate for the current calendar year. This is a risk with older buildings that need major work. If you can find properties in good condition and even rehabbed older ones, you could create long-term value by buying something through NOI increases.

Estimating Property Value With The Capitalization Rate

The Cap Rate merely represents the projected return for one year as if the property was bought with all cash.  But since we don't normally buy property using all cash we would use other measures, such as the cash-on-cash return, to evaluate a property's financial performance.

The Cap Rate is calculated by taking the property's net operating income (NOI) and dividing it by the property's fair market value (FMV).  The higher the Cap Rate, the better the property's income and market value.  The Cap Rate is calculated as follows:

     Capitalization Rate = Net Operating Income / Value

Let's look at an example.  Let's say your property's net operating income (NOI) is $50,000.  And let's say that the market value of your property is $625,000.  Your Cap Rate would be 8%.

Capitalization Rate  =  Net Operating Income / Value
Capitalization Rate  =  $50,000 / $625,000
Capitalization Rate  =  8.0%

As another example, let's suppose you are looking at purchasing a property that has a net operating income of $20,000.  From doing a little research you know the average Cap Rate for the area is 7.0%.  By transposing the formula we can calculate the estimated market value as follows:

Value  =  Net Operating Income / Capitalization Rate
Value  =  $20,000 / 7.0%
Value  =  $285,715

An advantage of the Cap Rate is that it provides you with a separate measure of value compared to appraisals where value is derived from recently sold comparables (which are primarily based on physical characteristics).  This is especially true when comparing commercial income properties.

Note that a small difference in the Cap Rate may not seem like much but it can make a large difference in your valuation.  For example, the difference between a 7.0% and 7.5% Cape Rate, a mere 0.5% difference, on a property with a $50,000 net operating income is a $47,619 difference in value!  So be sure to double-check the accuracy of your numbers.

As always, you want to look at multiple financial measures when evaluating income property including the cash-on-cash return, debt coverage ratio, and internal rate of return.

Commonly Asked Questions About Cap Rate

Below are a few additional clarifying answers to some of the frequently asked questions about cap rate calculators.

What is a Good Cap Rate?

The capitalization rate for real estate can range from a negative number to a double-digit return. A standard cap rate is typically between 4% and 8%, according to CBRE’s 2019 North American Cap Rate Survey. However, there is no such thing as a “good” cap rate. It all depends on the level of risk the property owner is comfortable with and how the cap rate compares to similar properties in the area.

Some investors say they won't buy anything with less than an 8 percent cap rate. It is difficult but possible to find properties with a 20 percent cap rate.

A high cap rate is generally caused by a low purchase price (including distressed sellers) or a high NOI. The key is knowing why the cap rate is higher than normal, not rejecting a property because the CAP rate is much higher than average.

A low cap rate is less risky, while a high cap rate is riskier but there is an opportunity to make more income. As we mentioned earlier, an unusually high or low cap rate (compared to other properties in the area) can indicate that something is “off” with the property.

What Does a 7.5% Cap Rate Mean?

A 7.5% cap rate doesn’t mean much by itself. Rather, it indicates the ratio between a property’s net operating income and its market value, in this case, 7.5%. Cap rate is a way of displaying how much the property is expected to make in a year using the relationship between revenue, operating costs, and market value for the property.

What this means in terms of good or bad investment or dollar amounts depends on the situation. For example, let’s say you want to buy a home that costs $1 million, with an expected net operating income (AKA yearly revenue) of $75,000. Using the cap rate equation of NOI (75,000)/property value (1,000,000,) you would get a cap rate of 7.5%. You can then easily compare to other cap rates in the area to evaluate your investment.

What is an Acceptable Cap Rate?

An acceptable cap rate varies depending on the situation. An average cap rate is typically between 4% and 8%, but what is acceptable varies on how much risk the investor is comfortable with.

Is Higher Cap Rate Better?

A higher cap rate is not necessarily better. Again, it depends on the level of risk the property owner is willing to deal with. A wealthy investor looking to make some quick income by flipping a property may be happy with a higher cap rate because of its greater earning potential, while the associated risk isn’t a concern. On the other hand, a young couple who wants to settle in a home and raise kids there for the foreseeable future will likely want a low cap rate, which has a correspondingly lower risk and will likely increase slowly over time.

Why is a Higher Cap Rate Riskier?

Not always. Capitalization rates in real estate are not necessarily an indicator of risk. This is in sharp contrast to stocks and bonds, where the rate of return is proportional to the risk. However, the cap rate can only be used with income-producing property. The formula just doesn't work if you're going to buy property now to sell it later, such as when you're looking for a fix and flip.

Note that the cash on cash return doesn't take taxes into account. High taxes can wipe out any potential investment return. This means that the actual returns you see after-tax are lower than the cap rate. The cap rate will vary based on several things, not all of which directly affect the property's value.

The age of the property, the desirability of the area, and the demand for rental properties in the neighborhood are a few such factors. If there is a greater demand for rentals than the market supplies, rental rates, and NOI may be relatively high despite the moderate home values.

And if there is an oversupply of luxury rentals in the area, you're going to see a low NOI and de facto ROI via the cap rate, because your property may sit empty for a long time or not rent for enough to cover your operating expenses.

There are other issues with the cap rate that explain why you need to know additional values like the cash on cash return. For example, the CAP rate is an annual figure. It will crash if the property was vacant for several months through no fault of the current owner. Yet the metric will rise automatically with inflation if the rents have kept up with market rates.

The cap rate does not tell you how the property has performed over time; vacancy rates and income statements will do that.  A higher cap rate is riskier for the same reason that any high percentage investment is riskier. It all has to do with probability and potential uncertainty, something called the Risk-Return Tradeoff, a well-known investment principle.

The math behind the Risk-Return Tradeoff is a bit complicated, but this guide from Model Investing breaks things down into easily understandable sections if you want to get into the nitty-gritty.

Is Cap Rate the Same as ROI?

No, the cap rate is not the same as ROI. Though both metrics use NOI in their calculations, they’re measuring different things. Cap rate is used to evaluate how profitable a piece of property should be in comparison to the market, regardless of buyer, while ROI (return on investment) is a more concrete calculation showing how much a specific owner will make each year. ROI incorporates mortgage payments while the cap rate does not.

The equation for ROI is the annual return/total investment. For example, a person living in a $200,000 home with an NOI of $12,000, an annual mortgage payment of $5,000, and a down payment of $40,000 would calculate ROI as follows: $7,000 annual return ($12,000 NOI – $5,000 mortgage)/$40,000 total investment (down payment) = 0.175 or 17.5% ROI. The cap rate for the same home would be 6% ($12,000 NOI/$200,000 property value).

How to Calculate Property Value using Cap Rate & NOI?

Using the cap rate and net operating income to determine the real estate value is known as the income approach to valuation. The Net Operating Income equals all income from the property minus all reasonable operating expenses. This is a before-tax figure. It doesn't include amortization, depreciation, capital expenditures, and mortgage payments. The NOI is equivalent to the earnings before interest and taxes if you're comparing the capitalization rate of a business that's for sale.

  1. Find the annual net operating income or NOI.
  2. Divide the net operating income by the cap rate.

For example, a rental property in Dallas with a net operating income of $30,000 and a cap rate of 7 percent is valued at $428,571. The same property with a 10 percent cap rate would have a value of $300,000. In other words, the higher the cap rate, the lower the property’s value.

We hope that the following explanations were helpful for any agent looking to provide a more holistic view of property options to their clients.

Now that you understand how cap rates work, here is an easy calculator that you can use.

Is the Housing Crisis Over in America?

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Is the Housing Crisis Over in America?

The housing crisis is not over in the U.S. There is a shortage, or housing underproduction, in all corners of the country. The major coastal cities are known for their exorbitant real estate prices, which are driven by zoning restrictions and a scarcity of available housing. According to a new study, these issues are increasingly plaguing once-affordable towns and cities across the United States.

According to an analysis by the housing policy group Up For Growth, more than half of the nation's metropolitan regions had a housing shortage in 2019, a significant increase from one-third of cities in 2012. The country is short 3.8 million homes to meet its housing needs, which is double the number from 2012.

In recent years, rising raw material costs have exacerbated builders' woes, particularly during the pandemic, when lumber prices increased by more than 150%. But, given the large cohort of Millennials entering the housing market, one of the most significant reasons for this shortfall has been the severe underbuilding of entry-level homes, where the majority of the demand exists. Given the significance of this factor, we go into more detail about the entry-level labor shortage below.

According to an analysis published by Freddie Mac, long-term single-family home development declines have caused the housing shortage. Starter homes have decreased much further, exacerbating that trend. Between 1976 and 1979, 418,000 entry-level single-family homes were built annually, accounting for 34% of all new homes built. Mortgage rates rose from 8.9% to 12.7% in the 1980s.

As mortgage rates rose, housing became less affordable, decreasing demand and supply. In the 1980s, the entry-level housing supply dropped by nearly 100,000 units to 314,000 per year. The entry-level percentage of new single-family homes remained at 33%, similar to the late 1970s, showing that entry-level supply fell by the same amount as the entire new construction market.

According to another report published on the housing shortage by Fannie Mae, every city in the country has a housing supply problem, but each city's housing supply problem is quite unique. The research conducted by the firm found out that while the US has a nationwide affordable housing deficit, each state and city's approach to solving it is different, and the tools and techniques utilized to build needed new housing supply must be adjusted.

Tools to increase housing supply are accessible, although less so. Many towns oppose hard choices and reforms to increase housing for low- and moderate-income homeowners and renters. However, without those choices, the economic and social benefits of adequate housing supply will be wasted and the issues caused by its scarcity will deepen.

The housing supply shortage has well-known causes. After the Great Recession, housing development plummeted. The last decade saw the fewest new residences created since the 1960s. 3.8 million housing units were needed in 2019. The pandemic-induced materials and labor scarcity worsened the tendency, as shown by the 2021 rent and home price increases.

Rising mortgage interest rates have already dampened housing demand, particularly for new homes, and an economic recession could reduce demand further. Prices and rentals may stabilize or fall in some markets. The supply crisis will persist, hurting low- and moderate-income families. Fannie Mae ensures affordable housing for low- and moderate-income families by providing mortgage funding.

From 2019 through 2021, Fannie Mae sponsored almost 575,000 affordable units, according to their analysis. Their loans on newly built single-family houses bought by moderate-to-low-income households, funding to preserve affordable multifamily rental housing, and investments in low-income housing tax credits make up the majority of that amount.

If the housing supply is there, we can finance more. Nope. Families everywhere will continue to suffer with high housing costs until communities take concrete action to construct and preserve affordable housing stock where and how it is needed most. Fannie Mae economists Kim Betancourt, Stephen Gardner, and Mark Palim have issued a study report.

The authors compared the housing supply of the 75 largest U.S. urban markets to the housing needs of their residents. The housing supply problem is national, but solving it is local. Most housing-cost-burdened households are not just in coastal metros with high housing expenses. Fresno, Charlotte, and Las Vegas have high housing-cost-burdened household rates. Even smaller cities like El Paso and McAllen, TX, lack affordable housing.

Housing shortages necessitate localized solutions. According to the research paper, affordable multifamily rental units in Dallas and Atlanta could boost housing affordability. Some markets need new single-family houses, while others need to preserve multifamily housing. This analysis, based on 2019 data (the last pre-pandemic year with accessible housing cost burden data), shows that supply and affordability issues have worsened.

Even if home price growth has slowed and inflation and rising interest rates have reduced demand, working people have suffered from the rise in rents and housing prices since 2019. The supply dilemma can only be solved by building more housing and preserving affordable housing. While the economic drivers of housing costs—materials and labor inflation, supply chain disruptions, etc.—may take years to fix, states and municipalities may work with investors, builders, and lenders to make more homes available.

In several of the most cost-burdened states, zoning reform to encourage higher density and multifamily housing near transit and job hubs are working. Another option is to reduce or streamline regulatory barriers that hinder new development, particularly for manufactured houses and smaller starter homes that have all but gone in many large metro areas and made it hard for millions to buy their first home.

Federal low-income housing tax credits have been one of the most successful capital-generating mechanisms for affordable housing production and maintenance for over three decades and should be expanded and reinforced. Helping first-time homeowners and low-income renters could encourage the construction of additional affordable housing in areas of high demand.

Fannie Mae and the thousands of mortgage lenders and investors they work with daily are ready to finance affordable homes. The US has a world-class housing finance system. It's time to equal the housing supply.

Will the Housing Crisis Worsen in 2023?

Many homeowners are still haunted by the 2008 housing market crash when property values plummeted and foreclosures increased dramatically. According to a new LendingTree survey, 41% of Americans now fear a housing crash in the next year, owing to the memory of a sudden disaster at a time when the real estate market was riding high. But NAR Chief Economist Lawrence Yun draws the distinctions between today’s real estate market and that of more than a decade ago.

“It’s a valid question,” Lawrence Yun, chief economist for the National Association of REALTORS®, said Tuesday at NAR’s Real Estate Forecast Summit. “People are remembering the crushing and painful foreclosure crisis. So, it has become a key question: Will home prices crash after the strong run-up in prices across the country over recent years?”

  1. The labor market remains strong.

  2. Less risky loans.

  3. Underbuilding and inventory shortages.

  4. Delinquency lows.

  5. Ultra-low foreclosure rates.

At the virtual conference, where leading housing economists offered their 2023 forecast for the real estate market, Yun offered assurance that current dynamics are nothing like during the Great Recession. He pointed to several key indicators of how this market differs.

Homes in foreclosure reached a rate of 4.6% during the last housing crash as homeowners who saw their property values plunge walked away from their loans. Today, the percentage of homes in foreclosure is 0.6%—also at historical lows, Yun said. He predicted foreclosures to remain at historical lows in 2023.

housing crisis or crash coming
Source: REALTOR® Magazine

Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at the National Association of Home Builders, said she expects housing starts to drop by double digits in 2023. Then, “as the economy improves in 2024, the housing market will gradually come out of this slump that is expected from the next year,” she added.

Builder confidence has fallen over the last 11 months as mortgage rates rose and buyer traffic slowed dramatically. Fifty-nine percent of builders have reported using incentives, like mortgage rate buydowns and price cuts, to try to win buyers back, Nanayakkara-Skillington said. Labor shortages combined with lot shortages, higher material costs, and lending issues for builders are all compounding factors preventing more construction.

And while lumber prices have eased from record highs, construction costs remain 14% higher due to shortages in other supplies, like gypsum and steel. “All of these issues will keep homebuilding down,” Nanayakkara-Skillington said. “We don’t see these issues being resolved in the near future either.”

Sources:

  • https://www.freddiemac.com/research/insight/20210507-housing-supply
  • https://www.cbsnews.com/news/real-estate-housing-shortage-crisis/
  • https://www.fanniemae.com/research-and-insights/perspectives/us-housing-shortage
  • https://www.nar.realtor/magazine/real-estate-news/2023-real-estate-forecast-market-to-regain-normalcy

What is Cash on Cash Return in Real Estate?

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Cash on Cash Return

Cash on cash return (CoC) is a measure of the cash flow from a real estate investment, expressed as a percentage of the initial cash investment. It is used to evaluate the profitability of a rental property or other real estate investment. A high cash-on-cash return indicates that the investment is generating a good return on the initial cash investment.

Low cash on cash return indicates that the investment is not generating as much cash flow as expected. The cash-on-cash return of an investment property is a measurement of its cash flow divided by the amount of capital you initially invested. This is usually calculated on the before-tax cash flow and is typically expressed as a percentage.

Cash-on-cash returns are most accurate when calculated on the first year's expected cash flow. It becomes less accurate and less useful when used in future years because this calculation does not take into account the time value of money (the principle that your money today will be worth less in the future). Therefore, the cash-on-cash return is not a powerful measurement, but it makes for an easy and popular “quick check” on a property to compare it against other investments.

For example, a property might give you a 7% cash return in the first year versus a 2.5% return on a bank CD. It's worth noting that cash on cash return is a short-term metric, it doesn't take into account the long-term appreciation of the property, and it doesn't include tax benefits. Therefore, it should be used in conjunction with other metrics, such as the cap rate, to evaluate the overall performance of a real estate investment.

The cash-on-cash return is calculated by dividing the annual cash flow by your cash invested:

       Annual Cash Flow / Cash Invested  =  Cash-on-Cash Return

The annual cash flow is the net income from the property, which is calculated by subtracting the annual operating expenses (such as mortgage payments, property taxes, insurance, and maintenance) from the annual rental income. The initial cash investment is the total amount of cash invested in the property, including the down payment, closing costs, and any other expenses.

Let's make sure we understand the two parts of this equation:

  1. The first-year cash flow (or annual cash flow) is the amount of money we expect the property to generate during its first year of operation. Again, this is usually cash flow before tax.

  2. The initial investment (or cash invested) is generally the down payment. However, some investors include their closing costs such as loan points, escrow and title fees, appraisal, and inspection costs.  The sum of which is also referred to as the cost of acquisition.

Let's look at an example. Let's say that your property's annual cash flow (before tax) is $3,000. And let's say that you made a 20% down payment equal to $30,000 to purchase the property. In this example, your cash-on-cash return would be 10%.

     $3,000 / $30,000  =  10%

Although the cash-on-cash return is quick and easy to calculate, it's not the best way to measure the performance and quality of a real estate investment. Future articles will introduce you to better ways to evaluate your real estate investments.

What is a Good Cash Cash Return in Real Estate?

There are no hard and fast rules for determining a specific figure that should be considered a good cash-on-cash return. Most investors, however, agree that a projected cash-on-cash return of 8% or higher is the ideal figure. It also relies on the investor, the local market, and your future value appreciation forecasts. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.

Cash on Cash Return Vs ROI

Cash on cash return (CoC) and return on investment (ROI) are both measures of the profitability of a real estate investment, but they are calculated differently and provide different information. Cash on cash return is a measure of the cash flow from a real estate investment, expressed as a percentage of the initial cash investment. It is used to evaluate the profitability of a rental property or other real estate investment.

Return on investment (ROI) is a measure of the overall profitability of an investment, expressed as a percentage of the total investment. It takes into account both the cash flow and the appreciation of the investment.

The formula for ROI is: (Net profit / Total investment) x 100

The net profit is the total return on the investment, which includes the cash flow, any appreciation, and any other income from the investment. The total investment is the initial cash investment plus any additional costs, such as closing costs, repairs, and improvements.

For example, if an investor purchases a property for $200,000 with a $40,000 down payment, the property generates $12,000 in annual cash flow and the investor sells the property for $220,000, the ROI would be: ($12,000 + $20,000 / $40,000) x 100 = 80%

Cash on cash return provides information on the short-term cash flow of the investment, while ROI provides information on the overall profitability of the investment, including both cash flow and appreciation. It's important to use both metrics to get a full picture of the investment's performance.

Cash on Cash Return Vs Cap Rate

Cash on cash return is a measure of the annual cash flow of a rental property as a percentage of the initial cash investment. The capitalization rate, or cap rate, is a measure of the rate of return on a real estate investment property based on the income that the property is expected to generate. While both measures are used to evaluate the performance of real estate investments, they are calculated differently and provide different information about the potential returns of a property.

Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value. Cap rates are measures used to estimate and compare the rates of return on multiple commercial or residential real estate properties. In contrast to the cap rate formula, which should only be used to compare similar properties in the same market, the cash-on-cash return formula can be used to compare potential cash returns across real estate markets.

To calculate the cap rate for a rental property, you will need to know the property's net operating income (NOI) and its purchase price or current market value. The formula for calculating the cap rate is:

Cap Rate = NOI / Purchase Price (or Market Value)

For example, let's say you are considering buying a rental property for $300,000 and the projected net operating income (NOI) is $30,000. To calculate the cap rate, you would divide the NOI by the purchase price:

Cap Rate = $30,000 / $300,000 = 0.1 or 10%

So in this example, the cap rate for the property is 10%. This means that the property's projected net operating income is 10% of its purchase price. A higher cap rate indicates a higher rate of return, so in this case, you would likely see the rental property as a good investment opportunity.

Benefits of Investing in a Real Estate Syndicate

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A real estate syndicate is a group of investors who pool their funds to buy, manage, and operate real estate. The group is typically led by one or more experienced real estate investors who serve as general partners and are in charge of managing the investment's day-to-day operations. The group's investors serve as limited partners, providing capital for the investment.

The syndication process is simply the aggregation of capital from a group of investors to acquire property. Real estate syndications are seeing new popularity as real estate is increasingly viewed as a fourth asset class in addition to stocks, bonds, and cash. Real estate investment trusts (REITs), many of which have dividend returns of 6 percent or more, are an attractive way to invest in real estate but their publicly traded shares are subject to a significant degree of price volatility that many investors seek to avoid.

By contrast, shares in a private syndicate, typically a real estate limited partnership (RELP) or limited liability company (LLC), are not priced to market daily and in addition, offer the possibility of higher returns than publicly managed REITs. Finally, private real estate syndications offer some tax savings unavailable when investing in a public company.

A real estate syndicate can take different forms, it can be a private or public company, a limited partnership, or a limited liability company, and each of them has its own set of advantages and disadvantages. The main advantage of a real estate syndicate is that it allows individual investors to participate in larger and more expensive real estate deals that they otherwise would not be able to afford.

By pooling their funds, investors can gain access to a diverse portfolio of properties while reducing risk by spreading it across multiple properties. Furthermore, general partners frequently have more experience and resources than limited partners, which can result in better decision-making and higher returns.

Real Estate Syndication Vs REIT

Real estate syndication and REIT (Real Estate Investment Trust) are both ways for investors to invest in real estate, but they have some key differences. A real estate syndicate is a group of investors who pool their money together to purchase, manage, and operate a real estate investment. The group is typically led by one or more experienced real estate investors who act as the general partners and are responsible for managing the day-to-day operations of the investment. The investors in the group act as limited partners and provide the capital for the investment.

On the other hand, a REIT is a publicly traded company that owns and manages a portfolio of real estate properties. REITs allow investors to purchase shares in the company, which gives them ownership of the underlying properties. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.

One of the main differences between the two is the level of control and involvement that investors have. In a real estate syndicate, the investors are typically limited partners who provide capital and have little control over the day-to-day operations of the investment. In a REIT, investors are shareholders and have no control over the properties, but they receive regular dividends and may have the ability to vote on certain matters related to the company.

Another difference is the level of liquidity, REITs are publicly traded on the stock exchange, which means the shares can be bought and sold on a daily basis. While in the case of a real estate syndicate, investors usually have to wait until the property is sold before they can receive their share of the profits. Both, Real estate Syndication and REIT have their own set of advantages and disadvantages, it's important to carefully evaluate the investment and consider the risk-reward balance, before making a decision.

Advantages of Investing in a Real Estate Syndicate

While investing in a real estate syndicate has certain disadvantages as compared to direct ownership of the real estate, syndicates do offer significant benefits. These include the following:

  • Access to real estate skills. The most obvious advantage of a syndicate is that the knowledge and skills of a real estate professional are available to nonprofessional investors. Real estate investment is a far more complicated process than might appear at first, requiring skills in determining real estate values, negotiating purchase agreements, financing a purchase, negotiating leases, and managing the property.
  • Increased savings. By pooling the funds of several investors, even a small real estate syndicate can achieve cost savings as compared to an individual investor. A well-capitalized syndicate can make a substantial down payment on one or more properties while still retaining necessary cash reserves. In addition, other things being equal, larger properties tend to be more cost-efficient than smaller ones, since many expenses are lower on a per-unit or square-foot basis.
  • Diversification. A major advantage of syndication is that it enables an individual investor with limited funds to diversify among several different properties. Diversification may well be the most important way to protect against significant losses in real estate.
  • Tailor-Made Investment Positions. Finally, a syndicate can be structured to offer a variety of “investment positions” that differ concerning the priority of return, risk of loss, and tax benefits. Thus, an investor can choose the balance of risk and return that best suits their wishes.
  • Cash Reserves. The need for cash reserves is often overlooked when inexperienced investors buy real estate. Syndication can assure that sufficient capital is available to give the investment staying power, and the ability to withstand economic downturns or temporary shortfalls.

Beginning the Syndication Process

A major consideration to be addressed at the beginning of the planning process is the number of investors the sponsor intends to solicit. In most cases, a syndicate will consist of 10 to 50 investors, often known personally by the sponsor, who may be a real estate broker, attorney, accountant, or someone fully involved in real estate operations. In these cases, no elaborate marketing plan needs to be implemented. In addition, federal securities laws may not apply if the offering is within a single state or otherwise meets the requirements for an exemption. State securities laws may or may not be applicable. Professional counsel should be sought to assure compliance.

Multi-Class Syndications

In a typical real estate syndicate, the investors constitute a single class, each receiving a pro-rated ownership interest in the syndicate. In some cases, however, to broaden the market for syndicate shares, the sponsor may create a multi-class syndicate or paired syndicate. This permits the creation of different classes of investors, each class entitled to a different type of return, just as corporate investors can choose among bonds, common stock, and preferred stock.

Three different approaches to the multi-class syndicate are (1) different classes of interests within the same syndicate; (2) fee/leasehold split in separate syndicates; and (3) equity/loan split in separate syndicates.

In the fee/leasehold approach, separate legal interests in the property are created – fee ownership and a long-term leasehold. Two syndicates are formed. The syndicate owning the fee interest in income property will be attractive to investors wishing to receive a secure cash flow in the form of rent from the leasehold syndicate. The syndicate owning the leasehold then operates the property directly or enters into a net lease with a high-credit tenant. Since no land investment is required, higher returns can be generated but more risk is assumed since the ground rent must be paid in all events.

In the equity/loan approach, instead of a division of ownership between two syndicates, one syndicate (for conservative investors) makes a mortgage loan to a second syndicate (of the equity investors) that owns the property. The lending syndicate receives interest on its loan, which can include some form of participation in future income, while the equity syndicate keeps the balance of income from the property and possible amortization payments as well.

Multi-class syndication is complex and must be expertly handled for economic, legal, and tax consequences. When two syndicates are created, as discussed above, the sponsors must be sure that applicable federal or state exemptions will not be defeated because the offerings are deemed to be integrated.

Investors Are Buying a Record Share of Homes

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Real estate is getting increasingly popular among investor groups. Investors bought more properties last year since home prices grew quickly and there were fewer homes for sale. They are eyeing growing prices because rental payments are also soaring, which encourages investors who want to rent out the houses they purchase. Many individuals who cannot locate a home to purchase are compelled to rent as a result of the housing supply constraint. In addition, investors who “flip” properties stand to make a substantial return as housing values increase.”

In the fourth quarter of the previous year, real estate investors acquired 18.4% of U.S. houses, according to Redfin. It was 12.6% a year ago and 17.4% in the third quarter. Although investor market share touched a record in the fourth quarter, the number of properties acquired by investors fell 9.1% from the third-quarter peak. In the fourth quarter, investors acquired 80,293 properties, up 43.9% year-over-year. Third-quarter investor house acquisitions were 75.3% cash. So, how are investors performing this year? Here's the summary of the latest Realtor.com® Investor Report for 2022.

Note: In their research, Realtor.com® analyzed deed data from January 2000 to April 2022 in 263 metro regions with more than 100 investor transactions in the year ending April 2022. They only considered single-family residences, condominiums, townhomes, and rowhomes, excluding multi-family buildings. They try to capture buy-and-hold investor purchases, excluding flippers. Some flipping activity is likely included as it is not always clear up-front whether an investor purchase is intended for a flip or buy-and-hold.

Investors Bought a Record-High Share of Houses in Spring of Last Year

Investor buyer trends 2022
Source: Realtor.com®

Realtor.com® defines an investor as a buyer or seller that was/is an absentee owner and that has a name that includes the following: LLP, LP, LLC, GP, or TRUST. According to their spring 2022 report, the investor proportion of house sales has declined significantly from its all-time peak in February 2022 but is about double its 2014/2015 level. After dropping in the early months of the pandemic, investors' proportion of house purchases has increased over the past two years, exceeding non-investors' growth and reaching a new high of 9.7 percent in February 2022.

Nonetheless, investor purchases have declined substantially in tandem with non-investor purchases since February 2022, bringing their entire buy percentage to 9.5%. However, the current proportion of investment purchasers is approximately double the proportion at the same stage in 2014/2015. In April, investors bought 9.5% of properties sold, up 2.8% from the same period last year but down from February's 9.7% peak.

After months of surpassing non-investor purchasers, investor behavior has paralleled non-investor behavior since February. 2021 investor house purchases surged 64% over 2020 when the COVID-19 outbreak hurt investor activity. 2021 purchasing was up 39% from 2019 before the epidemic. While investor purchases were down in January and February, they were up 31% in April and 64% over the same period in 2019, while total sales were down 8% and up just 7%.

Investors' percentage in house purchases is near record highs. In April, investors bought 9.5% of properties, down from 9.7% in February but up by 2.8% year-over-year. This high percentage is driven by both investor purchases and non-investor purchasers, who bought 11% fewer properties in April than a year earlier. The investor proportion of house purchases is almost double what it was in April 2015 (4.8%), but its growth pace has slowed compared to February after 19 straight months of increase.

Their data shows investor purchases under a corporate name. Cash purchases are overrepresented in the statistics because small investor activity under individual names isn't included. Pre-pandemic standards for investors buying properties with cash have changed. In September 2021, 78 percent of investors bought with cash, comparable to 2009 to 2015.

Larger investors with greater equity may have increased demand. Another is greater iBuying activity during this time. Since September, investors' cash purchases have fallen while mortgage purchases have risen. With borrowing rates so high, this pattern may alter in the coming months.

Larger Investors Grew Their Share of Purchases in 2021 to 35%

Despite the fact that smaller investors continue to acquire the highest proportion of properties among the group of investors we've found, bigger investors have overtaken smaller investors in terms of activity increase over the past year. Smaller investors, defined as those who have acquired 10 or fewer properties since their data collection began in 2001, accounted for 64 percent of investor-purchased homes in July 2020, just after the commencement of the COVID-19 epidemic.

Nevertheless, as housing demand surged and rents climbed over the last year, bigger investors, defined as those who have acquired more than 50 properties since 2001, raised their proportion of investment purchases from 18 percent in July 2020 to 42 percent in August 2021. Since August, demand from bigger investors has decreased to 32 percent in April, but their sales share has stabilized above historical norms, grabbing market share from both small and medium-sized investors.

Large home investor sale increase is attributable to Opendoor, Offerpad, and Zillow iBuyer activity (prior to their exit from iBuying). iBuyer's significant investor stake was 30% in 2021. In 2022's first four months, it was 22%. Large investor purchases fell from 32% to 27% in April when iBuyer data was removed. Among non-iBuyer big investors, demand peaked in August and has subsequently decelerated.

While investors are buying a record number of properties, the margin between their buying and selling has shrunk since August. August 2021 saw investors buying 14,000 more properties than selling. By 2022, the margin was 2,300 dwellings. While investor purchasing surpassed selling in March and April, investor selling is up 24 percent from April 2018 and 28 percent from April 2019.

real estate investor contribution 2022
Source: Realtor.com®

Charlotte Saw Greatest Growth in Investor Interest

Southern metros saw the most investment activity last year, followed by the West. Larger investors raised their purchases more than medium or smaller investors in the South and West. Investors bought 20% of Charlotte-Concord-Gastonia properties in the year ending April 2022. Branson, MO (19.5%), Birmingham-Hoover, AL (18.9%), Summit Park, UT (18.6%), and Memphis, TN (18.5%) had the highest investment activity.

Three of the top five metros where investors bought the most homes were in the South, which experienced the most investor interest and the most increase over the last year. In eight of the top 10 metros, investors paid less than the median price in April 2022. Summit Park, UT, and Branson, MO were outliers. In these eight metros, investors bought properties for 16% less. The median investor purchase price was $295,000 in April, 15% less than the median selling price overall and 10% less than the median investor house sold. In all 10 areas, investors bought more houses than they sold in April, vying with purchasers for limited inventory.

Metro Average Investor Purchase Shares and Change in Shares

Region Average of 12 Months End April 2021 Average of 12 Months End April 2022 Average of yy percentage point change
Midwest 5.9% 7.6% 1.7%
Northeast 4.3% 5.7% 1.4%
South 6.6% 9.5% 3.0%
West 4.6% 6.8% 2.1%
Overall Average 5.7% 8.1% 2.3%

Not all major investor markets showed increased interest in the last year. Charlotte-Concord-Gastonia, NC-SC (+0.7%), Jacksonville, FL (+10.2%), and Birmingham-Hoover, AL (+8.8%) witnessed the most investor market share growth. Eight of the top 10 metros with the biggest growth in investor purchases over the past year are very cheap South metros with median list prices as or more reasonable than the typical home nationally.

The average April 2022 listing price in the top 10 metros where investors are rising was $372,000, compared to $450,000 nationally. Investors bought cheaper properties in all 10 markets. They bought properties 13 percent lower than April's median price. Except for Danville, VA, investors acquired more properties in April than they sold.

Source: https://www.realtor.com/research/investor-report-april-2022/

Turnkey Property Investment: What is Turnkey Real Estate?

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This short article aims to provide information on turnkey real estate investing. Turnkey properties are a great option for real estate investors looking for steady and predictable cash flow without the headaches of property management. A turnkey property investment means buying real estate that has already been renovated before it's put on the market, is ready to move in, and can be immediately rented out. 

It is a passive real estate investment with no leg work required to be done by the buyers. Everything is done and managed for the buyers by a turnkey real estate company, which does all the heavy lifting to offer you an opportunity to become a property owner. As a buyer, you are purchasing a turnkey property that is producing a stream of income.

There are a lot of different ways to invest in real estate. You can passively invest in REITs, do fixing and flipping or wholesaling your rental properties, and indulge in all sorts of other investment opportunities. The easiest option is to buy and hold a turnkey rental property and get a passive income month over month.

Turnkey refers to something ready for immediate use. A turnkey property is a potential income-producing property because it has already been fully renovated and can be put on rent for a passive income. It does not require any repairs or improvements and is completely move-in or rental ready. Like any other real estate asset, a turnkey property can be easily acquired, and the process is similar to purchasing your own single-family house or a condominium.

As their names suggest, turnkey properties are often sold and managed by a company that specializes in purchasing and rehabbing under-market value properties on behalf of passive real estate investors. A turnkey real estate company identifies an area that has a strong demand for rental properties, locates the property, and renovates it to make it rental-ready.

It then finds and screens tenants, and will typically offer property management services, taking care of landlord activities such as repairs and addressing maintenance issues. It also ensures minimal vacancies to optimize the potential for steady cash flow to you. Your job is to find a trustworthy turnkey real estate company and a quality turnkey property.

You must understand how to review the financial projections of a turnkey property. Investors usually use the 1% Rule to Calculate Gross Cash Flow. The 1% Rule is a quick and easy way to estimate what the gross rent from a property should be. According to the rule, the gross monthly rent from a home should be at least 1% of the purchase price: Property price = $100,000 x 1% = $1,000 per month gross rent. Check out how to do easy cap rate calculation in real estate.

Turnkey investment properties have become more popular for investors who cannot find affordable properties where they are based, like in the New York real estate market. Such people prefer to buy properties in more affordable markets to generate more cash flow month after month.

If managing your rental properties is not your cup of tea, then you could try hiring a property management company. They would be managing the property for you in exchange for a percentage of your tenants’ monthly payments. Property management companies specialize in providing services to investors like renting out the property and checking up on its maintenance.

You do not want to deal with a company, which is slow at handling any maintenance and repair problems that would occur and cannot find the tenants to replace the tenants, who leave, in which case the vacancy rate would drastically affect your annual ROI. Usually, those companies also provide maintenance and repair services for the properties like lawn care, frozen pipes, elevator breakdown, broken garage doors, and the investor need not worry about these daily operations. Before sealing the contract with any property management firm, you should know:

  • The experience of the property management firm
  • How long does it take to find the tenants
  • If they provide monthly statements and keep track of expenses and income
  • Fees of the property management firm on which your net ROI depends.

Тhе gоаl hеrе іs tо mаkе thе рrосеss оf іnvеstіng іn rеаl еstаtе аs еаsу аs роssіblе, sо аll thе іnvеstоr hаs tо dо іs flір а swіtсh оr “turn thе kеу.” Many real estate investment companies in the U.S. specialize in restoring old properties and also provide services to investors minimizing the efforts of the buyers to convert the property into a rental. Тhіs рrосеss can also hарреn rеmоtеlу if an іnvеstоr chooses to buy out-of-state property by utіlіzing the services of a turnkey real estate company.

Benefits of Turnkey Property Investment

turnkey property investment

Want to become a landlord and enjoy a passive rental income from your investment property but don’t know how, or are unable to invest time in renovating and finding the tenants for your property, then buying a ‘Turnkey Property’ might be the best solution for you. Тhеrе аrе immense bеnеfіts of a turnkеу rеаl еstаtе investing, аnd іt саn dеfіnіtеlу bе аn аttrасtіvе саsh flоw strаtеgy for new investors.

1. One of the advantages of buying turnkey rental properties is that the buyers do not need to spend time finding a property, renovating the property, and finding the tenants all by themselves.

2. You start getting Cash flow from day 1.

3. The turnkey properties are fully renovated and are ready to move in and the property management companies look into the maintenance and repair of the properties themselves.

4. These property management firms do maintenance tasks like lawn care, elevator maintenance, and collection of rent from tenants.

5. They also attend to the complaints of the tenants like termites, broken garage doors, broken air conditioners, etc, so the investors do not have to worry about these things at all.

6. The property management companies are responsible for finding new tenants within time to replace them once they leave.

 7. It is also an eаsу dіvеrsіfісаtіоn оf уоur іnvеstmеnt роrtfоlіо. A turn-kеу rеаl еstаtе іnvеstmеnt саn bе а wіsе mоvе, іf dоnе соrrесtlу. You can іnvеst wisely іn multірlе growth mаrkеts of the US like Dallas, Houston, Atlanta, Memphis, Orlando, Jacksonville, San Antonio, Birmingham, Little Rock, etc., sоmеthіng thаt іs еаsу tо dо sіnсе іt rеquіrеs lіttlе tо nо tіmе оf уоur оwn.

8. Тhе bеnеfіts оf іnvеstіng іn multірlе mаrkеts are sіmрlе: іt рrоvіdеs уоu wіth рrоtесtіоn frоm аn unехресtеd dоwnturn іn аn есоnоmу.

9. Ѕіnсе turnkеу property іnvеstіng mаkеs іt sо еаsу tо hаvе multірlе income рrореrtіеs, thіs іs а very sіgnіfісаnt аdvаntаgе оf this іnvеstmеnt strаtеgу. Іn оthеr wоrds dоn't рut аll оf уоur еggs іn оnе bаskеt. It can become your solid second income source with ROI ranging from 7 to 12% depending upon where the property is located.

10. On the other hand, if the investor itself buys an old property, they need to look into everything from finding a team for renovating the house or an apartment, fixing the damaged roof and broken doors, finding the tenants, meeting, and bargaining with them and sealing the contract. Not to mention the investor will have to check for the maintenance for the rent out the property and also will be responsible to attend to the complaints of the tenants.

11. An investor can take a loan from the moneylenders or the banks to finance a turnkey property. If your credit rating is very good, you can take full advantage of getting a loan amount equal to 100% of the value of the house from your bank. However, if you pay down less than 20% of the home’s purchase price, then your lender will require you to pay for private mortgage insurance (PMI). Your lender will often offer you a lower rate if you can make a higher down payment and vice-versa. Typically a down payment ranges from 5% to 20%.

How To Find a Turnkey Property For Investment?

Investing in out-of-state turnkey properties is beneficial because of the simple fact that the best real estate opportunities are not always found in your neighborhood or local market. With over 400 markets around the United States, some markets become more favorable than others as they transition through their market cycles.  That means that at any given time there will be markets that offer you better opportunities in terms of cash flow and/or appreciation potential.

You could find an out-of-state turnkey property investing opportunity with lower prices, higher and better returns, and better cash flow. If you are interested in buying turnkey properties at this time, you can choose Houston Housing Market. Houston has everything: the people, the diversity, the business climate, being world-renowned in energy, medicine, space, and manufacturing, and above all a booming real estate market.

The first thing you need to do is identify what markets you want to get into. If you are a new real estate investor, you must consult a real estate investment counselor. They can guide you in choosing the best possible markets and connect you with the best turnkey property sellers. Be watchful as a few people simply toss the word “turn-key” around. Some are simply rookie agents who would tell you that the property does not need any repair work and is move-in ready, and then will dump you on to a property management firm when they profit off of the deal.

Therefore, you must research the internet to find the best turnkey real estate websites and go through the information they have provided. You should choose only those companies who have been in this business for at least a decade or so and have an ample amount of positive reviews in their kitty. Search for “turnkey investment company reviews” and read them very carefully.

If you find any negative reviews about a company, you should try to contact the reviewer as well as the company and find out what went wrong in that deal. Be very upfront in this regard as you are putting your hard-earned money into that investment. Any wrong move in turnkey property investing can result in negative cash flow and you may have to sell the property without making any profit at all.

Most turnkey real estate companies sell the house to an investor, and the investor will be the sole owner of the turnkey property, but sometimes turnkey property management firms create a limited liability company and ask the investors to become a general partners of it. This is because they want to stay in the title to make things easier. Whenever there is a repair to do or regular maintenance operations to take care of, they would not need the investor’s permission every time to do so for every small thing.

But on the contrary, it may cause a big headache for the investor, so one way is to open a separate account for the repair and maintenance of the property that the turnkey property management company can access while the investor will be the sole owner of the property. The second important thing while selecting a turnkey property seller is to check if they provide:

  • Full transparency in the financial reports of their properties and immediate access to your information request.
  • A real estate CFO specialized in strategic planning in their staff that will
    ensure the profit in your every transaction and your long-term success.

Before going further, talking to the existing clients of that turnkey real estate company who have made a deal with them in the same neighborhood, and knowing their strengths and weaknesses is also important to make “buying a Turnkey Property” a successful investment for yourself.

Best Places For Investing in Turnkey Properties in 2022

Here are some of the best places in the U.S. for investing in turnkey properties. These markets are smart for investment because of affordability, population growth, and job growth. No smart investor puts money into a property without doing some due diligence. Location is the most important factor and each city has its good and bad neighborhoods. Best properties are not only located in major cities. This list combines major and smaller cities that are hot and emerging markets for real estate investment in 2022.

1. Atlanta Turnkey Property Investment

Beautifully rehabbed single-family homes and townhomes in various nice communities in and around Atlanta,  Georgia. All these Atlanta investment properties for sale have a new roof, A/C, paint interior and exterior, flooring, appliances, fixtures, and major yard clean-up. The Atlanta turnkey properties are pre-analyzed with solid ROI. Atlanta is home to one of the most highly sought-after turnkey real estate investment markets in the U.S. Buy Properties 20-50% Off Retail. The best source for Atlanta real estate investors to find great discounted off-market properties.

2. Memphis Turnkey Property Investment

Memphis iѕ rеgаrdеd as the ѕесоnd lаrgеѕt metro area in thе region. It has developed into a suburban city of detached single-family homes at prices below the national average of the US. You will get completely renovated Memphis investment properties. Memphis turnkey property hаѕ one оf thе best rеnt to price rаtiо in the country. Fоr example, on a $100,000 рrореrtу, thе rеnt will соmе in right around $1,000 whiсh iѕ a 1% rеnt tо рriсе ratio. Thiѕ means that you mаkе a highеr return оn уоur money.

3. Dallas Turnkey Property Investment

You will find the best neighborhoods to buy a turnkey property in Dallas. Dallas has a mixture of owner-occupied and renter-occupied housing units. Dallas-Fort Worth homebuilders started 33,891 houses in 2017, an increase of 4,488 houses or 15.3 percent above 2016 home starts of 29,403, according to a report from the housing analysis firm Residential Strategies.

Dallas is one of the nation’s largest metropolitan areas. With a population of more than 7 million in the Dallas-Fort Worth CMSA, there has been a tremendous amount of real estate development activity to support this growth over the past 65 years. If you are looking to make a profit, you don’t want to buy the most expensive property on the Dallas real estate market and expect to make a good profit on rents.

Perhaps you are looking for a slightly different hold-over, a turnkey property in Dallas that you might move into or sell at retirement in the future! Either way, knowing your profit potential and purpose is the first thing to consider.

4. Chicago Turnkey Property Investment

Chicago is the United State's third most populous city and home to about 3 million residents. There are a lot of benefits to owning Chicago Investment Properties. With its low cost of living, relatively large housing inventory levels, and high affordability, Chicago has a large no. of renters. Therefore, buying turnkey properties in Chicago, and renting them out is an excellent choice for real estate investors.

5. Houston Turnkey Property Investment

Houston has been one of the hottest housing markets in the country for years. You can find fully renovated turnkey properties managed by professional property management companies. The Houston metro area offers great opportunities for investors who are looking for a stable market that offers both cash flow and equity growth at a price that is STILL well below their replacement value. Many of Houston’s neighborhoods are some of the most attractive places to live in the whole of Texas, and it’s not hard to see why it is a favorite among real estate investors.

6. Tampa Turnkey Property Investment

Tampa properties are one of the most affordable in the state. It is one of the hottest real estate markets for turnkey rental properties in the nation. There’s a tremendous amount of pent-up demand for entry-level single-family homes in the region. Since 2015, the median home prices in Tampa have appreciated by roughly 55.2% from $160,000 to $248,257, according to Zillow’s data. You can find fully rehabbed and rental-ready turnkey properties in Tampa. The prices of residential properties in Tampa are growing at a fast pace, though they are still affordable compared to other real estate markets in the country.

7. San Antonio Turnkey Property Investment

For those who want to invest in turnkey real estate, San Antonio is an ideal location because of its outsized military presence. Fort Sam Houston is located inside the city limits. Lackland Air Force Base, Randolph Air Force Base, Camp Bullis, and Camp Stanley are located in the immediate vicinity. This means that there is a large population that will almost always rent because they don’t know where they’ll be sent on their next assignment. San Antonio is a fast-growing city that literally cannot keep up with the population growth, keeping rental rates and property values high.

8. Kansas City Turnkey Property Investment

Kansas City is a large, prosperous, self-sufficient, and culturally rich city located astride the Missouri River. In the metropolitan area, the population is estimated at 2.1 million. The median household income in Kansas City is 45,376 and the median home price is $146,300. The BLS reported that the unemployment rate for Kansas City rose 0.1 percentage points in December 2019 to 3.2%. For the same month, the metro unemployment rate was 0.1 percentage points lower than the Missouri rate. while the average home price is $86,000. The median rent is $993, with an estimated $667 monthly net cash flow. It’s no wonder why one should invest in Kansas City turnkey properties.

9. Charlotte Turnkey Property Investment

Charlotte is a hot market for investors whether they want to renovate and flip, buy to hold and rent or invest in multi-family properties. Charlotte's real estate appreciation rate in the latest quarter was around 1.48% which equates to an annual appreciation rate of 5.92%. You can choose to market your home to potential buyers.

Any homeowner looking to cash out and sell off their property should do it in the current phase. It is better to avoid the price decline phase that will accompany the coming correction. Charlotte investment properties offer an excellent source of passive income. They also have a high rate of return.

10. Palm Bay Turnkey Property Investment

The Palm Bay area has an unemployment rate of less than 4 percent, and it is regularly several tenths of a percent lower than the national average. This area is part of the “Space Coast” because it is so close to Cape Canaveral and the Kennedy Space Center. This is why the city has a large number of high-tech employers. One point in favor of owning Palm Bay investment property is the steady stream of people relocating to the area who want to rent before they buy. You can find great deals on fully renovated Palm Bay Florida Rentals with a solid annual ROI.

Never hesitate to call us for your real estate investment goals. Ask us if we have any properties that are coming on the market that you are interested in. Norada Real Estate Investments is a premier real estate investment firm providing investors with quality new and refurbished turnkey investment properties in growth markets throughout the United States. We offer investors fully refurbished as well as new construction residential properties that might be a great investment to add to your portfolio.

How To Buy Turnkey Rental Properties?

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When it comes to real estate, you'll find widely divergent opinions about its importance in an investment portfolio of an individual. Investing in a turnkey rental property is among the best investments you could make today in the US real estate market. The value of your turnkey rental property may increase to make it profitable for you to flip it in the future. But having said that, turnkey real estate investing does require a lot of research, planning, and hard work to make the purchase a sound investment.

With turnkey rental property investing you do not buy such properties and hold them until you could sell the properties for profits. You buy them for a passive rental income and expect to get an ROI over the years to come. However, you can always flip a rental property after a few years for a lump sum of profit-making. This article will guide you on how to buy turnkey rental properties.

A turnkey rental property generating positive cash flow can be a great investment to add to your real estate portfolio of income properties.  The income is completely passive which means once the deal is over, you get a steady rental income month after month. Contingent upon your location, it may be difficult to locate a rental property that produces month-to-month passive income.

You may likewise find that the most ideal way for finding a decent income-producing rental property is to purchase a fixer-upper, after that do all the rehab needed on your own and lease it out to a qualified tenant. This can be an extremely tedious undertaking and if you have a full-time day job, it will make it much harder to do so. If you are a novice investor, you are bound to make some common mistakes that could lead to a serious downside in the turnkey property investing outcome.

There is a lot of misinformation out there which could lead you to a negative cash flow generation. However, a good aspect concerning purchasing a turnkey property is that it removes a great deal of the diligent work required when needing to get into rental property investment. It will be a rewarding investment if you add turnkey rental properties to your portfolio. Investing in a turnkey rental property can increase your monthly passive income.

Here are some essential tips to help you achieve this investment goal – how to buy turnkey rental properties. These tips have been proven to be productive and rewarding for a passive real estate investment.

CHOOSE THE BEST MARKET FOR TURNKEY RENTAL PROPERTY

If you have your eye on a turnkey rental property investment, it's most common that you live in a place where you can’t find the excellent cash flow meant for rentals. First, you have to locate a city where you can buy in. You must do proper research to pick the perfect market to invest in. For instance, it is not wise to buy a turnkey rental property in a city that has a very low growth rate in population and employment and where property prices have been stagnant for the last few years.

This shows that the real estate is not booming in that city and investing in rental properties entails a serious amount of risk. In the same vein also consider if the city has a diverse economy, has sports and cultural awareness, cheap real estate, and a steadily increasing population. These should all be put into consideration. If the markets are good like the Atlanta Real Estate Market or the Houston Housing Market, you should plan to get about four to five properties in each city.

Read this article for the hottest real estate markets for buying investment properties in 2022.

FINANCE TURNKEY RENTAL PROPERTY PURCHASE

Now, the next step is to get financing. Before you begin your turnkey rental property investment, it is ideal to have a secure means of funding your real estate investment. If you don’t, there is no reason why you should research turnkey rental properties in the first place. If you have all the money needed to buy the properties, then you can skip this.

For most people, this is the most difficult step. You need to find a lender who is licensed in the state you have picked for investment. It is also good to see a lender who is licensed in many states; this is to your benefit if you are seriously considering retiring early with out-of-state turnkey rental properties in your investment portfolio.

For this, you need multiple turnkey properties in your name. Also ensure, you don’t purchase them all in one city, be diverse, and using a multi-licensed lender will make life easier as you will continue to work with them in the future. For more information on things like mortgage options, you must read how to finance turnkey rental properties.

Click on the link if you want to know How To Buy Rental Properties With No Money Down.

FIND TURNKEY RENTAL PROPERTY FOR SALE

Now you that have a perfect market in mind, you also have the right lender; the next step is to find the best turnkey rental properties for sale in that state, and remember to sieve off the craps. You won’t love to work with any turnkey rental property provider that is not reputable, some are bad, some are good or just okay, but some are great.

Find the ones who are looking out for the best for you. Your interest should be your priority here. Find the ones with a lot of positive reviews from recent customers on websites like Yelp, Zillow, Realtor, etc.  Look for the best turnkey rental property companies who want to build a long-term relationship with their customers, and not the ones who are just interested in selling whatever is available with them.

If you opt to use the search engine for this then Google, “best turnkey sellers’’, “turnkey properties for sale’’ or “turnkey providers’’. Append your city name to see what will pop up. This will show you the top-ranking turnkey rental property companies like Norada Real Estate Investments. Norada Real Estate Investments helps you by researching top real estate growth markets in the USA and structuring complete turnkey real estate investments, they help you succeed by minimizing risk and maximizing profitability. 

You can also go to websites like turnkey-reviews.com. This site lists many turnkey providers and their reviews. Once you have made a choice; ensure you ask the top questions to that turnkey rental property provider. It is essential to know their track record, call their previous clients, and pick investors that have up to 2 to 3 years of experience. In the same vein understand if they offer any rent guarantees and maintenance warranties. These are all critical factors for your investment.

REVIEW TURNKEY RENTAL PROPERTIES FOR SALE

Start checking out all the available turnkey rental properties in their inventories. Make sure the property you want to purchase fits your criteria. You should take the turnkey investment property provider's numbers and calculations for ROI with a grain of salt, and hire your turnkey property investment adviser.  Do your research and confirm the rents, taxes, estimated repairs, and vacancies as this is an integral part to avoid later regrets.

You should adequately know if the location is excellent as your research will give you better insights into the price appreciation forecast. Stay away from high crime zones as it will ensure your property doesn’t go to waste. If you can’t find a turnkey rental property for sale which fits this criterion yet, please it will be wise to be patient. Wait for some time or better go to some other market. By any means don’t tie your emotions and love to a single property or market, this is business, and you must stay in a business mode to get the best turnkey rental property deals.

PUT THE TURNKEY RENTAL PROPERTY UNDER CONTRACT

When you have chosen a turnkey rental property that fits your criteria, you will be elated, and the next step is to fan forward and put your rental property under contract. Don’t get your hopes high yet, the journey continues. There are still steps to take, to make your turnkey a grand winner.

At this point, sign the required agreements and addendums you might have with the seller and send off an earnest money check (a warm one). Not all providers or sellers want earnest money, so ensure you inquire before jumping to conclusions. It is wise enough to get a refund on your earnest money if the inspection or appraisal does not meet the requirements.  Therefore, your addendum must have this clause in it.

ORDER INSPECTION OF YOUR TURNKEY RENTAL PROPERTY

This is important regardless of what the turnkey rental property provider has told you; you have to do this as soon as the paperwork and agreement have been started. If the property is still in rehab, then you have to wait until it is complete. Many times, the providers put on lip service just to sell their properties, so a complete home inspection will reveal the real facts.

You must hire a licensed general contractor in the state who has in-depth knowledge and specializes in residential home inspections. They will give you a detailed multi-point report describing the condition of the exterior and interior of the property. They will include some specific details (with photos) in the property inspection report. Usually, they will deliver a report to you within 24 hours on rush orders.

TIME FOR NEGOTIATION OF THE PURCHASE PRICE BASED ON THE HOME INSPECTION REPORT

Once the inspection of your turnkey rental property is done, you will have substantial evidence of what is and what is not, at this point don’t break due to the reports. Instead, send out the report to your providers and ask them to fix the issues at hand. In a perfect setting, they should fix this but in some situations, they may not. Even then, try to get them to fix the major issues and if they still refuse then it’s time to back off. It's not the end of the world. It can happen to anyone but hopefully not you. Find a new turnkey rental property deal for yourself and follow the same steps again.

ORDER PROPERTY APPRAISAL AND VISIT THE PROPERTY

Wait and order this after an inspection and repair are done. If the appraisal is not up to the purchase price, then this is also a good time to call it a quit. If all works out well, get acquainted with the city you want to invest in. Visit your turnkey rental property and meet your providers and see what you have in the contract. This can also be done earlier or later. After all these, the other few remaining steps follow suit. These are securing your tenants, closing on your new turnkey rental property, Relaxing, and then waiting for your gains.

FIND TENANTS FOR YOUR TURNKEY RENTAL PROPERTY

A true turnkey rental property provider will find tenants for you before closing the deal.  They might also provide you with a Property Management Company. If you choose to use a different turnkey property management company, make sure you interview them properly. You don’t have to use the property management that the turnkey seller provides.

Some of the things you must check before signing an agreement with them:

  • Make sure that the turnkey rental property management company you choose has experience in the type of property you have whether it be single family, duplexes, or condos.
  • Ask them how long they have been in this business.
  • Ask them for the phone numbers of their clientele, and call them for feedback. Do not hesitate in this regard. Their clients will give you a genuine firsthand experience in dealing with them.
  • You will also have to check what their management fees are. Usually, it is 10% of the monthly rent.
  • How do they screen for qualified tenants? Do they do the background and credit history checks of the tenants?
  • How do they calculate the rent value? You can use Zillow to match their rent prices and also see the rent prices of other houses in the neighborhood.
  • How do they accept the payments from the tenants? Do they have an online payment system?
  • It is better if you ask for it and review their sample contract documents beforehand to confirm they work well for you. You cannot manage your out-of-state turnkey rental properties. Therefore, having efficient and reputable management in place is essential to your investment.  It’s in your best interest to interview them and ask all the important questions mentioned above.

CLOSE THE DEAL OF YOUR TURNKEY RENTAL PROPERTY

As you move closer to closing the rental property investing deal, your lender will ask for the final paperwork needed at the request of their underwriters.  Make sure to provide all requested information promptly to your lender. A lack of proper documents may lead to the cancellation of your loan. You need to keep your lender happy for future turnkey property investments as well.

You have the clear to close and now an appointment has been set for closing.  Now you need a title company that acts as a combined agent of, the buyer, the seller, and any other parties related to a real estate transaction, such as mortgage lenders. The title company reviews the title, issues insurance policies, facilitates closings, and files and records paperwork.

A title company mutually chosen by all the parties will send out a notary to your location to sign all the closing documents.  Make sure to review all the final documents very carefully before signing. Now it's time to earn money by collecting your monthly rental income. These are some of the recommended steps you need to take for buying turnkey rental properties.

How To Finance Turnkey Rental Properties?

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Financing turnkey rental properties is the most difficult question to solve for a buyer with no experience in the real estate market. We all know that in a real estate investment “cash-is-king.” But, if an investor does not have that much cash in hand, finance is required to meet the purchase price of an investment property.

There are many options available to finance turnkey rental properties. Among them, non-recourse loans, hard money loans, and private loans are the most popular. In a conventional mortgage, the down payment is the smallest and the rate of interest is also lower. In the case of a Non-Recourse Loan, the investor puts an asset forward. In this article, our focus would be to discuss the various means of financing a turnkey rental property.

What is a Turnkey Rental Property?

A Turnkey Rental Property is a piece of investment real estate (mostly a house or an apartment) that an investor can buy and rent in a short period. The turnkey real estate companies are specialized in the purchase and restoration of old and distressed houses. They usually buy them at REO auctions, renovate them and rent them out to the tenants, before putting the property on the market for sale.

This type of real estate investing has become particularly popular after the 2008 bubble burst in the US real estate market. A turnkey rental property is a source of passive income for investors. It corresponds to those investors who do not have the ambition or the ability to directly/actively deal with the purchased real estate.

They engage other companies called turnkey property management companies that will deal with the maintenance of the property. Passive real estate investments are a great way to gain a constant cash inflow over a significant period without doing any heavy work. Also, such investments benefit from special tax discounts.

Advantages of Buying a Turnkey Rental Property

  • Location: With the Turnkey Rental Property option, the potential investor is not tied to the location of the property. For a small difference in price, the investor can buy a turnkey rental property for rent that is in a better location than his own, and with that up to five times more rent. This is certainly a Win-Win situation.
  • Resources: With Turnkey Rental Property investment, a potential investor, with an already checked property, usually gets a company that knows the neighborhood well and the market where the property is located.
  • Investing in a turnkey rental property is cost-effective for several key reasons.
  • Turnkey rental properties have proven high level of Return on investment.
  • Time-saving also stands out as a great advantage. An investor can find a good provider who will take care of the current restoration and tenants' problems. In this case, the investor gets an additional source of income without too much effort.
  • Turnkey Rental Properties are restored and sold by companies that know the terrain and this diminishes the risk of the inexperienced investor who cannot deal with a property requiring rehab.
  • Cheaper input investment – Turnkey Rental Properties for sale can be easily found in the best growth markets and can be easily scanned without unnecessary “wandering” in the real estate market. They are already move-in ready and rented out to qualified tenants with property management in place.

If you are interested in buying turnkey rental properties at this time, you can go to the Houston real estate market. Houston has everything: the people, the diversity, the business climate, being world-renowned in energy, medicine, space, and manufacturing, and above all a booming real estate market.

Financing Turnkey Rental Properties

There are three basic ways to finance turnkey rental properties – Cash, Borrowing, and Loan or Mortgage.

1. Financing Turnkey Rental Properties With Cash

Financing turnkey rental properties with cash is the simplest way, provided you have so much of cash in hand. It also means less paperwork and a higher inflow of money, as there are no EMIs to pay after the purchase. Cash buyers often get a discount from sellers. As a cash buyer, you can also save on closing costs. You don't need to pay a bank attorney for the mortgage.

Financing turnkey rental properties with cash means you don't need to put real estate taxes in escrow upfront nor pay for a mortgage application and loan origination fees. A property appraisal is not mandatory in a cash purchase, which is required by all mortgage lenders. As a cash buyer, it’s up to you whether you want title insurance or not.

Title insurance, which offers protection against problems with the chain of ownership and claims like unpaid property taxes or liens is mandated by lenders. Financing turnkey rental properties with cash is not possible for everyone, and it can also eat your whole savings.

However, If you have $5 million or more in cash, you fall into a different group of investors called high-net-worth individuals. In that case, if you take 10% of it out and invest in some turnkey rental properties in some of the fastest-growing real estate markets, it may be a good investment for a passive rental income.

2. Financing Turnkey Rental Properties With Loan

Some multiple factors and conditions affect getting a loan for the purchase of a turnkey rental property.

Some of the most important factors are:

  • Credit score (defines your credit rating)
  • Applicant must have an SSN
  • Steady income
  • Solid work history
  • Shortage of any of these factors could make you not pre-qualify for a loan.

Importance of Loan-to-Value Ratio For Financing Turnkey Rental Properties

A loan to value (LTV) ratio is a number that describes the size of a loan compared to the purchase price of the property securing the loan. Lenders and others use the ratio to understand how risky a loan is, and it can be used for approving loans or requiring private mortgage insurance (PMI).

Your loan-to-value ratio (LTV) indicates how much you will owe on the property after your down payment. The higher your down payment means to lower your loan value and a lower LTV as well. If your down payment is lower than 20%, your loan-to-value ratio for conventional financing will be higher than 80%, and your lender may require you to pay private mortgage insurance.

Types of Mortgage Options For Financing Turnkey Rental Properties

1. Fixed-rate mortgages

A fixed-rate mortgage means your mortgage interest rate and your total EMI of principal and interest will stay the same for the entire term of the loan. Your EMI will not increase or decrease.

2. Adjustable-rate Mortgage

Adjustable-rate mortgages have an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan. Therefore, your EMI will increase or decrease if the index rate goes up or down.

3. Alternative mortgage options

Some eligible home buyers or investors may qualify for an FHA (Federal Housing Administration) or a VA (Department of Veterans Affairs) loan. These loans tend to allow a lower down payment and credit score when compared to conventional loans.

These two options are most popular among home buyers in the US. FHA loans are government-insured loans and  VA loans are offered by VA-approved lenders. For example, Bank of America is both FHA and VA-approved lender.

Can FHA Loans Be Used For Financing Turnkey Rental Properties?

You can generally rent your FHA home if you have lived in it long enough. FHA or Federal Housing Administration loans are intended for owner-occupiers only. The FHA will not insure a loan if you are purchasing a turnkey rental property that has a tenant in place. FHA loans were created to promote home ownership.

These loans have lower down payment requirements than most conventional mortgages. Therefore, they are restricted to buyers who intend to occupy the houses they are purchasing. An FHA loan typically cannot be used to finance a second home, a rental home, a vacation home, or investment property. However, there are a few exceptions to the general rule.

However, you can refinance an existing FHA loan, if you move out of the home but continue to own it and rent it out for income. Even though you no longer live in the house, FHA rules allow you to refinance into another FHA loan. An FHA-to-FHA refinance is also known as an FHA streamline refinance.

There is another way to use an FHA loan to buy an income property. It is to purchase a duplex, or some other sort of residence with 2 to 4 distinct units. As an owner you will have to live in one unit, making it an owner-occupied property and thus FHA-eligible, and you can rent out the other units for income.

Using this method you can potentially get to live in your home for free. Unlike conventional loans, FHA loans are available with only a minimum down payment of 3.5 percent.

Finding Lenders Financing Turnkey Rental Properties

Finding a lender for financing turnkey rental properties is not a tough job. There are numerous competing with each other in the market. Lenders like national and regional banks, online mortgage lenders, and lenders for investment businesses (including real estate like rental property), all of them require some documents from buyers for checks like W-2 forms, paycheck stubs, list of debts, loans assets, real estate titles, etc.

Click on the link to know about buying rental property with no money down.

Mortgage rates, origination fees, appraisal fees, and other costs to borrow can vary substantially between lenders, and you should look until you find a lender that meets your needs. Remember, the lender you choose will affect how fast you can close and how much you need to pay for financing turnkey rental properties. 

A mortgage for a non-owner-occupied property carries a higher interest rate than an owner-occupied mortgage as it is viewed by lenders as a higher risk. To find lenders for financing turnkey rental properties, you can go to lendingtree.com which is an online lending exchange that connects consumers with multiple lenders, banks, and credit partners who compete for business.

It is not a direct supplier of loans; it is instead a broker. Over there you can compare the loan offers of multiple lenders for free. LendingOne.com offers 30-year fixed rate loans at up to 80% LTV. Best of all they can get you funded in as little as 10 business days allowing you to compete with all cash buyers.

Another top-rated direct mortgage lender for conventional, VA & FHA home purchase or refinance loans is The J.G. Wentworth Company. It is focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including mortgage lending and refinancing.

Sofi – It is a modern finance company. They partner with members to offer great service and low rates for student loan refinancing, mortgages, and personal loans. You can pay as low as 10% down on mortgages up to $3M, and with no borrower-paid PMI required. You can choose the mortgage that works for you from a 15-year fixed to a 30-year fixed term. The usual down payment required by lenders is 20% of the loan amount.

Once you qualify for a loan you can proceed further in your investment goal and read this blog on how to buy turnkey rental properties. When it comes to real estate, you’ll find widely divergent opinions about its importance in an investment portfolio of an individual.

Investing in a turnkey rental property is among the best investments you could make today in the US real estate market. The value of your turnkey rental property may increase to make it profitable for you to flip it in the future. But having said that, investing in a turnkey rental property does require a lot of research, planning, and hard work to make the purchase a sound investment.

Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process. They are well-informed about critical factors that affect your specific market areas, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing, and interest rates.

NORADA REAL ESTATE INVESTMENTS strives to set the standard for our industry and inspire others by raising the bar on providing exceptional turnkey real estate deals in the U.S. growth markets. We can help you succeed by minimizing risk and maximizing profitability.

This article aimed to educate investors who are keen to buy and finance turnkey rental properties in the United States. Purchasing an investment property requires a lot of study, planning, and budgeting. Not all deals are solid investments. We always recommend doing your research and taking the help of a real estate investment counselor.

How To Buy Rental Properties With No Money Down?

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Over the last few years, more and more investors have taken to rental property investment. Demand for rental property has increased with real estate dealers reeking in millions from sales. This rush for property ownership is quite understandable. Rental property investment is one with very promising returns. Do you know about buying rental property with no money down? Well, let us discuss how to acquire rental properties without putting all your money down.

Even though it's a more than worthy investment choice, investing in rental property is not always an easy ride. There's for instance the all too familiar case where you haven't enough capital to let you invest in property. This can leave you with very limited choices or even no choice at all. Are you currently short of funds? If yes, this needs not to quash your dream of owning a rental property. There are several ways in which you can still buy rental property with no money down.

How To Buy Rental Property With No Money

Gone are the days when real estate investment was a preserve of the very wealthy. Nowadays, even persons with limited financial resources can own real estate property. One only needs to explore the available options to find a way of owning property. In regards to buying rental property with no money down, one of the best options you can try out is that of borrowing. There are a good deal of lenders out there who can readily loan you the amount you need to buy a rental property.

With the help of banks and other lenders, you can easily acquire loans for rental property. Most banks will only require you to have satisfactory financial credentials. Things such as a high credit score, etc act as proof of your ability to repay their loans.

Seeking external funding is not just a way to fulfill a financial necessity. It is in itself a quite witty decision. Look at it in this aspect, you get to own rental property without breaking your back or exhausting all your savings. Banks offer a reasonable loan repayment duration. This being the case, you can always organize yourself and get to grow your rental property portfolio using loans.

Buying Rental Property With No Money Down – Loan Options

No lender will lend you money with no money down, and no seller will carry a note without you putting some money down even if it's a promise to do money in the future. There is no such thing as no money down in any type of real estate investment because the money is going to come from somewhere. Investors borrowing money for rental property investment can choose from this list of loans. 

6 Ways To Buy Rental Property With No Money Down

1. FHA Owner-Occupancy Loans

FHA loan for homeowners is one of the quickest loans you can get for a buying rental property with no money down. Based largely on your credit score, owner-occupancy loans generally tend to have better terms. They attract lower interest rates and also call for quite minimal down payments.

Opting for FHA's owner-occupancy loan however only has one major setback, you must use the property as your residence for the first year. It's only after the first year following the purchase has elapsed that you can convert it into a rental. Only go for this alternative if you have the patience and discipline to do so.

2. Hard Money Loans

From the phrase “hard money”, you can tell that there's something that isn't quite okay here. Anyway that aside, hard money loans are an easy way to buy rental property with no money down.

With hard money loans, a lender doesn't gauge your merit on your credit score. Rather, lenders try to look at the prospects of your intended investment. What is its market value? What returns does it hold for the future? These are some of the questions that they (lenders) first ask themselves. A lender can finance even up to the entire cost of the property once they feel sure of its viability.

Given the fact that they aren't based on good credit, hard money loans do have harsher terms. For one, they attract very hefty interest rates and fees. Additionally, they are also likely to come with shorter repayment periods. Only apply for hard loans if you're certain that your property will constantly generate a high flow of cash.

3. Real Estate Partnership

A real estate partnership is not typically a loan or mortgage. It's in essence an agreement to share investment real estate ownership with another party. The agreement spells out the responsibilities of each partner as well as the terms of any transactions involving the shared property.

With a real estate partnership, the partnership company may agree to fund your entire rental project on certain conditions. One of these may be that you contribute to the project in a major way – like funding its management.

4. Private Loans

Private loans are loans from friends and loved ones. This is another loan option for buying rental property with no money down. Although many of us would rather borrow from banks and financial institutions, we have to understand that desperate times call for desperate measures. You sometimes just have to mix business with familiarity and borrow from your immediate circle.

The beauty of borrowing from friends and family is the “softer terms” involved. Everything isn't as scripted and predetermined as is the case with formal lenders. You can for example agree on much lower interest rates and more flexible repayment duration.

Away from its simpler terms and flexibility, it is most important that you honor the loan deal. Respect your terms of agreement and promptly meet your end of the bargain.

5. Purchase-Money Mortgage

Have you ever heard of a situation where a seller directly finances the buyer? Chances are high you haven't but this is exactly the case with purchase-money mortgages. The rental property seller offers you a loan to buy their property with. These kinds of loans are however not quite common.

6. Lease To Buy Later

If you by all means wish to buy a rental property yet it's currently impossible, you can try out this option. Simply lease a property than buy it later when you're ready. With this arrangement, you pay to rent and have the option to buy the property after a few years.

Benefits of Buying Rental Property With No Money Down

When you buy rental property with no money down, you'll essentially be buying with other people's money (OPM). The benefit of buying rental property with no money down is that you can keep your ‘meager' savings intact. You won't have to empty your bank to be able to own a rental property.

OPM also generally suffices for rental property ownership. Banks usually give money enough for down payments and may also in some cases cover the full cost of a property. Investors often make an income through rental properties and those who are not interested in the details of owning a rental property can still make money flipping homes. Take advantage of such loans to scale up your rental property investment.

If you are interested in buying rental properties and portfolios at this time, you can go to the Houston real estate market. Houston has everything: the people, the diversity, the business climate, being world renowned in energy, medicine, space, and manufacturing, and above all a booming real estate market.

References

  • https://www.mashvisor.com/blog/how-to-buy-rental-property-with-no-money-down/
  • https://www.google.com/amp/s/www.entrepreneur.com/amphtml/285242
  • http://smallbusiness.chron.com/real-estate-partnership-agreement-74119.html

Real Estate Loans: Types, Features, and Benefits

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Real Estate Investment Loans

Real estate loans are a crucial part of the real estate industry, providing investors with the necessary funds to purchase, renovate, or refinance properties. From conventional loans to government-backed FHA and VA loans, there are various types of real estate loans available in the market. In this article, we'll discuss the different types of real estate loans, their features, and the benefits they offer to real estate investors.

Types of Real Estate Loans

Real estate loans are an essential tool for anyone looking to purchase, renovate, or refinance a property. With so many types of real estate loans available, it can be challenging to choose the right one for your needs. In this section, we'll discuss some of the common types of real estate loans available in the market, their features, benefits, and requirements. Whether you're a first-time homebuyer or a seasoned investor, understanding the different types of real estate loans is crucial to making informed financial decisions.

Conventional Loans

These are the most common type of real estate loans, and they are issued by banks and other financial institutions. Conventional loans typically require a good credit score, a down payment of 20% or more, and proof of income. Conventional loans are a popular choice for real estate investors due to their availability and relatively low-interest rates. However, they do come with some requirements that can be difficult for some borrowers to meet.

One of the main requirements is a good credit score, typically around 620 or higher. Additionally, borrowers must have a down payment of at least 20% of the property's purchase price, although some lenders may allow a lower down payment with private mortgage insurance (PMI). Finally, borrowers must provide proof of income and employment, which can be challenging for self-employed individuals or those with irregular income streams.

While conventional loans may be more difficult to obtain than some other types of real estate loans, they do offer several advantages. For one, they typically have lower interest rates than other types of loans, which can save borrowers money in the long run.

Additionally, conventional loans are often easier to refinance than other types of loans, which can help investors adjust their financing as their needs change. These loans are backed by the government-sponsored enterprises Fannie Mae and Freddie Mac, which provides a level of stability and predictability that can be reassuring for investors.

FHA Loans

FHA loans are a popular option for first-time homebuyers who may not have a large down payment or a perfect credit score. These loans are insured by the Federal Housing Administration, which means that if the borrower defaults on the loan, the lender is protected by the government.

One of the main advantages of FHA loans is that they have lower down payment requirements than conventional loans. Borrowers can put as little as 3.5% down on the purchase of a home, which can make homeownership more accessible for those who don't have a lot of savings.

In addition, to lower down payment requirements, FHA loans also have more lenient credit score requirements than conventional loans. Borrowers with a credit score of 580 or higher may be eligible for an FHA loan with a down payment of 3.5%. Those with a credit score between 500 and 579 may still be eligible for an FHA loan, but they will need to make a larger down payment of 10%.

While FHA loans can be a great option for some borrowers, there are some disadvantages to consider. One of the drawbacks of FHA loans is that they require borrowers to pay mortgage insurance premiums (MIP) for the life of the loan. This can add significantly to the cost of the loan, and it's important for borrowers to factor in these costs when deciding whether an FHA loan is right for them.

Another disadvantage of FHA loans is that there are limits to how much borrowers can borrow. These limits vary by location and are set by the government, so borrowers should check to see if there are any limits in their area.

VA Loans

VA loans are a great option for eligible veterans, active-duty service members, and surviving spouses who are looking to purchase or refinance a home. The biggest advantage of a VA loan is that it allows borrowers to purchase a home with no down payment. This can be a huge benefit for those who may not have the funds for a large down payment or who would prefer to use those funds for other expenses.

Another advantage of VA loans is that they often have more lenient credit score requirements than conventional loans. While a good credit score is still important, borrowers with less-than-perfect credit may still be able to qualify for a VA loan.

In addition to these benefits, VA loans also offer the following advantages:

  • No Private Mortgage Insurance (PMI) – Unlike conventional loans, VA loans do not require borrowers to pay for private mortgage insurance, which can save borrowers a significant amount of money each year.
  • Competitive Interest Rates – VA loans often have competitive interest rates, making them an attractive option for borrowers looking to save money over the life of the loan.
  • No Prepayment Penalty – Borrowers can pay off a VA loan early without incurring any prepayment penalties, which can save them even more money over time.

Hard Money Loans

A hard money loan is a type of real estate loan that is often used by investors who need quick access to funds or have difficulty obtaining traditional financing. These loans are typically issued by private lenders, rather than banks or other financial institutions, and are secured by the property being purchased.

Because hard money loans are considered high-risk, they often come with higher interest rates and shorter repayment terms than other types of real estate investment loans. However, they can be a useful tool for investors who need to close a deal quickly or have less-than-perfect credit. Hard money loans can be used for a variety of purposes, including purchasing, renovating, or refinancing investment properties.

Private Money Loans

Private money loans are becoming increasingly popular among real estate investors, as they offer more flexibility and faster processing times compared to traditional loans. Private money lenders are often willing to finance projects that conventional lenders may consider too risky, making them a great option for investors who have difficulty obtaining funding through traditional channels.

However, private money loans typically come with higher interest rates and fees, so it's important to weigh the benefits and drawbacks before applying for this type of loan. Investors should also make sure they understand the terms of the loan, including the repayment schedule and any potential penalties for early repayment.

Commercial Loans

Commercial real estate loans are a popular option for investors looking to finance the purchase or renovation of commercial properties such as office buildings, retail spaces, and warehouses. These loans typically require a larger down payment, often around 30% or more, and have shorter repayment terms than other types of real estate investment loans. Commercial loans can be fixed or variable rates, and the interest rate will depend on the borrower's creditworthiness, the size of the loan, and the current market conditions.

The approval process for commercial loans can be more complex and time-consuming, as lenders will carefully evaluate the property's income potential and the borrower's financial standing before approving the loan. Despite the higher requirements, commercial loans can provide investors with significant returns, especially if the property is well-located and has a high-income potential.

Factors to Consider when Choosing a Real Estate Loan

When choosing a real estate loan, there are several factors to consider. These include:

Interest rates: The interest rate you pay on your loan will determine your monthly payments and the overall cost of the loan. It's important to shop around and compare interest rates from multiple lenders to get the best deal.

Repayment terms: The repayment terms of the loan will determine the length of time you have to repay the loan and the amount of your monthly payments. Make sure to choose a repayment term that fits your budget and financial goals.

Credit score requirements: Your credit score will play a big role in your ability to obtain a real estate investment loan. Make sure to check your credit score before applying for a loan and take steps to improve it if necessary.

Down payment requirements: The down payment required for the loan will vary depending on the type of loan and the lender. Make sure to save enough money for the down payment before applying for a loan.

Loan-to-value ratio: The loan-to-value ratio (LTV) is the amount of the loan compared to the value of the property. Lenders often have maximum LTV ratios that they will lend to, so make sure to check with the lender before applying for a loan.

Pros and Cons of Real Estate Investment Loans

Like any type of financing, real estate loans have their advantages and disadvantages. Some of the advantages of real estate investment loans include:

Pros:

  • Access to capital: Real estate loans provide investors with the capital needed to purchase or renovate properties that they might not be able to afford otherwise.
  • Diversification of portfolio: Real estate investment loans allow investors to diversify their portfolios by investing in different properties and markets.
  • Tax benefits: Real estate investors can take advantage of tax benefits such as deductions for mortgage interest, property taxes, and depreciation.

Cons:

  • Higher interest rates: Real estate loans often come with higher interest rates than traditional home loans, which can increase the overall cost of the loan.
  • Stringent requirements: Some types of real estate loans, such as commercial loans, have more stringent requirements than traditional home loans, making them more difficult to qualify for.
  • Risks: Real estate investing comes with inherent risks, such as changes in the market or unforeseen repairs, and taking out a loan to invest can increase these risks.

Summary

Real estate loans offer an important means of financing for real estate investments. By understanding the various types of real estate loans and considering key factors when choosing one, investors can make informed decisions and increase their chances of success. However, investing in real estate always comes with risks, so it's crucial to do thorough research and seek professional advice before making any investment decisions.

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Norada Real Estate Investments 30251 Golden Lantern, Suite E-261 Laguna Niguel, CA 92677

(949) 218-6668
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