What is Cash on Cash Return

Understanding how cash on cash return works for real estate is vital when evaluating real estate investment transactions. Before plunging directly into specific examples of cash on cash return scenarios, it’s important to have a firm grasp of what the term exactly means. Starting with a basic formula we can start to see how this calculation is made:

cash on cash return = annual before tax cash flow ÷ total cash invested

As shown in the formula above, cash on cash return is a basic measurement of investment performance which is calculated by taking the cash flow of the property before taxes and dividing it by the initial equity investment. The before tax cash flow figure for each year is based upon the “real estate proforma” and the initial investment of equity is the total purchase price minus any loan proceeds.

Example of cash on cash return

Now for a simple and basic example of how this works. Let’s suppose that you are appraising a duplex that has a projected year 1 before tax cash flow of $20,000. Let’s also conclude that the settled upon purchase price of the property is $400,000 and you can secure a loan for $300,000 which is 75% loan to value. What would be the cash on cash return for one year?

$20,000 ÷ $100,000 = 0.20 = 20%

Now, this calculation is rather simple, your cash on cash return for one year comes down to the one year before tax cash flow divided by your total out of pocket cost. This equates to precisely 20%. This calculation is very basic but allows the investor to understand that their one year return on investment is 20%. Of course all of this is based strictly upon the proper calculations of cash flow projection and the accuracy of your intial equity investment figure.

The cash on cash return calculation is a simple way of measuring investment performance and can be a great way to quickly filter through several different potential investment property opportunities. It is however a very limited form of calculating finite details of investment and predicting future growth or decline.

Discounted Cash Flow Analysis

The simple measurement of cash on cash return to gauge investment performance works as a reasonable good starting point in a proerty evaluation, however when your interest in the property begins to get more serious, it would be wise to conduct a further and more detailed analysis.

A discounter cash flow analysis factors in important elements such as time value of money to place a value on a real estate asset. When considering a time period that extends out over several years, a discounted cash flow analysis estimates future potential cash flows and will discount cash flows back to the present. Utilizing the DCF requires forecasting future cash flows and concluding the necessary total return. After forecasting future cash flows (both incoming and outgoing) you then discount the projected cash flows back to the present-time at the necessary rate of return.

How to Calculate Your House’s Capitalization Rate

The capitalization rate or “cap rate” is a concept that is fundamental to the real estate industry. It is however commonly misused or misunderstood. This post should help clear the term up a bit and allow you to understand how to properly use it.

Definition of Cap Rate

The capitalization rate is the ratio between NOI (Net operating income) to property asset value. An example of this would be if a property was listed on the market for $2,000,000 and generated a NOI of $200,000, this would mean that the capitalization rate would be $100k/$1million, or 10%.

Cap Rate = annual net operating income / cost or (value of the property)

Example of Cap Rate

Let’s suppose that we were researching the sale of a commercial strip center with a net operating income of $450,000 and a sale price of $5,000,000. In the commercial real estate business it would be common to say that the property is being sold at a 9% cap rate.

Logic behind the Cap Rate

The logic and intuition behind using this ratio is to be able to find a percentage return to the investor on a all cash purchase. So, on the example above the investment in that particular property would yield a 9% annual return to the investor.

When to use Cap Rate and when not to use it

The cap rate is a highly common and useful ratio in the commercial real estate sector, and is very helpful various situations. It is very useful when making a quick decision on whether a property investment represents a better value or lower risk when comparing it to other on the market. For example, a 7% cap rate acquisition compared to a 10% cap rate for a similar property in a comparable area should immediately help the investor indicate which property has a higher risk premium over the other.

Another useful way cap rates can come into play is when they form trends. If you look at cap rate trends in a particular market then it can give an investor an indication as to where the market is headed and if it’s an opportune time to invest. Depending on whether the cap rate percentages are rising or falling in a uniform manner that can be shown by the trend, one can make certain assumptions as to the direction of valuations.

Cap rates can be incredibly useful for quick calculations and value comparisons, but there are certain times where they should not be used. For example, if a property’s NOI is unstable of irregularly complex, with large fluctuations in cash flow, a more in-depth discounted cash flow analysis will serve to better reveal a proper valuation.

Essence of the Cap Rate

One way to conceptualize the essence of cap rate is to think about the risk free rate of return that one might get from ironclad or very secure investments like treasury bonds, and subtract that rate from the cap rate to calculate a risk premium. For example, let’s suppose a treasury bond yields a risk free premium of 3% annually. Then let’s say the acquisition cap rate of a certain property is 6%. This would yield a risk premium on the property of 3%, which reflects the entirety of risk the investor would assume over and above the risk free treasury bonds. This calculation does not take into account many important factors such as the age and integrity of the property, the reliability of the tenants, length of current leases of tenants, or any underlining economic factors of growth or recession.

After considering the aforementioned factors on a certain property, it’s then quite easy to see the relationship between risk free rate of return and the overall cap rate. The ultimate risk factor of the property, which is a somewhat subjective combination of the risk premium plus any knowledge gained about the current property functionality will determine if the investment is worth making. In other words, cap rate is a useful formula in helping the investor narrow down risk factors, but the ultimate decision lies with the judgement and experience of the investor and how much risk they deem is worth the return.

Understanding The Real Estate Market Cycles and How They Affect You While Trying To Sell Your House

The real estate market is a very dynamic and sometime un-predictable sector. There are great chances of succeeding in this sector provided you have the right information at the right time, and are selling at the right location. As an individual looking to buy or sell a home, it is vital that you learn key characteristics of each real estate market cycle. These cycles are based on geographic locations and will be different in every country, state, or city. This explains why you may be trying to sell your house in a certain region and only getting very low price offers. It only means that the market cycle in that area of the country is not currently favorable for property sale.

Therefore, to succeed in selling or buying a home in your locality means you have to learn the history of the area’s real estate market cycle. In general, the real estate market cycles are classified into 4 phases. For those who took an economics 101 lesson, these phases are easy to relate with. They include; Recovery, Expansion, Hyper Supply, and Recession.

Let’s delve into each of these cycles in detail;

1. Recovery

The real estate market has no real beginning; so we pick this phase as the arbitrary starting point. This phase begins at the lowest point of the market cycle and occurs when the excess construction that occurred during the previous cycle (Recession) has finally stopped.

Due to the excess construction that was in the previous cycle, this cycle inherits an oversupply of inventory. New construction is virtually non-existent or excessively low in this phase. Instead, the demand growth experienced slowly absorbs the existing oversupply of inventory.

This phase is characterized by high yet stabilized unemployment levels, many home foreclosures, and great fear in the general population. Many individuals will opt to stay as far away as possible from the real estate market in this cycle; citing the fear of losing their properties like in the previous cycle.

However, this is a great phase for one to buy a property. At this time, there are still sellers wanting to dispose their properties because they think prices will continue to fall. Therefore, house prices are low and a great time to make a buy.

2. Expansion

During the expansion cycle, there is confidence again in the real estate market as it starts showing signs of growth. The area is experiencing population and business growth. People are coming into the area because of good job prospects, better living standards and access to good amenities and facilities. Due to the growth, home buyers are in a buying mood.

The population and business growth creates demand and real estate developers begin to build new homes and commercial properties to cater for the demand. Prices start rising because of high demand by buyers, rents start going up because of high demand by tenants, and people generally become optimistic about the future. This is also a great time to make purchases or sale of property in the market.

Eventually, the growth accelerates to a new point where now sellers are pricing property at its current value, plus a premium in anticipation of its future worth. This gives birth to the “real estate bubble”, as rents and prices rise further.

3. Hyper Supply

During this cycle, the supply of new construction continues to come in from the previous cycle but now demand starts to decline. People can no longer purchase properties because their income levels are not growing at the same pace as the prices in the real estate market.

Occupancy rates in constructed properties fall and rental growth slows. Worse still, construction of new properties continues and leads to an oversupply in the market. If the construction continues to accelerate more than demand and occupancy drops below the long term average, the real estate market plunges into a severe downtown.

4. Recession

This is a very catastrophic cycle of the real estate market. Here, there is massive oversupply of property and unmatched demand (negative demand growth). This causes rents to be lowered and vacancy rates to rise as people are either moving to new areas in search of cheaper rentals, or moving back to live their families. In the end, many property owners face the possibility of incurring massive losses.

There is a high number of foreclosures in this phase as many homeowners find themselves unable to pay their mortgage with decreasing rents and increased vacancies in their properties. Excessively high prices caused by the Hyper supply phases prompts the Federal reserve to raise interest rates to slow down new construction.

In Conclusion;

It is paramount for any individual dealing in real estate to understand all the cycles of the real estate market in their area of preference. More importantly, they should know the cycle which their area is facing in order to make an informed decision.

What is an Assumption of Mortgage and How It Could Help You

An assumption of mortgage is something you may not ever have heard of, but it’s a way that some sellers are able to get rid of their home when more traditional methods just won’t work. After all, in a buyers market it can be difficult to get that house off your hands without allowing the bank to take it over. But just what is an assumption of mortgage? It’s when someone else takes over the mortgage on your property so you no longer have to pay and you get to walk away from it without any worries.

Checking Out the House

Let’s say Mary and Joe have owned their home for 5 years but they’ve fallen into some hard times. They just can’t afford the house anymore and they actually haven’t even been able to make the payments in quite a while. They’re looking at a bank foreclosure but they really don’t want to let the bank just take their home so they decide to try and sell their house as quickly as possible and get anything they can for it. The bank however, is pretty picky, and wants to make sure they’re going to get everything that’s owed to them, since they know Mary and Joe can’t afford it.

You come out to check out the house and realize there’s just not enough value to the home to make it worth the asking price. You can’t even make a reasonable offer because you know there’s no way the bank is going to accept it and therefore Mary and Joe can’t afford to accept it. There’s just way too much money owed and not enough equity in the house. But you do like the house and you think it’s going to be a good flip house or investment property, if you could get it for a lower price anyway. That’s where mortgage assumption comes in.

Assuming the Mortgage

With a mortgage assumption you can talk to Mary and Joe and their bank and find out how much equity they have in the house. That’s the amount of money they’ve actually paid so far. So if they bought a $200,000 house and they’ve made payments in the amount of $30,000 then the equity in the house is $30,000. With a mortgage assumption you would pay them up to $30,000 and they would hand over the title to their home. You would own it for that $30,000 but you would also own their now $170,000 mortgage, which you would owe to the bank.

One benefit of assuming a mortgage is that you won’t have to go through the entire underwriting process to get a loan on the house and you don’t have to spend a whole lot of extra money. You would only need to negotiate with the original owners and then you would need to pay a few small fees to transfer the house over from the previous owners over to your name. In just a short amount of time you will own the house and be in the same position as owner that Mary and Joe were (except you can afford to pay the mortgage payments).

What You’re Left With

Now you’re able to do whatever you want with the house to start making some money and Mary and Joe get to walk away with their $30,000 and look at getting a new place instead. Everyone gets to leave happy. It’s definitely a winning situation. But it doesn’t always work out quite so well when someone wants to assume a mortgage or when a homeowner wants someone to assume their mortgage.

Not all banks or mortgage institutions allow this type of mortgage assumption so you’ll need to talk with the institution first to make sure it’s even going to be possible. You’re also not going to get just anyone to jump on the offer because it’s not really ideal for a homeowner unless they’re really in a distressing financial situation. As an investor, it’s also important to look at the equity they have in the home (the amount they will want to walk away from it) and the value of the home as well as how much money is still owed. You’re not going to have a lot of negotiating power with the bank after all since you’re simply taking over responsibility for the mortgage.

Government Programs that Could Help Save Your House

As soon as we start to approach adulthood, we start to think about our future. For most of us one of the most important things in this is being a home owner. Of course for a majority of people simply handing over a wad of cash and buying a house is out of the question, which is why we need to rely on mortgages to get us to where we need to be. If you don’t pay your mortgage you could become the victim of foreclosure; where the financial company that lent you the money in the first place claim the house back.

Losing Your Home

No one wants to think about becoming a victim of foreclosure but for lots of homeowners it becomes a reality. Lose of job, ill health, bereavement -there are many reasons why your financial circumstances could change and your home could be at risk. If you find yourself in a situation like this then it is important to explore your options and seek advice. There are some options that could give you a little breathing space to get your finances back on track.

Seeking Help

The good news is that there are federal government schemes that can help with this. They are designed to help people who are struggling stay in their home due to financial difficulties. Whether you’ve made some payments or you’re very far behind in repayments there is more than likely some government help out there. Make sure you seek this sooner rather than later, otherwise you could risk it being too late.

What Help is Out There?

One of the first things to do is sit down, take a breath and don’t panic. It can be a scary time being on the verge of losing your home but it’s important to have a positive and open mind. There are ways out of this, you just need to research and work out what you’re going to do.

There are several schemes out there which can help you change the amount of your mortgage payments. These allow you to lower the amount you pay, or enter into refinance packages to ease your financial difficulties. These work differently so it is important to do some research and see what could suit you best. Some of the best schemes out there to help with modifying your payment amounts include The Making Home Affordable Program (MHAP), The Home Affordable Modification Program (HAMP) and The Home Affordable Refinance Program (HARP).

The Home Affordable Foreclosure Program (HAFA) can help if you reach the point where you have to sell your home due to foreclosure. It means that you will not be held responsible for the amount left over on the mortgage when the house sells. You will also be given $3,000 to help you relocate once it has gone through. Once the home is sold the mortgage company must not hold you responsible for any debt against the home.

If you have already fallen behind and defaulted on payments then make sure that you look into the Federal Housing Administration (FHA) program.

Alternative Options

If you are really struggling financially then make sure you look up the Fannie Mae’s HomePath Program; which is designed to allow people to buy Fannie Mae-owned homes with more favourable terms than a traditional home buying loan.

This works in two ways – Firstly you could look into applying for a HomePath Mortgage. This allows you to buy homes that are ready to move into, by buying a foreclosed property. Secondly you could look into a The HomePath Renovation Mortgage, which as the name suggests allows you to buy a home that is in need of work and repair at a lower cost.

I Don’t Own a A Home Yet

If you’re thinking about signing up for a mortgage and owning your own home then you must make sure that you do research first and know what you’re getting into. It’s a big financial decision and one that you must make sure you’re ready for. If you’d like a mortgage but aren’t sure about being able to afford it, look into Freddie Mac’s Targeted Affordable Housing (TAH) Program. This scheme allows housing agencies to give low-rate mortgages to people buying their first home

Adhoc Help

Sometimes you’ll find that your finances hit a blip, but you know it’s going to be temporary; don’t worry there is help out there for you too! For example if you have lost your job then the Home Affordable Unemployment Program (UP) could allow you to freeze your payments for 12 months whilst you get yourself back on track.

You could also seek help from The Emergency Homeowners’ Loan Program (EHLP) who can help when you have a loss of income due to unemployment, medical emergency etc.

Getting Help

When you’re in financial dire straits it can be a lot to read everything and take it all in. The important thing is to take your time and not panic. Firstly make sure you start looking into help and support as soon as possible – some schemes require you to apply for help in the early stages.

Secondly use the internet to do your research and see what help is available out there. Don’t be afraid to speak to your mortgage company about the help that they offer – after all, they’re not going to know if you’re struggling unless you tell them.

No one wants you to lose your house, so seek the help that is out there and you can be sure that government programs will do what they can to help you save your house.

The Impact of The Federal Reserve Interest Hike on the US Real Estate Sector

The plunge in dollar prices implies that most real estate firms will be forced to financial borrowing so as to keep level with the expected financial turmoil. The federal government has already signaled a rise in the overall interest rate charged by financial institutions and this is expected to greatly impact on the real estate firms who had already conducted home sales. The biting financial conditions will enable homeowners to typically take longer in order to pay the dues owed to the developers. The real estate firms in return will be somehow hand tied as they will be forced to make a balance so as not to fall into economic disarray. For the potential homeowners who would like to purchase new homes, the hike in interest rates will prompt the developers will lease few of their properties fearing that the prospective buyers will take considerably longer time to successfully complete their payments.

The housing demands in the United States have always been on the upward and this can be explained by the recent economic recovery which has resulted to a growing middle class. This may take another turn as top global economy lie China has been in for a shock as its growth projection for this year has been the lowest as compared to the last 25 years. The Chinese economic shortfall has a direct impact on the dollar prices and the raised interest rates will limit the ability of real estate firms to further expand through creation of new projects. To firms who have had a high debt level, this is a bad news as prospective home buyers are likely not to spend their cash fearing unpredictable economic turmoil as it was with the 2008 recession. As a result real estate developers will try to come to terms with the fact that home sales are expected to be in their lowest as compared to the previous years.

The stakeholders in real estate will be looking forward to seeing any economic move which would see the United States economy gaining some strength. The falling prices for commodities like oil may signal this kind of hope however only slight economic improvements can get to felt. This is due to the fact that the crops export markets is struggling with the dropping prices and this is for the third year running. A hike in the interest rate will force farmers into borrowing from their respective manufacturers. The weak oil and commodity prices will therefore throw the United States economy into a “mini-recession” economic model and this will limit the consumers’ spending. This will directly affect the real estate sector in that home sales are likely to see a considerable drop in sales.

By raising the interest rates the Federal Reserves is likely to spur some kind of inflation and as a result many firms including the real estate developers will be forced to find shelter in some cost-cutting effective measures. Cost cutting measures will imply that the affected firms will be forced into a period of low productivity and for real estate firms this implies reduced home sales as there will be less capital for creating more homes. Real estate firms heavily do rely on financial borrowing so as to keep their projects on toe. Due to the short term hike in the interest rates many of these firms will refrain from conducting more projects for being in fear that their expected profit margins will be reduced as most of the consumers will be greatly handicapped in their spending.

By raising the interest rates the Federal Reserves is likely to spur some kind of inflation and as a result many firms including the real estate developers will be forced to find shelter in some cost-cutting effective measures.

The interest hike shouldn’t be given a negative look as there are some other benefits which will positively impact on both the consumers and manufacturers. Economic analysts base their argument on the fact the United States economy is very strong and the short term hike is expected not to have any considerable effect on home sales by real estate firms. Some potential home buyers are likely not to notice this short term economic plunge that has hit the real estate firms as compared to the economic slump of 2008. Keen buyers will definitely feel the small rise in home prices but this won’t hold many of them back from purchasing their preferred homes. The Federal Reserve hopes that after this time duration that the economy will pick on an even stronger and this will mean a better business environment for the investors which real estate firms being a inclusion.

How to Sell Your House Fast Without a Realtor

Selling your home is a big deal. Expediting the process is a whole other deal. Regardless of what the motive behind selling your house is, the key element to accomplishing a quick sale for your house is to detach yourself from the emotional aspect. Once you have made the decision, you need to think from the buyer’s perspective. There are different kinds of takers for a house – a family looking for a new home, realtors looking for a good commission, or just somebody who wants to make a good investment for a resale.

You need to make your house an attractive proposition for all of the above mentioned. There are plenty of ways to set your house up as a valuable asset without having to invest a king’s ransom into it. Here are a few pointers on how to sell your home fast profitably and without turning to a realtor.

Step into the Buyer’s Shoes

We mentioned in the beginning how it’s necessary to think from the perspective of a buyer. So, the first thing you need to do is look at your house like a potential buyer would. We’re talking about pure curb value here. Forget the signs, forget the marketing. Just step out of the house onto the street, turn around, and take a good long look at it. Would you buy it? Again, it’s important to dump all emotional baggage you have about it. It is not your HOME, it is a HOUSE. What can you do to make somebody say, “Wow, that looks like something I would like to get for myself.”

First things first – Work on the exteriors. Get some fresh paint on the exterior walls, fix that broken fence, mow the loan and get a little landscaping done. These are little things but they do require you to spend some money, but remember it will get you a reasonably steady flow of prospects.

Give the Right Vibe

Okay, so now you have people looking at your house and stepping inside for enquiries. We don’t suggest you invest a great deal on improving your interiors. Sure, you need to take care of the basics. Leaky faucets, cracked walls, and any tell tale smells, windows and doors that don’t budge, all need to be taken care of. Apart from that, there’s no point in making any major overhauls as it really doesn’t add much to your sale price. You may be incapable of making an unbiased assessment of your interiors because it has grown on you. Call in friends or even realtors to give you an objective analysis. All you are trying to achieve here is to give the impression that the house is reasonably well maintained and that it will not crumbled down over the buyer’s head after he acquires it.

Remove Yourself

Again, you need to remember that you are selling a house for somebody else to use. You’re not selling your personal concept of a nice home. Buyers like to see a neutral image, so that it becomes easier for them to visualize their own home concept being implemented in their heads. So, prior to showing it to prospective buyers, make sure you remove all the “You” from your house. Designer furniture, a picture wall, quaint paint patterns, artifacts and souvenirs plastered to the wall, all of it needs to come down. Give prospective buyers a blank canvas look for your home. If you have bright personalized paint on your wall, cover it up with some neutral white or beige. It definitely makes a difference.

Leveraging the internet

These days, nothing gets sold fast without the internet. Market your house online. It gives you much more exposure. Get social media on your side. Get a professional photographer, take some high quality pictures, and post it on various social platforms like Craigslist, Facebook, Pinterest, and Instagram. This way your house is on the market 24×7 and accessible to a much wider audience.

Local Real Estate Investment Association

You probably didn’t know it existed. Well it does. There is usually an REIA in just about every locality. They can prove to be extremely useful to you to expedite the sale process without taking the services of a realtor. Attend the meetings and try to mingle with real estate investors who may be checking the scene for new sites. Even if they are not making a direct investment on your home, they can provide you with valuable leads that could be a catalyst to sell.

Price it Carefully

Of course, pricing is everything. Many sellers make the mistake of overpricing their house to try out their luck. This is never a good idea. Get an expert opinion on getting a value fixed for your house. Realtors can come in handy or search for recent sales that have occurred in or near your locality. Do your homework and place a reasonable price for your house. The problem with overpricing is that you turn a lot of customers away and before you know your house is a “sitter” on the market. Once it gains a sitter reputation, you will find it hard to get some traction ever again. This is because all kinds of misinformation to get generated about why your house failed to sell. Local realtors may assume that the house failed to pass an inspection or that there is something wrong with the interior. At the end of the day, your house gets rejected by potential buyers even before they can take a look at it.

Time Your Sale

Timing is another factor you need to be looking into. Spring season is when the major share of the population makes their move to a new home. Various factors are involved. A family with kids will find it much easier to make the transition while their kids are on vacation. So, make sure your house is spic and span to welcome buyers by mid March or April.

You now probably have a decent outline on how to sell your house fast. Keep these tips in perspective and you may just be able to hit the jackpot in making the best deal for your house. If you have a house you no longer want or you are in trouble and need to sell your house fast, fill out the form below.