#יםמהשבוי post number 3 - rental transactions Hello to the members of the forum and thank you for your time to read the post...
# Initiated week Post Number 3 - Rental Transactions
Hello to the forum members and thanks for your time reading this post.
Today, we will start talking about the first real estate investment field - rental transactions.
Most of the investors I came to meet started their overseas investment in a rental deal. So what is this about? Buy property for rental. Usually, the intention is to lease the property for at least a few years.
In a rental transaction we usually consider 4 aspects:
1. The purchase price of the property. A rule of thumb means to purchase a property below the market price. But what is the market price really? One option is to check the appraised price of the property on sites like Zillow, Redfin, and the like. These sites make use of statistics that include transactions made recently for a property of a similar size, similar year of construction, a small geographic distance, and more. Another option is to look at transactions made in the so-called Comps area. The problem with the above two methods is that it is not possible to know what the condition of the sold property was that we are comparing our property to, but a more significant factor is who the buyer was who purchased the property. Or is it a person who purchased the property for residence? Of course, each of these buyers will price the property differently, since the value perceived by each of these buyers is different. For the most part, we cannot differentiate between a transaction made by a foreign investor and an American investor. But a property purchased for Owner residences we can definitely see. It will start with the description of the property, the photos, it will usually sell with a higher level of finish and a higher marketing investment. The price will also be higher and sometimes will affect the price estimates in the whole neighborhood and make us think that the price of our property, which is a rental deal, is similar to the price Property sold to owner. Some numerical examples - on the same street, two adjoining houses, same size, built in the same year, look quite similar from the outside and have the same room/bathroom layout. One, sold to a cash investor as a rental deal for about $90,000 while the other, sold to a residential property owner private for about $230,000. For those who raised an eyebrow, yes. The differences can reach such levels. Therefore, when evaluating the price of the property, one must check not only similar properties, not only in a nearby area, not only a similar year of construction, but also that they were sold to a similar audience.
2. Once we have verified that we are purchasing a property not at a price higher than the market price, we will begin to analyze the monthly / annual income from renting the property. This income is complex and influenced by several factors. First, the rental index in the area. For a picture of the rental index, you can check several sites, including Zillow, Rentometer, Redfin and more. Since the vast majority of foreign investors' investment assets will be managed by management companies, it is advisable to consult with the management company regarding the rental price in that area. Once we understand what the expected rental income is, we will look at the average spending in the area on Vacancy & Repairs. Each area has its own statistics based on the socio-economic level of the tenants, the type of jobs and the level of turnover of jobs, their marital status and more. These factors will affect the Vacancy Index. The higher the turnover rate of tenants, the higher this index will be. The second thing to consider is the level of maintenance of the assets, the cost of labor (we have already encountered areas where the cost of labor is more than 100% higher than other areas). Type of property - Is this a property built of bricks Bricks Is this a property with one siding coating or another? What type of roof? What type of cooling and heating system in the house? Examining these factors will affect the Repairs Index. Finally, we will get a number that will statistically tell us what the annual expenditure on maintenance and replacement of tenants is expected to be. In addition, check the annual expenditure on municipal taxes and garbage removal (sometimes separately and sometimes both in one account), and to a neighborhood house - HOA, insurance cost and do not forget, the management company's fee. The following is an example of a calculation. Property rented for $ 1000 per month, in an area where there is 15% Vacancy & Repairs, up to a neighborhood house for $ 150, municipal taxes and garbage removal for $ 120 per month, insurance for $ 80 per month and a management company that charges 10% management fee which is $ 100 in this case. The monthly profit expected from this property is about $ 400 per month.
3. After looking at the market price and analyzing the monthly rental income, we need to look at the potential for value increase. Most sites show price history in the region and trends of value can be seen. Of course, this information should not be relied upon alone, as there may be a jump in prices due to neighborhood relocation from tenant-owner housing, there may be a rise in investment in infrastructure, a school or some other public institution nearby and other factors that can cause an extreme but not sustained price increase. Therefore, if we look at the closest area and similar deals as much as possible and with identical buyers, considering the price of the property, here we will look at the price increase in cross section as much as possible.
4. Most people analyze the previous 3 factors in every rental transaction. The next factor, most people analyze in a sales renovation deal and usually skip this factor when checking a rental deal. This factor is the factor of the renewal of the face of the neighborhood. Is there a trend of renovation and sale / renovation and rental deals? Is there new construction in the neighborhood? We can see the effect of this factor if the expected exit from the rental deal is done in the form of renovation and sale. Sometimes this is a huge profit! To understand, I will give a numerical example: a property was purchased in 2016 at a price of $55,000. It was rented for $900 per month and after all the reductions we described in section 2, about $500 per month remains. On the face of it, the annual return on this deal is 11%. There were extreme price increases in the neighborhood so that the market price of the property in 2019 is about $90,000. Lots? Wait, that's not all. This is where factor number 4 comes in, that properties in the neighborhood of a similar size after a significant renovation sell for about $230,000. And what is the cost of the significant renovation? About $50,000. In practice, the renovation was done and the house was sold for $220,000.
Hope in examining your next rental deal, don't forget to look into the 4 parameters listed in this post and especially the 4 number ?
Wow… How much nonsense, deception, misunderstanding and inaccuracy this post contains. Lior Lustig is it serious what's written here?
Excellent! Thanks!!!