Learn how to maximize return on investment and finding high CAP rate properties. As a software engineer I was always interested in real estate and knew one day I would be fully immersed in investing in real estate. I am currently working on a real estate startup in Silicon Valley. Prior to this I worked as an engineer on self-driving cars and helped build Twitter in early 2010s.
Pitfalls Of Real Estate Partnerships
What are some of the major points to pay attention to when forming a partnership?
First make sure you have a legal entity in form of an LLC for example. This is vital to make sure if someone is coming after you they cannot take your personal assets.
The next big thing is to make sure in case of a stalemate one person has the ultimate decision making power. This is a bit abstract but the point is you never want to get into a situation where there is a stalemate, often times that is not good for either party involved.
Doing a 40/60 split could also work but that makes the intangible things harder to make fair. What I mean by that is if you're splitting the cost of maintenance or taxes based on a 40/60 ratio that is no problem there but what happens when you need to do due diligence on a property or you need to think about it rationally and see if it's a good investment? Well those are the things that are just as important as paying your taxes for example but they are intangible things that cannot be split 40/60 or any other way. That is why if you do 49/51 split that is basically the same as a 50/50 split so no one has less incentive in any area of the deal and everyone treats every deal they are involved in equally both on paper and in their head.
3 Up and Coming Real Estate Markets
To spoil the beans, they are:
I talk about what to do if you have $100k and looking to purchase a house. First of all don't buy a house you are going to live in. That is usually a bad investment strategy because the chances are where you live is not where the real estate market is the hottest. You need to find a location where you will cash flow.
The next step is to refinance the property you purchase so you can free up some of the equity you put into it, aka the cash. Most bank will give you a loan for up to 80% of the value of the property. These loans are typically easier to get than for example a loan to purchase a car.
Finally you can increase your CAP rate even more by waiting a few years so the ratio of the interest to principle goes down. This is an important factor because when you get a 20-year mortgage you in essence are paying it back even though you are cash flowing. So you divide the total amount you borrowed by 20 and you add that additional income to your CAP rate calculation.
How To Calculate CAP Rate
Probably the most important number when it comes to real estate investing. CAP rate is the number that tells you whether you should invest in a property or not. Here is how you can calculate the CAP rate of any property:
First let's imagine you purchase a property for $50k cash. And you rent it out for $500/mo. To find out how much you make in a year from the rent you multiply the $500 by 12 or $6,000, which is your annual gross income. You then take that amount and divide by the amount you invested so $6,000 / $50,000 = 0.1 and finally you multiply by 100 to get the percentage, in this case 10% is your gross CAP rate.
But gross CAP is not what you're after because you also need to take into account the operating expenses for the property, things like maintenance fees, up front rehab costs, annual taxes, etc. So what most investors do instead of accounting for every single item that is an expense they instead subtract 30% from the gross CAP and call it a day. In our case $6,000 x 30% = $1,800 so we have $6,000 - $1,800 = $4,200 is your net annual income. So to get the net CAP rate you divide that number by how much you purchased the property for or $4,200 / $50,000 = 0.084 and to get the percentage you multiply by 100 so your net CAP rate is 8.4%
This number is super handy when you're looking at hundreds of property to decide which one to purchase. This greatly simplifies the math needed to do the calculations.
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How Legit Are Wholesalers In Real Estate
What are those pesky "We Buy Houses" signs you sometimes see at the street corners or in front of houses in dire need of repair?
Those houses are offered by real estate wholesalers, people with no accreditation or license unlike real estate agents, wholesalers do not have to pass any type of exam or be certificate to practice. So how does wholesaling work?
Wholesalers usually send tons of direct mail to stressed or motivated sellers, usually due to financial difficulty or being unable to be current on their mortgage payments. Once they find a seller they try to make a deal to sell their house for well below market rate as the seller is motivated and cannot work with a real estate agent to property list their property they may accept the low ball offer. The wholesaler then turns around and reaches out to investors looking for deals on real estate forums and other places. Once a match is made the wholesaler makes their commission on the deal.
How To Make $3,000,000 With $100,000
Vanguard Index Funds are a powerful to grow your wealth. Specifically using the combination of stock market and compound interest to achieve extremely high returns over several years.
By using a Vanguard Index Fund with VTSAX symbol you'll make 13.5% average interest per year. A well balance fund like that is the best way to guarantee consistency and high interest.
How To Flip A $4,000,000 Property In San Francisco
Just met an investor who spent $1,000,000 on a multi-family property in San Francisco. He bought it for $4,000,000 and sold it for $6,000,000.
San Francisco is one the most expensive real estate market in the entire country. Watch this video to find out what it's like to live in SF and learn more about this deal.