Real Estate Investing 101 Part 2

This is the second entry of a series of articles I will be contributing to my blog to help educate the consumers and clients who contact me for my services. I will cover the basic steps to get started and help new investors with basic concepts on thier first deals to be successful.

In the first article I covered selecting a qualified Realtor and team to get started, and looking for instant equity in properties that are priced below market value.

KEY #2: APPRECIATION

One of the most basic and most attractive reasons to invest in real estate is the fact that it appreciates over time. Each market has a different rate of appreciation, and there are a variety of factors that will influence the rate of appreciation. There is a general consensus that real estate values double about every 20 years.

We can actually chart appreciation rates in neighborhoods and cities. In my market area I like to calculate the appreciation rate at a very conservative 4% per year. Actually most residential properties I analyze average about a 5% to 6% appreciation rate annually.

Unlike the stock market, we can predict the annual appreciation of a real estate investment. The stock market prediction is based on speculation and company results. Real estate is also some speculation, but in our market there is very little risk.

EQUITY CAPTURE + APPRECIATION =

Equity Capture + Appreciation = Just the Beginning! Combine both of these key qualifications we identify in investment properties and you have the formula for creating personal wealth and a sound investment. Do not consider properties that do not meet both of these criteria.

CASE STUDY SAMPLE IN SUGAR LAND

For example today I ran a search on the MLS for homes in my market area. I came across a property that is selling for $25,000 below market value. According to tax records and neighborhood trends I will calcuate in the average 5% appreciation rate in this neighborhood.

CALCULATING APPRECIATION

This home is listed for around $120,000, current market value is about $145,000 if it is in good condition. Looks like it needs new carpet, paint, and countertops to be in great condition. With the 5% appreciation rate with current market value calculates out to be $7,250 the first year of ownership resulting in an estimated market value of $152,250 after year 1.

If my investor leases the property for at least 3 years before selling it and allowing the market to recover, we can predict the 5% appreciation value the property at $167,855. So my investor sells for $165,000 after 3 years of ownership for an estimated profit of $45,000 from just the appreciation alone without factoring in the rent collected or improvements.

A $45,000 profit isn't bad, BUT I'M NOT FINISHED MAKING MONEY FROM THIS INVESTMENT YET!

In my next entry I will detail the numbers and analysis and show you the real profit potential of this investment with the #3 key. For now I need to get some rest, so I can be up bright and early to check out this case study property in the morning.