Every real estate deal starts with a pro-forma analysis. The buyer learns quickly if the seller and his broker’s numbers support the asking price.
If you do not confirm all the numbers, you will be the fool.
Beau Beery is a Commercial Real Estate Broker with Coldwell Banker in Gainesville, FL who specializes in Multifamily. I had the opportunity to review with Beau the numbers and learn what should be present when doing an analysis.
Grab the example used on the call click here.
Beau’s experience has shown there are some primary expenses that tend to be different for the seller and the buyer.
Pro-forma Analysis Expenses
Property Taxes: Property taxes are based off of a tax value, which rarely reflects current market conditions. If the seller has owned the property for a long time, it is likely that the taxes reflected in the pro-forma will be substantially low. It is important to evaluate what the taxes will be when you buy the property.
Reserves: Smaller properties that are managed by the seller will likely either show a low number, or nothing at all. This is where you account for things like new roofs, ac units, paint and parking lots. It’s a real expense, and an easy number to omit, or minimize which will affect the actual performance of the property.
Insurance: The seller’s insurance program is likely not what you will find. The seller could have multiple properties and have access discounts not available to you. Or if the seller does not have a loan, he may elect to self insure.
It is a must to learn, know and evaluate the numbers presented by the seller to make certain your deal will be profitable for you.
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Hey property investor, have you thought about what happens when disaster strikes your property, how do you keep from a loss of rent?
If your tenants are unable to occupy your building, your rent will stop unless you protect your rent. Where will you get the money you need to pay your mortgage, pay your employees, and ongoing expenses? What about your profit?
You would be shocked to know how many landlords do not buy Loss of Rent protection, especially on C & D class assets.
If income matters, you want to insure your rents from loss in the event of a “covered loss” to your building.
Insurance is complicated, so please understand this:
1 - The Property Coverage Form, has multiple lines of coverage. If there is not a number on your declaration page next to the coverage description, with rare exception, you do not have coverage!
2 - A property insurance policy with “special form” protects your Building from all perils EXCEPT those that are excluded, such as; “Earth Movement” & “Flood”.
What do you need to protect yourself from Loss of Rent?
A - The coverage you need to insure your rents can be called a couple of things:
What is covered?
B - The property policy provides protection from loss caused by a covered peril including:
How much do you need?
C - There are multiple coverage limitation options available. You need to consider the time needed as well as the amount. If your market is experiencing significant rent increase, or a local building boom, and the damage is extensive, you may need substantially more than you expected to get back up and running.
Actual Loss Sustained is the most preferred option if your insurance company provides it. The simple reason this is preferred is because there is no dollar limit.
However, the standard length of time for Actual Loss Sustained is twelve months. This is great in a partial loss and normal building market. If you need more time, you could be screwed. Unless you are able to extend the time limit.
There are insurance companies that provide coverage time limitations of 18, 24 and even 36 months of coverage. You will need to check with your company or agent to determine the maximum amount of time available.
Other versions of coverage require that you preset a specific dollar limit. These options include additional terms you need to understand:
For your FREE worksheet to determine the amount of rent you need, CLICK HERE
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Investing in Real Estate works because of leverage. Other People’s Money is the leverage of real estate.
Whether you use a bank, investors, relatives or seller financing, you are using other people’s money. It is the leverage that allows people with little or no cash of their own to buy a property and benefit from real estate.
This is unique to real estate.
In the stock market, you buy shares of a company. Your upside and downside are limited to the gain or loss of the shares you own.
In real estate, you are able to benefit from the value of the whole property. In residential real estate, your success is determined by the surrounding properties. In commercial properties, you can force appreciation through reducing expenses and increasing rent.
The power of leverage is undeniable when compared.
Let’s say you have $10,000 to invest.
If you invest $10,000 in the stock market, and the stock goes up 17%, which is really good. Your $10,000 is now worth $11,700 and your gain is $1,170.00. That’s great!
Compare this to $10,000 invested in Real Estate.
Suppose you purchase a property for $100,000 and are able to get in for just $10,000. It happens a lot. You have $10,000 of equity and $90,000 of leverage using other people's money. According to the Case-Schiller Index, home prices rose from 1987 to 2009 an average for 3.4% per year. In this case, your $1000,000 property would now be worth $103,400.00. Your gain is $3,400.
Which would you prefer:
17 % on $10,000 = $1,170.00
3.4% on $100,000 = $3,400.00?
That's the power of leverage!
This is one of many reasons to consider investing in real estate. Currently there are tax benefits available to real estate investors. There is the real possibility that the Trump Administration may reduce some tax advantages of real estate in an effort to simplify the tax code.
Regardless of what happens with the tax code, the power of leverage remains.
Click here to get your FREE Real Estate Deal Workbook.