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Investors Guides

Investment in Single Family Homes

Most often, present primary residence is a future investment home. In such a scenario, a home owner buys a home for their principal residence, lives there for some time ant then moves out to a different home either in the same town or out of town.

The move could be because the family has outgrown the size of the home; or the family has moved up the income ladder and is wanting to own a nicer home. The home owner may have lived long enough in the home to build substantial equity. He might as well qualify for a mortgage on a new home without having to sell his current home and pay-off the mortgage. In such situations, the homeowner is mostly looking to earn a rental income that will generate cash flow in excess of his mortgage payments

Many times, investors with disposable income would want to buy homes for investment purposes. In such cases, investors would seek homes that meet renters’ criteria as well as potential for rental income and ease of finding tenants

Return Expectation:
Single family homes are one of the highly leveraged investments. A 20% down payment is enough to buy an investment home. Mortgage term could be as long as 30 years. Other classes of real estate rarely offer such a high leverage. Because of generous loan funds available, competition for investment in single family homes is high. Therefore, single family homes offer moderate returns. But, for most investors, single family homes is the most easily understood investment option.

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Investment in Acreage Lots

DFW real estate market is booming. Investors are fearful of a possible downturn, but land buying spree continues unabated. Investment in land is not only speculative but also illiquid. Caution is required in selection of acreage land for your investment portfolio. Not all lands suit all investors. Several factors need to be considered. Click here for guidance on investment in acreage lots.

Basics of Commercial Real Estate Investment

An individual investor is almost always marginalized, cannot outbid institutional investors on large, urban properties; and as a rule, loses out to end users on small, sub-urban properties. Large investors with a stockpile of low cash, grab large properties with credible tenants and stable cash flows. In case of smaller properties, banks prefer owner occupied buildings over investor owned buildings. Hence, end users will outbid individuals on small, sub-urban properties. To add this, an individual is always tempted to apply their knowledge of residential real estate.

As compared to Residential Real Estate, commercial real estate is tough to understand and involves complex analysis. In most cases, rent alone decides the value of a commercial property.

Cap Rate is the most frequently used decision tool. Cap Rate is net rental income expressed as a percent of acquisition cost. For a property that is owned and leased, the more the net rent, the higher is the cap rate. For an investor making an offer on a commercial property, the higher the cap rate expectation, the lower is the purchase cost.

Investor Expectations

Individual investors, under tight market conditions and when interest rates are high, expect a 10% cap rate on their commercial investments. In a good market with low interest rates and easy availability of funds, an 8% cap rate expectation is normal. For great properties with good leases in place, sometimes even a 7% cap rate would be acceptable. Very rarely individuals will be willing to accept a cap rate less than 7%. This kind of reward is required because of inherent risks associated with small commercial properties tenanted by local and regional businesses. Cash flows from properties acquired at a cap rate of 9 or 10% could yield an annualized IRR of 14% if held for five years prior to selling.

How is an individual investor marginalized by Large Investors?
Office vs Retail – which is a better investment?
Challenges / Risks of Owning Commercial Properties
Life span of a Commercial Property
When does commercial real estate peak?
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