NRVLiving - Real Estate. Simplified.

Good News For Blacksburg Real Estate Investors

More good news for Blacksburg real estate investors.

If you have questions about investing in Blacksburg real estate, whether or not investing makes sense in a college town (because it doesn't always), or want advice on property management, email me and we'll run an investment analysis for you.  The numbers don't always work, but we'll take a look with you and help you decide.

If you enjoyed this post, why not leave a comment and subscribe via RSS or email here to be sure you don't miss the next post?

Investing? What's Your DSCR?

Debt Service Coverage Ratio … DSCR.  Steve and I are working with a couple of sets of clients who are looking to invest.  Some are local, some are international, all are interested in what opportunities we have available here in the New River Valley, but not all know how to determine whether the debt service is covered by the income.  I thought this might be a good time to study real estate investing 101 …

Anytime you’re considering investing in income-producing property, you need to know whether or not the income can outpace expenses.  That only makes sense - you’re not investing to LOSE money, right?  And when you take out a loan on the property, the bank wants to know whether THEY’RE going to make money as well, which is why they want to know your Debt Service Coverage Ratio.  It’s really easy to figure out … let’s assume that you’re looking at a duplex that costs $250000, and rents for a total of $2400 a month.  Here’s the breakdown:

•    Gross Annual Rent – $28800
•    5% Vacancy Rate – $1440
•    Gross Income – $27440
•    Real Estate Taxes – $1450
•    Hazard Insurance – $500
•    General Maintenance and Upkeep – $2000
•    Utilities – $1500
•    Management Fee 10% - $2880
•    Reserves – $2000
•    Total Operating Expenses – $10330
•    Net Operating Income (NOI) – $17110

So after expenses, you’d make more than $17000 on this property.  Wait, you put down 20% of your own cash but you’ve still got a loan you’re paying every month, so that debt service has to be factored into the equation.

•    Loan Amount - $200000
•    Interest Rate – 7% at 30 years
•    Annual Debt Service - $15891.24

Now we’re getting somewhere.  To figure out the Ratio, divide your Net Operating Income of $17110 by the Debt Service of $15891.24 = 1.07.

Not too bad – you’re looking for anything higher than 1, which means that you’re making money.  Ready to get started?  Email me to discuss it in more detail.  Have a property that doesn’t have a Debt Service Coverage Ratio of 1.0?  No problem – let’s discuss ways we can improve that ratio.  I just looked at one of my properties, the DSCR is .85 … guess I need to look at some rent increases!

Interested In College Student Rentals? Look At This Comparison ...

Yesterday, Scott Rogers in Harrisonburg posted an explanation of why investing in college student housing MIGHT NOT be for everyone.  It's an excellent post, and I recommend you read it.  But that's not what this post is about.

Scott highlighted a complex called Hunters Ridge, which caters to college students.  I found that ironic ... Blacksburg has a Hunters Ridge, as well, which caters to college students.  And lo and behold, they look the same!  Must've been built by the same company, and I thought it would be an interesting comparison, to put two college communities in separate university towns against one another.  We'll look at cash flow as it's affected by purchase price, mortgage rates, and rental income, among other things.  Prices in Blacksburg's Hunters Ridge appear to be a bit higher than at Harrisonburg's Hunters Ridge, so we'll take that into consideration as of today, December 21 2007.  So let it begin ... The Battle of Hunters Ridge, 2007.

1470-J Seneca Drive, Blacksburg	1346-D Hunters Road, Harrisonburg
Price of $136450, 80% financed at 7.25%, self-managed	Price of $105000, 80% financed at 7.25%, self-managed
Rental Income + $750, going to $1000 in May 2008	Rental Income + $770
Mortgage (Principal & Interest) - $744	Mortgage (Principal & Interest) - $573
Condo Association Fee - $145	Condo Association Fee - $155
Real Estate Taxes - $80	Real Estate Taxes - $45
Insurance - $28.50	Insurance - $35
Monthly Profit - $247.50 loss until May 2008	Monthly Profit - $38 loss

If you decided to put down only 10% and hire a Property Manager, your numbers would look like this:

1470-J Seneca Drive, Blacksburg	1346-D Hunters Road, Harrisonburg
Price of $136450, 90% financed at 7.25%, property mgr	Price of $105000, 90% financed at 7.25%, property mgr
Rental Income + $750, going to $1000 in May 2008	Rental Income + $770
Mortgage (Principal & Interest) - $837	Mortgage (Principal & Interest) - $645
Condo Association Fee - $145	Condo Association Fee - $155
Real Estate Taxes - $80	Real Estate Taxes - $45
Insurance - $28.50	Insurance - $35
Property Management - $75, going to $100 in May 2008	Property Management - $77
Monthly Profit - $415.50 loss until May 2008	Monthly Profit - $225 loss

Scott muses, "with these monthly losses, you might wonder why someone would buy an investment property." Keep in mind, at least with the Blacksburg property, after May 2008 you'd MAKE $2.50 a month if you managed the property yourself, and lose $190.50 a month if you let a Property Manager take over.  So ... why does investing in college towns make sense??

• from a tax perspective, losses on investment property can actually be a good thing (provided that appreciation isn't going south, as well!)
• College towns have historically been great investments - JMU and Virginia Tech continue to project for more and more students, as does Radford University , and they'll need somewhere to live.
  
  It's an interesting comparison, to be sure.  In both examples, it's either a wash or a loss each month at current market prices.  That isn't to say investing in properties like these doesn't make sense ... but, before you jump into the game, let's talk about what specifically your goals are and structure a plan to get there. 

How To Turn $100k into $10mil, Guaranteed!

If I could show you a way to turn $100,000 into $10,000,000, would you be interested?

Thought so ...

If you've ever wanted to make money buying and selling properties, here's an easy, no-risk way to get started. Enjoy.

Billionaires Have No Idea, & Jim Cramer Is Upset About It

I'm a fan of Stephen Colbert's ... I found my wife giggling at the TV one night, and we catch his show "The Colbert Report" fairly regularly.  Last night, he brought in Jim Cramer from "Mad Money".  The two were hilarious, watch the whole thing.

Jim Duncan at Real Central VA caught this line, which I had originally missed:  "Apparently a bunch of billionaires thought it would be a good idea to give millions of poor people mortgages that they couldn’t afford and somehow that turned sour."  Shocking ... How did that fail?

Want To Get Rich Quick? Invest In Real Estate!

But it's not as easy as it sounds.  Sure, lots of self-named Real Estate Gurus would tell you differently, and none of them will get a plug on this site.  And it's not as easy as they'd make it out to be.  But if you want to grow wealth, faster than you can in just about any other investment vehicle, then let's talk real estate.

I'm a beginning investor, picking up my first property - a townhouse - with steady appreciation and good rental rates.  I'll hold it for a while, in the meantime looking for more opportunities with different investment goals ... and eventually sell it (using a Tax-Free Exchange, of course).  When I read this post by BawldGuy on how real estate beats stocks investing I was blown away - it explained it all much better than I could, so all credit has to go to him for the examples. 

The gist of the post is this -  a $100000 investment in both real estate and stocks would net an investor a profit of $358000 in real estate vs. $159400 in stocks over a 10-year period.  Significant yes, but he goes further by providing three additional benefits associated with real estate investing:

• "Any income derived over that period generated by the real estate would not be taxable because of depreciation."
• "All excess depreciation would then be allotted to the ordinary income (salary from job) of the investor, resulting in thousands of dollars in taxes not paid."
• "On the other hand any dividends derived from stocks are taxable.  With rare exceptions the only way the stock market investor gains any tax shelter is when he loses his money, which is far more likely in stocks than in real estate, especially over the long haul."

The secret?  Leverage.   

How To Avoid Paying Taxes

Didn't think it was possible?  It is, and can be done through what's called a Starker Trade, or a 1031 Exchange.  Say you bought a rental property five years ago that has appreciated well; you now have $100000 in equity but have decided you don't want to be a landlord anymore.  You want to sell the property and invest in a piece of land you've found, but you don't want to pay 35% to Uncle Sam when you sell the rental property.  What do you do?

With primary residences, the law says any profits up to a certain amount are non-taxable if you have lived in the property for 2 of the last 5 years, but with investment properties that's not the case.  If you want to sell an investment property and use the entire amount of the equity to purchase other investment real estate, you set up an exchange - using a qualified intermediary - and purchase the replacement property.  It works like this:

* Property A - owned for 5 years, $100000 in equity
* you decide you want to sell, so you put Property A on the market and a buyer writes you a contract.  At that time, contact a qualified intermediary (like Equity Investment Exchange) to hold your profits in escrow until you find a replacement property, Property B.
* Close on Property B, and your intermediary sends the profits to the new closing for you to use.

The secret is that the money never touches your hands, so it stays non-taxable.  And you can use a 1031 Exchange to sell an apartment while buying land, or selling a commercial space while buying a house ... it doesn't matter!  The NRVLiving Team has done several of these over the last few years, if you're considering selling an investment property and want to save on those taxes, or are thinking of investing and want to learn how to get started, contact us and let's see how we can help!