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We provide full disclosure of all costs that an investor can expect to bear and accurately model the proforma returns on investment.
Each property that we offer to investors comes with a brochure that shows pictures of its interior and exterior, a detailed description of the property and a summary of the renovations that were performed.
Two full pages of the brochure describe all of the relevant acquisition and debt service financials, rental information, and key financial ratios. The first-year pro forma cash flow projection includes all of the income and expense estimates, including rents, property taxes and insurance, utility expenses, property management expense and debt service, as well as allowances for maintenance and vacancy. From these projections we can accurately predict the first-year cash-on-cash return, the most important cash flow metric for investors.
In addition, we model the acquisition costs, annual cash flow, and sales revenue and sales costs in a 5 year pro forma financial projection to calculate the internal rate of return (IRR) over 5 years. IRR is a metric that comprehends the acquisition costs, the receipt of cash flows over time and the profits made when selling the property, net of all expenses, into a single return on investment figure. It allows investors to more easily compare the performance of different properties that they are evaluating. All of the modeling assumptions used in these calculations are disclosed, including assumptions about maintenance and vacancy expense rates, property and rent appreciation rates, and expense inflation rate.
Our thoroughness, level of disclosure and analysis is uncommon in our industry. In particular, many sellers of investment real estate are notorious for understating or omitting entirely the true costs associated with vacancy and maintenance. This makes the cash flow seem much higher than it truly is. For your convenience, we have provided a useful property analysis tool that can be used to analyze any property or perform a “what if” analysis to see how changes in the modeling assumptions impact return on investment.
This tool performs the same calculations that we use in our brochures, Property Analysis Tool.
Openness and honesty are part of our core values at ProfitFromRentals.com. We provide full-disclosure brochures with the all of the property and financial information that investors need to properly evaluate the performance of our investments so that they can invest with confidence.
We help our clients obtain competitive financing if required from reputable lenders, and we help process all of the contract-related paperwork.
While a number of our investors pay cash for our investment properties, the majority of them finance their properties with a mortgage. By financing the properties, they are able to use their capital to acquire multiple properties instead of just one or two so they can achieve higher total returns. This is known as “leveraging” their properties.
At ProfitFromRentals.com, we maintain relationships with major banks and mortgage brokers who specialize in making loans on investment properties. We qualify and recommend these lenders on the basis or their competitive interest rates and financing fees, level of client service, and the number of loans that they will make to a single investor. However, our clients are free to use any lender that they wish.
We assist our clients by putting them in touch with qualified lenders that we recommend. As part of our service, we assist both the lender and our clients with getting the loan package documentation put together, although the lending relationship is ultimately between the lender and the client (borrower).
The lending environment has changed significantly since 2008. The good news is that interest rates in 2015 are at historical lows; the bad news is that it is harder to qualify for these loans and they take longer to close. However, qualified borrowers are getting some great loans with low interest rates, and therefore some great cash flow. The interest rates for single family investment properties are generally 0.5% - 1.0% higher than for owner-occupied properties.
In general, the requirements for getting loans include the following:
- Good credit. FICO scores need to be at least 680, and the best rates are above 740. The more properties that a borrower finances, the higher that their credit score needs to be.
- Good income relative to total debt. Most lenders qualify borrowers on the basis of their back-end debt ratio, which is the borrower’s total debt (e.g. mortgages, car payments, credit card debt, etc.) divided by their total income. Most lenders like to see this ratio be under 36%, although with good credit they will accept up to 40%, sometimes higher.
- Available funds for the down payment. Lenders will want to verify that borrowers have about 25% of the purchase price of the investment property available in liquid assets. In addition, they will require at least 6 months’ worth of reserves on hand (monthly principal, interest, taxes and insurance times six.)
- Appraisal. Banks will loan up to 80% of the appraised value of the investment property. If an investor has more than four mortgages, most lenders will only loan up to 75% of the appraised value (ten mortgages maximum.
- Documentation. Lenders require complete documentation of all income and debts. For individuals who own their own businesses or are self-employed, this process is the most time-consuming. It is an easier process for borrowers who rely on a salary alone as the basis of their income (“W-2 employees”.)
The actual qualifications for loans vary and depend on the individual lender, Fannie Mae guidelines, and the ever-changing laws and guidelines of government regulatory agencies. At PFR, we work hard to stay abreast of the changes in our industry so we can provide our clients with our best advice and make the financing process easier for them.
Quality investment properties are located in quality neighborhoods.
At ProfitFromRentals.com, we make sure to have a hands-on approach when selecting our properties. Every property is inspected more than once in order to determine the neighborhood quality. Our field agents drive by each property during different times of the day to determine the level of activity, traffic, noise, etc. This neighborhood data is collected and reviewed thoroughly, so that PRF can select the best possible location for the highest overall investment return.
As investors ourselves, we take all of the data we compile and incorporate it with previous ownership experience, which helps us predict which neighborhoods will perform the best based on our high standards.
Our markets are similar to any other U.S. city with significant population. There is a wide variety of diversity, which include: low income residents, middle income residents, and wealthy residents.
ProfitFromRentals.com invest in neighborhoods that:
- Fall within -30% to +10% of the median price range for the city
- Support monthly rents that are approximately 1.5% or more of the market value of the property
- Generally fall outside of the city center, in typical residential communities
- Appeal to traditional single family renters (3 or 4 bedrooms, 1 to 2 baths)
- Have a high number of qualified tenants
- Are in zip codes, subdivisions, or neighborhoods, and streets that we know personally and that offer the attributes that we seek
We seek neighborhoods with these attributes because:
- Median-priced homes in quality neighborhoods have the broadest appeal, and are the easiest to rent and sell
- These neighborhoods attract tenants with high section 8 vouchers generally above the national average
- Property managers have an easier time selling, managing, and keeping good tenants in these desirable neighborhoods.
We have demonstrated expertise and specific criteria for selecting quality neighborhoods. We have over 50 years of combined real estate investment experience that have taught us exactly what to look for to ensure the highest possible returns.
Quality neighborhoods --- short term cash flow and long term investment
Short term, quality neighborhoods have homes that “people have to live in”: they are affordably priced and lie in areas with higher percentages of homeowners. Not only do they offer excellent rent ratios, they are attractive to tenants and property managers, have low vacancy rates, and low maintenance expenses. Long term, these premium neighborhoods are always in demand, have stable appreciation, and are the easiest to sell if and when an investor chooses.
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