Issue #208
In This Issue
Welcome / This Week's Special Offer
Welcome To The Latest Issue
Hello. I hope this Friday finds you and your loved ones well. Just a reminder that next Thursday is our free seminar/presentation on that real estate investing opportunity I keep talking about. See the Seminar section below for details.
Find Your Dream Home In The San Diego or Riverside Realtor’s “MLS” With Just A Few Clicks…
To search for a home right now, click here: Free MLS Homesearch
True Story: With Happy Clients Like These…
A potential client asked me for references. I agreed and jokingly told him to expect them all to say good things because I’d only give happy clients as references. I relayed this story to someone who told me that when she needed a housepainter, she asked one for references. Imagine her shock when the three she called told her they’d NEVER use him again! She didn’t use him either…
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Subscribe them with a quick email to TellAFriend@GaryKent.com with their email address in the subject line. Remember to email your questions, comments, compliments, corrections, critiques, & rebuttals to Questions@GaryKent.com.
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Homebuying Question
"Hi Gary, thank you for your newsletter, I really learn a lot. Question: My
wife and I are planning to buy a home in about 6 months. Is there anything we
should be doing right now in anticipation?"
***ANSWER:
Very smart question. Here’s what I recommend:
1. Check your FICO (credit) score now.
This will give you ample time to be sure your credit report is correct and to
fix any errors. And if your score is correct, if needed you can get to work on
improving it.
Suggestion: Call me @ (858)457-KENT and we’ll put you in touch with our trusted
lender to run your FICO and advise you.
2. Talk with a lender.
Again, planning ahead can pay off big for you. Perhaps you need to pay down your
credit card balance, delay a major purchase (Humvee?), or start working on Uncle
Bob for a loan. Also, a lender tells you what price range you qualify for (which
could go down as rates go up). This will keep you from looking at champagne
homes if you only qualify for a beer loan. And vice versa.
Suggestion: Call me @ (858)457-KENT and we’ll put you in touch with our lender
advise and qualify you, for free.
3. Get set up on "MarketWatch".
Receive free daily or weekly emails informing you of every new listing in your
preferred area and price range. You’ll be able to keep track of what's going on
in the market and specifically in the areas you're interested in.
Suggestion: Call me @ (858)457-KENT and we’ll set you up for free.
4. (If applic) Find out your home's value & what fix-ups to do.
If you need to sell a home in order to buy, you should get started now. It’s
especially helpful to have lots of lag time to get your home looking its best so
you can get top dollar.
Suggestion: Call me @ (858)457-KENT and I’ll be happy to give you an idea of
your home value (possibly even over the phone) and profitable fix-up tips.
"I recently refinanced a rental condo (in Orange county - used the money to buy land for an investment) that we now want to sell. My new loan was 415K. The same condos in the complex closed for 460K in December. I see that the homes are not moving fast now and I no longer have the unit rented so I am losing money on a monthly basis. If I list with a full price realtor I am looking at between 5-7% commissions. I am now seeing that the trend is for the seller to pay the buyer’s closing costs which would be another 5-10K off the profit. So even though I may be able to sell it for 460K with commissions and closing costs I am actually looking at breaking even with my refinance.
What benefit is there to hiring a full service realtor if it means I will lose money in the end? Don't you think its better to try to use a discount realtor or should we try the new "auction" gimmick? Do you think we should still use a full service realtor even in my situation?...”
***ANSWER:
That’s 2 weeks in a row that I’ve received questions about Realtors and fees. But your question involves a lot more than that. Here are my comments. Please read them closely, as they’re important:
1. You are not losing money, even if you’ll need to take money into escrow to close. That’s because you’ve already taken out your profit when you did your cash-out refinance. The basic formula for profit is:
Original Purchase Price
- Original Purchase Costs
- Capital Improvement (Upgrade) Costs
- New Selling Price
- Selling Costs
= Profit
You’ll notice that nowhere in the calculation is your loan amount. (Note: this is not the exact formula to determine your taxable gain. That would also include depreciation and any partial sale.)
2. Whether you have no equity or a lot of equity, only hire a full-service Realtor if you feel it’s worth the money. And it is. Many people make the mistake of only looking at the expense side of hiring a Realtor. So let’s look at just a partial list of the value side of having a good full-service Realtor:
> price your home correctly
> give you cost-effective tips on getting your property ready to sell
> get you a higher price
> save you from unneeded expenses
> sell your property faster
> protect you from liability
> make everything go a lot smoother and easier
> give you peace of mind.
Believe it or not, statistics regularly show that the net cost of a good Realtor, after the higher price and costs saved, is usually about ZERO.
3. With your unit vacant, every extra day your condo sits vacant on the market will cost you money. A good full-service broker will sell it faster. Any money you think you’d save with a discount broker would be erased day by day as you sit and wait for your condo to sell
4. I haven’t heard of the “new auction gimmick”, but it sounds a lot like the “old auction gimmick” that never caught on in the slow market of the early ‘90’s. While I’m all for being creative and trying new things, it didn’t work then and I doubt it will now.
5. You didn’t mention taxes. Remember: profit is not the same as net proceeds (see #1 above). So it sounds like you’re going to have a taxable profit. Assuming you’re not eligible for the principal residence exclusion, unless you do a 1031 tax-deferred exchange and buy another investment property, you’ll have to pay taxes on your gain. And if you have no money coming out of the condo, you’ll have to add some funds for a down payment to buy another investment property. Please consult with your tax professional.
Whew that was a long one…
Investing or Financing Question
This is Part 2 of last week’s question when I explained what a “gross multiplier” is. This week I explain “capitalization rate”…
***ANSWER:
"Capitalization Rate" (aka "Cap Rate") is more involved than the “Gross Multiplier”, and more accurate. Most commercial brokers use it as one big factor in estimating an investment property's value. Here’s how it works...
1) The formula:
Cap rate = Net Operating Income / Value.
Or: Cap=NOI/V.
Using a little algebra, you can also determine value:
V=NOI/Cap.
2) Explanation:
Take the “Gross Scheduled Income” (GSI) or total annual income a property could earn if 100% rented. Then subtract vacancy and all costs of running the property (management, repairs, property taxes, etc.) EXCEPT the mortgage payment. This leaves the NOI.
3) An example:
Take those same 6 Pacific Beach apartments from last week. They have gross annual income of $100,000, with expenses of $35,000. That leaves a $65,000 NOI.
Let’s assume the typical cap rate for P.B. is 4%. Then the approximate value would be: $65,000 / .04 = $1,625,000.
4) Comments:
But wait! That $1,625,000 is way off from the $1,800,000 we came up with last week using the Gross Multiplier. So we made a mistake, right?
Wrong. The difference illustrates two points. 1) The Gross Multiplier method tends to be less accurate; and 2) Different methods come up with somewhat different results. The hope is that the different methods get you in the same ballpark.
Here are some limitations of the Cap Rate approach:
A. If the rents are below market, you’ll come up with a below-market price
B. If expenses happened to be unusually high or low the previous year, that could distort the value.
C. It doesn’t take into account financing. Due to age, property characteristics, and the financials, some properties can get better loans than others. And that impacts the value a bit too.
Since cap rate is far from perfect, what SHOULD you use to determine the value of a rental property?
There are other, much more complex approaches such as “Internal Rate of Return”. But unless you’re a whiz with numbers, my advice is to use cap rate along with the comparable sales approach and its rough cousin, the “price per unit” approach.
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Call me at (858)457-KENT to find out more or arrange a private showing...
Thank you Matt K. for referring
someone to buy & sell a home…
Thank you Fred W. for referring your daughter to buy a home…
Thank you Eric C. for referring your parents to buy a home…
Thank you again for all of your generous referrals! Have a great week...
"The Agent You See EVERYWHERE"
All-Time #1 Agent/Team In San Diego County for RE/MAX
21 Years Experience -- 3,000+ Homes Sold
Gary Kent Team --- RE/MAX Associates
(858)457-KENT --- (858)457-5368
GaryK@GaryKent.com -- http://www.garykent.com/
Due to production and shipping expense, free items are available only to residents, owners, and people planning to purchase real estate in San Diego.
