Connect with us

Real Estate Investing

Moving Out? Smart (And Eco-Friendly) Ways To Save Money

Published

on

You may not live in the greenest city in America, but you have done your part to help the environment.

Maybe you’ve installed smart thermostats, LED lighting, and explained to your tenants how they could save money with smart eco-friendly apps.

You managed to get a recycling dumpster placed in the apartment parking lot. Also, you talked to your neighbors about how they could save energy by keeping windows covered during the heat of the day and by turning the thermostat up in the short summer and down during the longer winter.

Now you have transformed your rental property while helping others do the same.

There are a lot of eco-friendly places to model your rentals after, such as Denver, CO where rent prices are on the rise. Regardless of where you decide to invest, you can focus on keeping the environment clean.

But, now it’s time for YOU to move, either for a new job or just to a new home.

The last thing you want to do is keep everything green at your buildings, then leave a giant carbon footprint anyhow. As you load up all of your stuff on a big truck and move it to your new location, consider doing it in the most eco-friendly fashion..

You want to stay green and eco-friendly, but how can accomplish that during your upcoming move?

Here are some tips:

1. Save The Kitchen Until the End

You of course will need to pack up all of your kitchen supplies, but if you tackle the kitchen first and pack up all of your utensils and plates, you’ll find yourself relying upon plastic and paper disposables.

The lack of a functioning kitchen may also cause to drive to a fast-food restaurant more often and consequently use more environmentally unfriendly throw-away packaging. Save your kitchen packing to the night before you move.

2. Boxes

Yes, cardboard is recyclable, but will your movers actually recycle it properly?

To avoid adding waste, save boxes throughout the year and use them to pack your stuff. That way, you have at least reused used a resource that you already possess, and you won’t have to purchase anything new.

Along the same line, use containers you already have for packing, like suitcases, plastic bins and gym bags. Anything that holds something can be used as a place to pack items.

If you do need to purchase boxes, find used ones or green boxes. These can be cheaper and using these a second or third time is a great eco-friendly thing to do.

3. Packing Materials

You know that Styrofoam is not an environmentally friendly material, and you know that you should avoid using Styro packing peanuts. What are some alternatives? Anything that keeps objects steady and in place can work very well.

Think newspaper, towels, comforters, linens, and even clothing items like blue jeans. If you unfortunately find out that you do need to use some plastic packing materials, do your research and determine which ones are recyclable and find out where to take them in your new city.

4. Skip the Back and Forth

If you are moving a relatively short distance—like 90 miles—you may be tempted to make many trips to avoid using a moving company. You may think that renting a small trailer and taking five days to move will save you money.

Money, maybe, but multiple trips are just not eco-friendly.

Better to get one truck on one day and get the job done.

Even though many people want to try to make the move themselves, take a second and think about the environment and also the time you’ll save by making one large trip – it will pay off in the long run.

Hiring the pros can alleviate big time stress and can make the first trip to your new place much more enjoyable.

5. Get Rid of Stuff

The simplest way to make your move eco-friendlier is to move less stuff. We all have stuff, and many of us have a lot of it.

Our parents may have agonized over the thought of throwing away their 8-track or cassette tapes (!), and if you are an audiophile, maybe you have to think about those plastic crates full of old vinyl records.

Almost everything is available online now as you know and packing up a tiny speaker that plays everything from your phone would be a lot easier than loading up your old tube amplifier, your turntable and those giant Onkyo speaker towers you inherited from your uncle that was addicted to the Dead.

We do realize, however, that this might be a tough one even for strident environmentalists.

Otherwise, just look at everything you are packing and make sure you really need those items. If you don’t, there are a few alternatives. You can donate usable products to homeless shelters. Bet you didn’t know that the number one requested item at homeless facilities is socks!

You can have a garage sale and make some extra money to help with the move. Just be ready to do something with any stuff that doesn’t sell.

And, if you are so motivated, place Craigslist ads for things you don’t want to move like those barbells you never use or even your trusty but older treadmill.

6. Hire the Pros?

If you’re one of the lucky ones who has plenty of time to prepare for an upcoming move, you might want to consider hiring a green moving company.

One of the best ways to make an impact in a positive way on the environment is to use a moving company that does things the right way when it comes to the environment.

A green moving company will use trucks that run on biodiesel instead of normal gas. The company will also implement reusable boxes, so that you do not have to worry about going to the store for more cardboard boxes. These green moving companies might also:

  • Offer complimentary use of their eco-friendly boxes,
  • Collect all non-reusable moving boxes and send them to a recycling center for you
  • Use only biodegradable foam packing peanuts during your move
  • Source their own moving boxes from companies that participate in Sustainable Growth programs
  • And more!

If you search in your area, you’ll likely find a company that has a green moving program. Just simply ask them when you’re filling out a consultation or moving inquiry and you’ll be on your way to an eco-friendlier move in no time.

7. Green Cleaning

Moving means cleaning your new place, but also your old place. There are some things that you can do to clean both places without the use of harmful chemicals that might cost you a fortune.

Items like vinegar, baking soda, and ammonia are old-school cleaning supplies that will make a low impact on the environment when compared to modern cleaning agents that use a ton of chemicals.

Don’t worry; you’ll still be able to get a perfect clean in your place even without the use of the harmful chemicals. Think about it….your grandparents had to clean during moves, too.

They weren’t using chemicals that were harmful to the environment, so why do you have to?

While you can find articles like this one that will help will eco-friendly moving concerns, there may not be as much information available as there is about eco lighting and HVAC issues.

Nevertheless, with some effort and determination, you can be nice to the planet as you move to a new location.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Real Estate Investing

Commercial Real Estate: Property Types And Classes

Published

on

Before you start investing in commercial real estate, regardless if it’s via online crowdfunding or through a syndication, you want to know what sort of investment you are getting into.

In general, crowdfunding and syndications both invest in commercial real estate. Single-family properties are too cheap for developers to raise capital on. There is a fixed cost of raising capital. So, developers focus on $1m+ properties.

And usually those are commercial real estate projects.

Since commercial real estate is new to most investors, we’re going to cover the different property types within commercial real estate, as well as the different classes of property and neighborhoods.

Asset Class vs Property Type vs Property Class

An asset class is a group of investments that have similar characteristics and behave similarly in the marketplace.

Equities (stocks), fixed income (bonds), and cash equivalents (money market) are the 3 traditional asset classes. Additionally, there are 2 alternative asset classes that are extremely common as well – real estate and commodities.

There are a whole host of alternative asset classes which professionals may agree or disagree on them, such as valuable art, numismatics, or other collectibles. Increasingly many are looking at crytpo currencies as an alternative asset class.

Each asset class can further be broken down. For example, there are 11 sectors for stocks (healthcare, industrials, technology, etc).

A lot of people will ask about asset classes in real estate. What they actually mean to ask is about property types within the asset class of real estate. There are no asset classes within real estate because real estate is an asset class.

Property types are what the real estate asset class is broken down into. Just like stocks have 11 sectors, real estate has a variety of property types from office to multifamily.

Real estate does have a “class” rating system as well, which may be part of the reason why people confuse the terminology.

Property classes in real estate are referring to a rating system we use in the real estate industry to help us categorize neighborhoods and property types. This is generally on an A to D rating scale where A is the nicest properties and D is the oldest and most run down.

Real Estate Property Types

The asset class is an overarching and very broad type of investment. Within real estate, there are 4 primary types of property which include:

  • Residential
  • Commercial Real Estate (CRE)
  • Industrial
  • Land

Each one of these can be further broken down. For example, farming and resource extraction (mining and oil) are uses for raw land.

We’re going to focus on commercial real estate because that is what most investors are buying when they want to buy income producing property.

Types of Commercial Real Estate

There is almost an unlimited number of types of commercial real estate, but here are the most common ones you’ll see.

Multifamily

Multifamily is a type of commercial real estate because the owners buy it to produce income, not to live in.

Multifamily is anything that is 5 units and above (in the United States).

There’s really no reason for it except that the primary mortgage lenders Fannie Mae and Freddie Mac will back personal/residential mortgages on any owner occupied property 1-4 units, but not 5 and above.

So, a homeowner can get a traditional mortgage on a 4 family, not on a 5 family.

4 family properties are technically multifamily. But, they are excluded because they are bought by typical homeowners. Commercial multifamily property is exclusively 5 units and above.

Garden style, mid-rise, and high-rise buildings are 3 sub-categories of multifamily to be aware of.

Retail

Retail is the subcategory of commercial real estate that includes all shopping. This includes everything from a building with a single retail tenant in it (such as a fast food restaurant), all the way up through shopping plazas or even shopping malls.

It is a really complicated space because there are a variety of lease terms that can directly impact the value of the asset. For example, a single tenanted building with a lease that is about to expire is worth far less than the same building with a new 10-year lease.

Additionally, there are different types of malls, shopping centers, outlets, and more that complicate the space.

Regardless of how they are broken down, they are all considered retail.

Office

Similar to retail, these can be multi-tenanted or single-tenanted. But, unlike retail, these can range from giant skyscrapers to small office condo developments.

Self Storage

Self-Storage is relatively new to the list and is not included in most other breakdowns of commercial real estate. But, it should be.

Self-storage is one of the fastest growing and most stable CRE investments available. Supply simply cannot keep up with demand in many markets, and available spaces are being leased up at unbelievable rates.

Hotel

These are properties that are owned and operated for the purpose of very short term rentals. Can also include motels.

Mobile Home Parks

Mobile Home Parks are a huge sub-category. It’s often overlooked or counted as a sub-category to multifamily, but that’s not accurate.

Mobile home parks were very popular in the 70’s and earlier, but few new MHPs have been built in several decades. As such, occupancy is high and stable.

On the other hand, infrastructure is aging and investments in underground water/sewer, roads, and electrical can be very costly.

Special Purpose

This just captures all the other unique types of commercial real estate out there such as amusement parks, bowling alleys, and more.

Classes of Property

In residential and multifamily, the property/neighborhood class is a rating from A to D. It describes the overall age and quality of both the neighborhood and the individual property. For example, you might hear that this is a C class property in a B class neighborhood.

Multifamily is anything that is 5 units and above (in the United States).

There’s really no reason for it except that the primary mortgage lenders Fannie Mae and Freddie Mac will back personal/residential mortgages on any owner occupied property 1-4 units, but not 5 and above.

So, a homeowner can get a traditional mortgage on a 4 family, not on a 5 family.

4 family properties are technically multifamily. But, they are excluded because they are bought by typical homeowners. Commercial multifamily property is exclusively 5 units and above.

Garden style, mid-rise, and high-rise buildings are 3 sub-categories of multifamily to be aware of.

Retail

Retail is the subcategory of commercial real estate that includes all shopping. This includes everything from a building with a single retail tenant in it (such as a fast food restaurant), all the way up through shopping plazas or even shopping malls.

It is a really complicated space because there are a variety of lease terms that can directly impact the value of the asset. For example, a single tenanted building with a lease that is about to expire is worth far less than the same building with a new 10-year lease.

Additionally, there are different types of malls, shopping centers, outlets, and more that complicate the space.

Regardless of how they are broken down, they are all considered retail.

Office

Similar to retail, these can be multi-tenanted or single-tenanted. But, unlike retail, these can range from giant skyscrapers to small office condo developments.

Self Storage

Self-Storage is relatively new to the list and is not included in most other breakdowns of commercial real estate. But, it should be.

Self-storage is one of the fastest growing and most stable CRE investments available. Supply simply cannot keep up with demand in many markets, and available spaces are being leased up at unbelievable rates.

Hotel

These are properties that are owned and operated for the purpose of very short term rentals. Can also include motels.

Mobile Home Parks

Mobile Home Parks are a huge sub-category. It’s often overlooked or counted as a sub-category to multifamily, but that’s not accurate.

Mobile home parks were very popular in the 70’s and earlier, but few new MHPs have been built in several decades. As such, occupancy is high and stable.

On the other hand, infrastructure is aging and investments in underground water/sewer, roads, and electrical can be very costly.

Special Purpose

This just captures all the other unique types of commercial real estate out there such as amusement parks, bowling alleys, and more.

Classes of Property

In residential and multifamily, the property/neighborhood class is a rating from A to D. It describes the overall age and quality of both the neighborhood and the individual property. For example, you might hear that this is a C class property in a B class neighborhood.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Continue Reading

Real Estate Investing

What is Debt Service Coverage Ratio and Why it’s Important?

Published

on

There are few numbers more important in commercial real estate than the debt service coverage ratio.

It’s one of the first things and one of the last things that any commercial lender or broker will talk about. It’s first and last because it’s simply that important!

A lot of people toss this term around without explaining it while others are using it without fully understanding it. It’s a lot more than just a simple formula and when you understand the debt coverage ratio, you’ll be able to control it to get maximum financing.

Let’s dive into it.

Why the DSCR is Important

Imagine finding a commercial property worth $400,000 and you need to put 25% down.

You think, “alright, I can afford that!” and move forward with the deal, expecting $300,000 in loan proceeds.

As you approach closing, your mortgage lender calls you to say “The maximum loan we can give you is $225,000 because the debt coverage ratio is too low.”

Now what do you do?

This is real and happens every day. To avoid a situation like this, you need to fully understand the debt service coverage ratio before you make offers.

The fact is that it’s regularly used by banks and loan officers to determine if a loan should be made and what the maximum loan should be. If you don’t have the extra money laying around, you won’t be able to close the deal and you’ll lose a lot of money.

Debt Service Coverage Ratio Defined

The debt coverage ratio is a simple ratio that tells a lender how much of your cash flow is use to cover the mortgage payment. It’s known as the debt service coverage ratio, debt coverage ratio, DSCR, or DCR.

Debt Service Coverage Ratio Calculation

In general, it’s calculated as:

Debt Coverage Ratio

where:

Net Operating Income = Gross Income – Total Operating Costs

Debt Service = Principal + Interest

To calculate the debt coverage ratio of a property, first, you need to calculate the NOI. To do this, take the total income, subtract any vacancy, and also deduct all operating costs.

Remember, operating costs do not include debt service (principal and interest), or capital expenditures. Insurance and taxes are operating costs, so don’t forget to include them.

Next, take the Net Operating Income and divide it by the annual debt service, which is the sum of all principal and interest payments during the year.

To do this you must take the entity’s total income and deduct any vacancy amounts and all operating expenses. Then take the net operating income and divide it by the property’s annual debt service, which is the total amount of all interest and principal paid on all of the property’s loans throughout the year.

How The Debt Ratio is Used

A Debt Coverage Ratio below 1 means the property does not generate enough revenue to cover the debt service while a debt ratio over 1 means the property should, in theory, generate enough revenue to pay all debts.

It’s very common for lenders to require a 1.2 DSCR, give or take.

If your debt coverage ratio is too low, the only way to make it work out better is to reduce the loan balance. Your NOI is the same but now your principal an interest decreases, making the ratio go up.

And that’s how you can get your loan proceeds cut dramatically.

Debt Coverage Ratio Example

Let’s say there is a property that generates $10,000 in revenue, has total operating costs of $4,800, and yearly debt service of $4,000

NOI = $10,000 – $4,800 = $5,200

Debt Coverage Ratio

In this example, the debt coverage ratio is above 1.2, so this would be a good risk for the bank and they’d likely give the loan.

Let’s say that interest rates change and the bank gives a slightly higher rate, causing a new debt service of $4,500.

DSCR

Notice how a small change can suddenly change everything!

The Bank Will Reduce Your Loan

Image result for bank loan

In this situation, the bank probably won’t reject the loan. Instead, they will reduce the loan balance until the payment comes in line with their minimum DSCR requirements.

In this situation, the lender will simply reverse the formula and determine what the maximum debt service can be. We can plug in the variables we know to solve for the allowable debt service

1.2 = $5,200 / Max Debt Service

Max Debt Service = $5,200 / 1.2

So, the maximum debt service can be $4,333. Now they just need to figure out what loan balance that will be based on their interest rate and loan term.

…and you’ll be stuck trying to squeeze some quarters out of your couch to pay for the extra down payment.

How the Debt Ratio Affects Returns

In the example above I showed how a loan can be adjusted down before the lender will give the loan. This can significantly reduce your cash on cash returns.

Let’s say you are buying a property in the example above costs $100,000 and requires a down payment of $25,000.

Let’s also say that it generates $10,000 in cash each year and has an NOI of $5,200.

Originally the debt service was supposed to be $4,000 per year, leaving $1,200 in total cash flow.

Now, let’s calculate our cash on cash return. We know that it’s calculated as:

Cash on Cash Return =  Total Cash Flow / Total Cash Invested

CoC = $1,200 / $25,000 = 4.8%

This means that for every $100 you invested, you get back $4.8 every year, cash in the bank. This is not to be confused with the overall return on investment.

But due to some fluke, the terms changed and now the debt service will increase. Let’s say that the interest rates increase so your $75,000 loan is at 4.5% now and your debt service goes up from $4,000 per year to roughly $4,560/year. You can see that the new debt service coverage ratio is well below the 1.2 minimum.

I’ll spare you the math, but when I punch it into a calculator I find that the maximum loan value is now roughly $71,000. This creates a yearly debt service of $4,320, bringing you back to 1.2

Comparing The Two Scenarios

Since you’re loan has gone down, you will need to invest an extra $4,000. You’ll also have a lower cash flow because of the higher debt service.

Cash Flow = $5,200 – $4,320 = 880.

Now let’s compare two scenarios. Imagine if you were still able to get 25% down, your cash on cash would look like:

CoC = $880 / $25,000 = 3.5%

Not very good, right? But, that’s because of the increased interest rates.

Now, let’s see how the change in the loan amount affects your return. Remember, your down payment is no longer $25k because it became $29k.

CoC = $880 / $29,000 = 3.03%

Even worse…

Never Neglect the Debt Coverage Ratio

You can see how important this simple ratio is to banks. It can change your returns, your down payment requirements, and it can even kill your deal.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Continue Reading

Real Estate Investing

Real Estate: Is It In A Bubble?

Published

on

I originally wrote this article 6 months ago but the same question applies so I’m updating and improving it. The question still applies, is real estate at a bubble? Is it at the top?

I was at the bar for a friend’s going away party and a random guy at the bar started telling me how I needed to buy some new coin. Not Bitcoin, he said, but some other coin he had discovered that is going to make you rich.

In fact, he had just quintupled his money since this morning. I needed to hurry up and get in on the action!

…When the local regular at a small bar in small-town USA has finally started giving investing advice, it’s time to move on to the next big thing. So, I’m done with cryptocurrency (until it collapses).

Mind you, I wrote those words back when Bitcoin was was reaching new highs every day (it’s since lost 90% of it’s value)

But, What About Real Estate?

Ten years ago when I got started in real estate, everyone thought it was a terrible idea.

“If it was so easy everyone would do it.”

“Don’t you think real estate is too risky?”

You know the lines. I heard them all. But now, real estate is the best investment on the planet.

A huge number of friends and also former co-workers of mine have jumped into real estate investing within the last year. People who used to warn me how dangerous real estate was are now telling me real estate is probably the best thing to get into (except cryptos, of course!).

It’s the “best” because their best friend’s, uncle’s, nanny just house-hacked a home and earned $50k and quit being a nanny and is now a full-time house flipper!

Or…someone they knew bought a house 3 months ago and already sold it for $20k profit!

Maybe…their friend’s nephew just became a landlord though he’s 19 and doesn’t really even have a stable job (so he’s technically “retired”, right?).

The Vibe in Real Estate

If you’re getting this feeling or this vibe with any sort of investment, you need to be very cautious. Every time I’ve seen it, it’s been bad.

I turned 18 in 2003. Though I was young, I remember the boom years – I was 16 and everyone was offering me part time work at $10-$12 per hour to do construction work that I had no idea how to do.

When I was 18, 19, and 20, I was remodeling apartments at $10-$15 per hour though I had basically no experience.

Everyone was making money and throwing it around. Then I graduated college in 2008 and the economy collapsed.

It was the same feeling with cryptos. Everyone was excited about them, now I never hear about them anymore.

…and now, everyone I know has become real estate investors.

Real Estate & Economic Fundamentals

When your gut tells you something, you need to pay attention. But, I question myself at the same time.

Housing inventory is chronically low which is forcing housing prices to go up. House construction simply can’t keep pace with demand and the same is true with apartment developments.

Interest rates are dampening demand. If interest rates continue to rise, it could affect the entire economy, but the Fed has signaled it might slow or stop their interest rate increases.

The economy is great, unemployment is rock bottom, real estate prices are increasing. New wealth has been created by the trillions in the last year or two.

Stocks are going through a correction, but stock prices are not an economic indicator. If they get too low it can change people’s perceptions of the economy though and reduce spending. So, we need to pay attention to it.

Wages are growing faster than inflation for the first time in decades.

But, cap rates are amazingly low and property prices are ridiculously high compared to the income being produced. This means people prefer real estate over other investments.

Economists are constantly revising up their estimates for growth.

But… the yield curve inverted, at least on part of the curve, which usually signals an upcoming recession within 1-2 years.

So, which is it? Is real estate at the top or are economic indicators showing strong fundamentals?

Image result for real estate rates

Is it Rational or Irrational Exuberance?

Well, my crystal ball is as clear as yours. No one can predict the future but here’s my take.

I don’t feel that all signs point to bubble yet because there is enough conflicting thoughts to make me believe we aren’t quite there yet. Real estate is cooling down, but a lot of that is due to interest rates. If they don’t continue to rise, then real estate should be more stable or continue to rise.

For now, though, all we can do is to plan and to prepare. Here are your options.

Joining The Herd.

Most people invest a lot and take risks when times are great, but pull way back when times are bad. They dump $50k into stocks then when they drop 20%, they immediately sell to protect them from further losses.

Then once stocks have dropped 40%, they are too scared to reinvest until stocks are back up or higher than where they were before.

People jump into bitcoin when it’s 15,000, ride it to 17,000, then dump it when it gets to 10,000.

This is the herd mentality and is the absolute wrong way to invest.

Back in 2007, they were giving loans to anyone with a pulse but by 2011 it was basically impossible to get financing, even though housing was at rock bottom prices.

When properties could be bought for literally 40 cents on the dollar, nobody was lending and nobody was buying.

Bucking The Herd…

The hardest part of doing the opposite thing is you’ll have some serious FOMO (fear of missing out).

I know people who have made $200k+ in cryptos. FOMO was taking hold of me and I almost I actually invested $1,000 into bitcoin right around $15,500. I played with it for a week or two and sold it, losing roughly $3. That is not a typo.

I did it for fun because investing due to FOMO is the absolute worst reason to invest. A lot of people put a ton of money into it right at the wrong moment.

Instead, I believe people should invest when times are great and invest way more when times are bad. Also, I only want to invest in well known and historically good investments. In a way, it’s like dollar cost averaging.

Using the above example, if the market is hot, I wouldn’t dump all $50k into the market. Instead, I might dump $20k and leave $30k cash. As the market drops, I keep buying more. If it goes up, I buy more too, just more slowly.

In fact, this is almost exactly what I did during the market crash after Lehman Brothers collapsed. I invested my life savings in the beginning of september 2009 and lost half 2 weeks later.

I was somehow able to make all my money back within about 6 months because of dollar cost averaging.

Dollar Cost Averaging Works in Real Estate

The fact is that nobody knows when we will be at the top and nobody knows how hard the market will correct when we get there. It could come in 3 years or it could come tomorrow.

3 years ago I knew a person who sold a lot of their multifamily because they said we are at the top. 3 years later they lost out on a ton of money because it’s still going strong.

So, if you held back your investments today, you could lose 3 more years of a bull market.

My point is, I wouldn’t avoid buying. Just buy a deal or two, buy them right, and focus on adding serious value to keep you above water when the market corrects.

During a correction, use your capital reserves to really get in and buy as many properties as possible with as little money as possible. Don’t focus on adding a lot of value, just focus on getting them cash flowing.

Adding value means typing up capital. Tying up capital means buying fewer properties for huge discounts.

So, save those improvements for when the market is hot and deals are hard to find.

How Are You Planning to Invest in the Next Few Years?

Are you following the herd and diving in, or are you bucking the herd and doing the opposite.

 

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Continue Reading

Trending