Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Rosemary in Northern California: Hi Brian, I think that I may have confused myself trying to decide if now is a good time to invest in real estate. I know that interest rates remain at near-record lows and that prices have stabilized compared to recent years. I’m also watching to see what happens with the pending evictions and what that might do to prices short term. On the other hand, unemployment is high, the economy is in tatters, and a lot of uncertainty exists all around. If I do decide to invest, I plan for it to be rentals generating income both today and when I hope to retire in about 20 years. I have the money to invest today but is this the right time?
Answer: Hi Rosemary. It sounds like you are paying attention to what is going on and working to develop a long-term plan. Good for you! History has shown us that there are good, better, and best times to invest in real estate but there is seldom a truly bad time. I suggest that you begin by taking inventory of your situation.
If you’re confident that you are ready to move ahead with an investment, the next step is creating a solid property analysis process. That begins with knowing how to evaluate different property types. Most people are comfortable with the basic process for evaluating a single-family house that relies heavily on a market analysis of comparable houses in the neighborhood. Multi-unit properties, like small apartment buildings and even duplexes, should be evaluated for financial performance. That’s what we’ll take a closer look.
With multi-unit properties, you want to look at the income and profit that the property generates. Broadly, there are at least two sets of data that you want to evaluate. The current owner’s recent financial information and the financial performance you expect to achieve - Pro-Forma. The current owner’s data will provide important information such as rents collected, vacancies, property taxes, and expenses but there is a limit to how much this will apply to your specific situation. For instance, has the owner increased rents to stay aligned with the current market? Or will you be able to increase rents (although probably not all at once)? On the expense side, has the property been well maintained or are major expenses lurking in the near future? When is the last time the property was assessed for tax purposes? You need all of this information and more to conduct a thorough Pro-Forma financial analysis. For instance, is the current cash flow based on the owner taking out a mortgage 20 years ago that is almost paid off and he or she has raised the rents 18 times over the years? Your positive cash flow is going to be much less when you take out a new mortgage even if it has a low-interest rate. Rosemary, the basic information that you need to begin a financial analysis includes:
Keep in mind that the current owner is going to put their finances in the best light. Don’t accept only a spreadsheet that he or she provides. Insist on seeing verifiable data that include income tax returns, property tax bills, actual rents deposited, and maintenance receipts. Of course, you need to have the property professionally inspected to make sure there aren’t seriously neglected maintenance and repairs.
Once you have all of the needed information, you begin making calculations that give you a good idea of how the property will perform financially. Without going into detail, these are the important calculation to conduct and fully understand.
Rosemary, I hope this information is helpful. It doesn’t directly answer your question whether this is a good time to invest in real estate but it does give you the basic process to answer the question for yourself.
Please add your comments about what you think is important to consider in today’s investment environment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].