RG 002 – Understanding U.S. Real Estate Investing Lingo With Joe Fairless
In case you missed it, here are some of the highlights from our conversation with Joe:
- Host of the podcast: The Best Real Estate Advice Ever Show – check out Joe’s show here: http://joefairless.com/blog/
- Helps other investor break into the game and start successfully investing in U.S. real estate.
- For more info about Joe check out his website www.joefairless.com
- Based in Cincinnati, Ohio.
Nuts and Bolts: Understanding U.S. real estate investing lingo!
- NOI: Net operating Income
- Effective gross income minus the expenses
- Shows total cashflow before you pay the debt services
- Can help you determine how much debt you put on the property.
- EGI: Effective Gross Income
- Total potential rent from the property, minus the vacancy (the rule of thumb I like to use for multi family properties 10%, or the market vacancy, whatever is higher).
- Total potential rent is the sum all rents that can be collected from a property;
- Rent from tenants,
- Pet fees
- Storage fees (if there is storage onsite)
- Late fees
- OPEX: Operating Expenses
- Property taxes
- Repairs and Maintenance: typically rule of thumb is 10%, if a property is spending more than 10% each year that’s a red flag!
- Contracted Services: Lawn care, snow removal, landscaping, etc.
- Rent Ready cost allocation: This is the money set aside per unit once a tenant moves out to get it “rent ready” for the new tenant.
- Cashflow = Effective Gross Income – Operating Expenses – Debt Services (mortgage payments).
- CAP Rate, aka Capitalization rate: The rate of return if you paid all cash for a property.
- CAP Rate = NOI / Sales Price
- Cap rates indicate risk vs return
- Lower cap rates mean higher demand (NYC; 3-5% CAP rate)
- Higher cap rates mean lower demand (Midwest cities like Cincinnati: 7-10% CAP rate).
- CAP rate can be used to compare other properties in a market to see how they stack up against each.
- Cash on Cash Return: Annual cash flow from a property divided by the cash you invested into the property; this doesn’t include the debt.
- Internal Rate of Return (IRR): Internal rate of return is used to evaluate the attractiveness of a project or investment.
- Good IRR for a investment:
- 12-14%: Some investors will be interested
- 14-17%: Majority of investors will be interested
- +18%: Absolute cracking deal! Get involved if you can.
- Property Classification:
- Class A: Highly desired properties, typically new construction built with the past 5-10 years
- Class B: Built in 90’s to early 2000’s
- Class C: Built in the 70’s or 80’s
- Class D and below: Built earlier than 1960’s
- Compare CAP rates of similar class properties: apples to apples.
- Neighborhood Classification:
- Class A: Most affluent neighborhoods, no crime
- Class B: Working class neighborhood, no crime
- Class C: Low to moderate income, limited crime
- Class D: High crime area
Books mentioned on the show:
Rich Dad Poor Dad by Robert Kiyosaki: Link here
Investing for Dumbies: Link here