Thursday we started a series on how to get the most out of FinestExpert.com, Getting Started with FinestExpert.com. Rather than go into information overload, we just discussed the two most commonly used components of the financial criteria search – by discount (aka equity in the property) and by cash-on-cash return.
If you are new to this, the power of the financial search criteria was summed up by one of our users who reported that using the financial search saved him over an hour per property he had been considering.
When you want to control additional financial criteria in your search, click the “+ More” button which expands the available criteria to look like this:
Rent ratio (RR) – this is the gross monthly rent divided by the property price. A good rule-of-thumb minimum value here is 0.8%. This is similar to asking for a specific gross rent multiplier (GRM = Market Value / Annual Gross Income). RR * 12 = 1 / GRM.
Price discount – calculates the difference between the asking price and the estimated value of the property. I like to use the range 15-50%. This is equivalent to asking how much equity is in the property.
Price range – provides for the typical limit on a property price. This is often unnecessary when you are looking for cashflow positive investment property unless you have a limited budget. Depending on your market, it is often useful to set the upper limit to about 10% above what you / your client can afford, with the expectation that with a soft market you can get down into the desired price range. In a hot market, you may want to set it 5 to 10% below your desired range.
$ / Sq Ft (price per square foot) – is only useful if you are looking in a very specific micro-market where such a comparison really has meaning.
Cap rate (capitalization rate) – is a term more commonly associated with commercial real estate. The cap rate = net operating income / price. It is considered to be far superior to gross rent multiplier, rent ratio, or most of the other mechanisms because it accounts for the operating expenses of the property.
Cash flow / year – is only useful when combined with other search terms, such as a specific price range or a rate of return. For example, a $100/yr cash flow on a $1m property isn't nearly as powerful as $100/yr cash flow on a $100K property.
Cash-on-cash return (CCR) – tells you, after all expected expenses (including vacancies), what kind of return on your money you would be making in the first year. If you are new to real estate investing, you can think of this as a way of comparing how much interest a bank would be paying you on the same amount of money that you are investing in the property. I like to use an 8% minimum for the cash-on-cash return as it provides a nice risk adjusted return as well as some extra cushion in case unexpected expenses might occur. You may find the need to adjust the rate up or down if you have too many or too few opportunities to choose from.
Cash flow (after taxes) – considers your tax bracket per your user profile. If you do not have a user profile, the system assumes a default of 28%. If you are in the alternative minimum tax bracket (AMT), you should probably ignore this option entirely - unless you are highly keyed into your tax situation. The main value in considering your returns after taxes is that it accounts for the tax benefits associated with real estate. For example, a property may have a positive cash flow, but in the eyes of the IRS, be considered to be negative due to depreciation, hence an extra bonus to you. Or, in the case of a strong positive cash flow, after taxes, you may not be making as much as you thought you might be.
Cash-on-cash return (after taxes) – also considers your tax bracket, but this time the after tax cash flow is considered relative to the cash invested.
Finally, after you have selected your financial criteria, click on the “- Close” button and then press “Search”. This will then take you to a map (or list) of potential properties satisfying your financial search criteria (on paper). As always, the search can only tell you about the property "on paper"; when you see a property in person, there are likely to be additional physical factors to the property we are not able to capture (e.g., is it in mint condition or a beater).
Before you go, can you do two small favors for me?
- Would you tell me what you think?
- Can you tweet this, tell others, and ask them what they think to?
This is such a wonderful post. I look forward to seeing more of your writing.