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:

About 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
    • Insurance
    • Utilities
    • 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

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