One thing that’s commonly asked of me from non-commercial agents and investors alike is what all the different terms mean. Net Operating income (NOI), Cap rate, Cash on Cash, Internal Rate of Return (or IRR) and Net Present Value, or NPV. Knowing these terms and how to calculate them is essential to anyone who invests in real estate. This is especially true for new investors. If you’re learning or if you’re a bit unfamiliar with where to start, be sure to watch me “How to Start Investing” video. I’m going to explain each one of these the same way I explain it to my clients in my two part video. In this video we’ll discuss Net Operating Income, Cap Rate and cash on cash. In my “Investing Terms Part 2” video we’ll tie in the internal rate of return and net present value. To start off, let’s take a look at a make believe commercial investment property.
In the investment world, there’s many different ways you can invest your money. One would be stocks — You buy a small piece of a company, and if the company does well you’re piece is worth more…maybe it even pays a dividend. Then there are bonds — you along with others pool your money together to loan out to companies and they pay you a fixed rate over the long term. Definitely considered more “stable” than stocks, but with a much smaller return as well due to its safety over stocks. Of course there are gold, commodities such as oil, mutual funds and many others, but today we’re going to be talking about real estate.
One of the biggest positive factors when buying real estate is all the tax benefits you are able to realize. Real estate is actually one of the most tax-friendly investment vehicles. You can write off practically everything — mortgage payments, expenses,…even the property itself in most cases! Of course there’s multiple ways of structuring a real estate sale as well to defer tax payments.
If you pick up a copy of any major newspaper and open it to the business section, you’ll commonly see headlines of extremely large real estate purchases that are usually well over $50-100 million. Most people glance at these articles and think “man it must be nice.” However, most people don’t realize that these extremely large transactions don’t involve just one individual as a seller or buyer…in fact, only a small percentage of these super large transactions are bought or sold by just one or two people. Easily over 90%+ of these properties are bought and sold by groups, companies, retirement funds etc.
One common misconception I see when I’m working with new investor clients is related to financing. Most people who are ready to invest in commercial real estate are usually somewhat familiar with the home loan process. That’s commonly because they might have bought a home or two in the last few years and they remember the mounds of paperwork that go with it. Although there are a select few similarities, getting a loan for a commercial property is a bit different.
A large percentage of people when purchasing a home usually do so by obtaining financing. In doing so, the most common first step is getting preapproved with a bank or lender. The preapproval process is fairly straightforward. First, you have to decide if you want to go to a bank – such as Bank of America or Wells Fargo — or a mortgage broker. Although there are a few minor differences between the two, there’s really one major one that I explain to my clients. That is that when you go to a bank such as Wells Fargo, they’re going to give you Wells Fargo rates. If you go with a Mortgage Broker, they can give you ANYONE’s rates…which in turn may be cheaper.
One of the most common questions asked of me is if a buyer can get a better deal by buying a foreclosure rather than a short sale or regular sale. The immediate response to my buyer is if they know what the difference between all three of them are? …usually they don’t – which is completely ok. People hear things repeatedly in the media and it’s hard to sift through what’s true and not true. I’m going to clarify the difference for you once and for all so you know the EXACT difference between all three.
One of the first choices you’re going to have to make when you decide to buy a home, is what TYPE of home you want to purchase?? Do you want to buy a condo or co-op? A townhome? A detached home? As I explained in my “Home Buying Process” video, this is going to be one of the first choices you’re going to have to make. I can’t make the decision for you, but I can help with explaining the difference so you can make a choice that works for you.
In my opinion, credit scores are one of the most obscure and methodical concepts to a client. I’ve actually had clients tell me something they swore would help their credit, when in fact it was the complete opposite. One of the many examples I have is when I had a client tell me that he never fully paid off his credit cards because paying interest helped him get a better credit score. I’m going to explain to you what determines your credit score, the best way to get and keep a high score, and some common myths about your FICO score.