1. Calculate the cap rate. The cap rate is a ratio between the net income of the property and its original price or capital cost. It is calculated as Cap Rate = the annual net operating income / cost (or value)
   
   
   
2. Understand how cap rate can be used by the investor. The investor can start with her desired rate of return and then use the cap rate to establish the asking price of the investment property. For instance, if the investor wants to generate a net income of $10,000 for year one, and wanted an 8% cap rate, then the asking price should not exceed $125,000.
   
   
   
3. Example: An investor purchases a home for $40,000. It is currently rented for $750 per month ($9000 per year). There is a 10% property management fee, $710 in taxes, $650 for insurance and figure 5% for maintenance.
   
   $9000 (gross income)
   -$900 (property management)
   -$450 (maintenance)
   -$710 (taxes)
   -$650 (insurance)
   =$6290 (net income) / $40000 (purchase price) = 15.7% cap rate

5 Signs We’re Not in A Real Estate BubbleIf you’re following real estate headlines, you might be getting worried we’re entering another real estate bubble. Here are some of the headlines I’ve run across recently, “Signs of new housing bubble in several areas”, “Wall Street Buying Adds To Housing Boom. Is A New Bubble On The Way?”, “From Brooklyn to California, Housing Bubble Threat Grows”, “Warnings of the Next Housing Bubble Have Already Started”, “The Housing Bubble Goes Mainstream”.

These headlines can be very disconcerting to real estate investors, especially with wounds from the previous bubble still very fresh. But if we take a close look at some of the claims made by housing market bears here’s what the cold hard facts will tell us.

1.Homebuilding Stocks Too Far, Too Fast?

The S&P 1500 Homebuilder group hit a low in August 2011, since then it is up 170%. In the short-term these stocks have had a meteoric rise, but it is still down a whopping 55% from the high reached in 2005.

Bubble Concerns Warranted: NO

2. Peak Homebuilding and Sales Activity?

The most recent data from January 2013 shows single-family housing starts are about 65% below the peak hit during the boom. And if you look at long-term averages since 1962, they are roughly 40% below this average. If we look at existing home sales, the current levels are about 30% below peak levels.

Bubble Concerns Warranted: NO

3. Residential Fixed Investment (RFI)

In Q4 of 2012 RFI turned positive adding 0.4% to GDP growth after being negative since 2005. But again if we look at the long-term average since 1995, RFI needs to increase another 40% just to hit the average.

Bubble Concerns Warranted: NO

4. Less Distressed

Foreclosures and short sales are an important component when evaluating the health of the real estate market. What does the data tell us? According to RealtyTrac, notices of defaults, scheduled auctions, bank repossessions and other filings fell 28% in the past year.and new foreclosure filings are at their lowest levels since June of 2006. However, foreclosure filings are about twice the pace they were in 2005.

Bubble Concerns Warranted: NO

5. No More Negative Equity For You

Now that housing prices are rising again in most areas, nearly 2 million homeowners have been freed from negative equity over the last year says Zillow. But with the number of homeowners underwater at 13.8 million there should be more that enough room for the real estate recovery to continue.

Bubble Concerns Warranted: NO

So there you have it. Looking at the cold hard facts indicates the housing rebound is entrenched at this point, but there should be plenty of room for it to run.

Read the full article “10 Signs We’re Not in Another Real Estate Bubble (Part 1)” by Louis Basenesehere.


Ninja Tip: Have a script ready with what you want to say and common questions you get asked.

Stay tuned for my next blog on what to do once you have tons of cash buyers.

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