Hi, I’m a 24 yr old guy. Been working for a year and a half since graduating. I have no experience in investing in anything. Everything I do know comes from the CFA textbooks. However, while humbly going through the day-to-day grind of my job I’ve saved up enough cash for me to be concerned about ignoring investment opportunities.
I’ve been playing with the idea of investing in a small 1-bedroom / studio unit in the capital city of my home country (which is generally classified as an emerging market). The amount I’ve saved would ideally be used as a downpayment to cover a significant chunk of the cost and the rest financed with either a bank loan or my parents (who I would pay back later).
I’m aware of the general risk and return characterisitics of property:
return comes in the form of price appreciation and rent yields 2) there is the risk of prices falling, not finding a tenant, not being able to liquidate the investment at short notice etc. 3) there is the non-monetary benefit of having somewhere to live, 4) location is a very important determinant of value 5) owning a property has many associated costs such as contractual fees, administrative fees, building management fees etc…
I was wondering if anyone with experience in investing specifically in small apartment units such as studios and 1-bedrooms in an urban / city type area could share their experience and if they recommend these as a long term investment.
The two most important considerations are the cap rate and the rental vacancy rate for similar apartments. Those two metrics will indicate both the level and security of cash flow for your investment and the potentia marketability should you drcide to exit the investment. From there you get into the nitty gritty details of the specific property such as management, expenses/repair, issues with strata. Personally I am a huge fan of Direct RE investment, for a number of reason. but think of it as buying a fixed income security with a mixture of debt and cash, you want strong cashflows that are somewhat predicable (ie no major repairs or cash sucking management fees) everything else is secondary.
hey I was wondering the same thing. I was just coming on here to ask and found this post.
I was looking for jobs the other day and saw an opening at a “real estate investment management” company. They claim to be very different from real estate agencies or property management companies. From what I can tell, they’re like a property management company that manages it’s own property, but sells bonds or shares. They buy small-medium retail and residential stuff and rent it out, selling bonds/shares so open up cashflow to continue buying. Anyway they claim they have a “model”, which I assume is used to calculate cashflows for NPV analysis.
I want to do this myself, rather than slave away for them.
I’m trying to get my own “model” together. I see some suggestions below about turnover rate and other metrics. Does anybody have other suggestions on making a “real estate investment model”? I’ve come across some stuff on google but it’s really dense post-grad paper stuff.
cap rate? so would this be expected monthly rent over initial price of the house/apt? that indicates the level of cash flow? and the rental vacancy rate for similar apartments is the security of that cash flow?
how do you determine the turnover rate? any suggestion for data sources? is it better to use turnover rate or rental vacancy rate to determine the security of the cash flow?
It seems the hardest number to calculate will be the rental vacancy rate for “similar apartments”. I assume this is similar in size, location, quality? Do you have any suggestions on how to go about this? U.S. census data? state/local data? or is it worth paying for a customized report of an area you plan to operate in-- and have some inclination of being a successful area but warrants a more in-depth analysis?
thanks for you time and responses, very interesting stuff
I’m looking to buy a single family in an area with 4-7% rental vacancy rate for about 25-35,000usd and then putting 6-10,000usd in it. Charging rent of $850-1250. Then hoping to rent it out asap and immediately sell $45,000 worth of 3 year rental/real estate-backed security at 8.99%apr
Then I’m going to take that $45,000 and roll it over into another place…
hoping to do this at least 3-4 times over the next year… thusly… 4-5 pieces of real estate
p.s.- The area has a high rental vacancy, but the state overall one of the top 4 lowest rental vacancies… not entirely irrelevant. And this also assumes I can’t borrow from a bank at a lower interest rate.
What do I need to do to sell a contract similar to a rental backed security?
Cap rate etc do not matter at all for a single unit.
When buying single units or a small building, you need to know who your tenant is, how easily you can evict them, and how long you can hold onto the property if it is sitting there empty.
The benefits to owning a single unit are generally tax benefits and the ability to gradually build wealth by renting to someone else. The market in most places is too efficient to get too much cash flow, especially when property taxes, insurance, and reserves for fixing things are considered.
This is what I would do. I have limited experience renting (rented my place out a few months while I was out of town for work and now rent out 2 of the 3bedrooms).
Before I bought my place, I put an AD on craigslist. I used this to determine the sensitivty of tenant interest relative to price. It helped me determine a price I could charge with enough applicants to find good ones. Also, I used padmapper.com to see rents in the area.
I became familiar with the rental law, to see how hard it is to evict and what requirements are placed upon being a landlord.
I understood the accounting and implications of it. The US tax code has a lot of cool little tricks, just have to look for them Not sure about Korea.
I found good screening websites run by two of the three credit score providers. In USA, renting to certain groups of people can be a legal liability for the landlord. Plus I want to see their credit report/score and a criminal background check.
From what I’ve read from other more serious land lords, not doing your homework can be a very costly mistake.