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Pros and Cons in owning a rental property – DC Fawcett

 There are certain advantages and disadvantages in owning a rental property.  Now let’s look at both of them.

The advantages in owning a rental property:

  • Compared to other forms of income the advantages of owning a rental property is less. However, everything goes on in the appropriate manner, you can earn a huge sum from this stream of income.Pros-and-Cons-in-owning-a-rental-property

  • You will be having the benefit of a direct income flow through a rental property. The monthly paychecks will give you an income that you get when you don’t mostly carry out any work. In cases the mortgage is lower than your sum got for rent there will be the advantage of a surplus.

  • All the form of investments comes with a risk and so does owning a rental property. But once you go with this, you may get some reward out of it. The property will see appreciation in due course and your equity investment is balanced. There is also the chance of getting considerable tax break. At the case of selling off your property these two aspects will boost your income. This may also happen when you refinance the property.

  • You will upgrade and maintain your property. The value of the property will be enhanced during this course action and this is called sweat equity. You may involve in repainting the property etc. to improve the value of the property at a reasonable financial cost. This will be useful when you sell it at a later stage.

  • When you are owing and having control of your rental property there is the advantage of independence attached to it. But again you will not be able to earn your livelihood through the profit gained from just one rental property. Having said that, many prudent investors own and manage a huge number of properties which in turn requires lot of commitment and hard work. But the key is that they are in a situation to act out independently.

The disadvantages of owing a rental property

Sometimes the tenants will leave the place in such a mess that you need to repaint it. You may be also put in a situation wherein you have spend lots of money to make the property retain its original attraction.  Sometimes the tenants will even escape from paying the rents.

Not only do you need to have some cash for buying the property but should also have some money to manage it. If the tenant has put your property in a mess you may require lot of money.

The tenant is on the advantageous side when you don’t carry out the required repairs. This may be owing to your financial woes. But here then the law is favorable to the tenant only. It becomes essential to consult a lawyer who is expert in real estate to go through your lease.

There are risks for a rental property including the vagaries of the market. The property may see a depreciation, a succession of bad tenants etc.

Do clarify the questions regarding tax with your accountant.

The final note:

Managing and owning rental properties is one of the several alternatives and it may suit few people. You have to have cognizance of your financial position and your inclination to take up this alternative while moving on with this move.

Dc Fawcett, the founder of the Virtual Real Estate Investing Club, gives some sound advice regarding investing money in rental properties. One could get a fair idea regarding the real estate scenario by going through his blogs.

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Suggestions for purchasing a second home to rent – DC Fawcett

At the present juncture, the interest rates are very low.  So, this is the apt time to take into account putting the investment in rental property.  If the huge portion of the monthly cost for ownership, which is of course the mortgage payment, could be frozen for 30 years while there is a gradual increase in the rent, there is an escalation in the resale value of the property.  All along, you enjoy the income and benefits with regard to the tax.  That is the best accomplishment or suggestions that you could make.

Suggestions-for-purchasing-a-second-home-to-rent

But, there are some ifs which we need to consider.  It mostly is related to the investment property itself, rather than the issues regarding finance and tax.  Those rates of interest for a 30 year fixed mortgage are presently in the 3.5 – 4.0 range.  DC Fawcett says But, it has not been that much less in the past four decades.  And of course, the tax code is in the favor of home ownership and investment.

Consider the advantages in the tax:

  • Taxes, interest, insurance and other expenditures could be deducted against the property income. Losses could be deducted against the other source of income.

  • There is another tax deduction that comes in the form of depreciation. It is actually an allowance for damages, which is usually more than 27.5 years.

  • Rental properties could be disposed and the developments could lead to purchase of another rental property without payment of capital gains taxes.

Take into account variety of properties:

  • If one arrives at a decision to put investment in a rental property, he or she could do it in a variety of way.

  • A rental unit in the present residence or on property that exists.

  • Raising an apartment in an existing multi-residence apartment house or cooperative.

  • A residence or complex in a community that you would like to retire to.

  • A residence or apartment in the vicinity where children are going for college and this is a viable alternative to student housing.

  • Having a vacation home besides a lake, beach or ski slope where it could be used in two weeks of a year without going for a compromise on tax advantages.

 

Do not miss out the fact that you will turn into a landlord

Every one of the above listed factors has its own pros and cons.  Some people do not prefer turning into a landlord.  Management of a property and the occupants needs ample time and effort.  One can do the minor repairs all by himself.  If one is going to purchase a dual family residence in a developing neighborhood, for instance, residing in one unit and putting the other to rent, one could pinpoint the own expenditure of shelter (home expenditures joined with rental income and a fine depreciation on the rental unit) making a free approach or surpassing it within a couple of years.

Do the Homework on real estate

Making a fine research through the rental property should be as arduous as purchasing a residence to live in.  You must know the specific criterion in the market, the zoning laws and the existing trends and types of the vicinity.  Look out for something like a waterside, or nearness to a college or an older house in a particular community.

While doing the necessary arithmetic, take into account the fact that tenant paying substantial money has the privilege to anticipate immediate reply to any problem be it huge or not noteworthy. Those residents who know that they are paying less will not be that much demanding.  If the aspect of managing the rentals is intimidating, your broker in real estate could refer you to a property manager or a caretaker.  Also, online search will get you specific property managers.  But, one should be aware that getting a property manager will consume a huge amount of money.

Conclusion:

Putting money into real estate might not be the right choice for everybody. But, if you have a long term investment goal, and patience for the inherent risks, the advantages are truly considerable.

Dc Fawcett, the owner of the Virtual Real Estate Investing Club, has blogs through which you can draw a fine idea regarding purchasing a second home that could be rented.  Dc Fawcett invests into various virtual markets and is a master of wholesaling, rehabbing, and cash flow investing. His blogs are valuable in the sense that he could give a fine idea in the buying scenario.

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Flipping houses – Is it as easy as it appears? by DC Fawcett

One might have come across advertisements showing how making money through real estate is a very easy task.  One might also have come heard seminars in radio which guarantee flipping of houses without one’s own money.  Also, there are sponsored posts in the Facebook which say that it is very easy to flip house with no money at all. DC Fawcett says  When one comes across the word ‘Easy’, one needs to be very cautious.  One who is well-versed in realty might know that real estate is not that easy as one thinks.  As a matter of fact, if one has to become wealthy, and successful, it is not an easy task.

Flipping-houses---Is-it-as-easy-as-it-appears

One might have acquired millions of dollars, but it demands work to manage the wealth and retain it.  That is the reason why majority of people who acquire huge wealth turn bankrupt in a matter of years.  One might be waiting for the easy way to succeed, but you will just keep waiting for a long time to achieve the success.  Investing in real estate provides wonderful opportunities for people to acquire wealth, but it is not an easy task.

Variety of real estate investing techniques – How easy is it to make money -DC Fawcett

There are umpteen ways to make money in real estate.  There are some very easy methods to put money into real estate, but those methods will not make one rich.  They can give you a decent value in return for the money that is already saved.

  • Real Estate Crowd Funding:

One of the most noted ways to invest is through crowd funding.  One can put in small amounts of money via crowd funding companies.  These companies then pool the money with other investors to make a larger investment.  This investment changes hands to flippers or other developers in real estate.  One may be able to get huge amount with crowd funding, but there would be a lot of money to get affluent via that return.  For those who are starting up, crowd funding can be comparatively easy.

  • Putting money into REIT:

There are the turn-key rental properties.  These are rentals that can be purchased and are already rehabbed, managed and rented by a property manager.  These are particularly situated in high cash flowing areas and demand less work.  However, there are difficulties with occupants, repairs and bad turn-key companies.  One might own a turnkey property. Purchasing a turnkey property could be easy, but one should be intelligent enough in selecting the company.

  • Being partner with other real estate investors:

Yet another option to put money into real estate is to partner with active investor.  One among the partners may lend money for a particular deal, while the other partner fixes the deal, completes the rehab and disposes the property.  One could lend money or retain equity position also. Partnering can be an easy way to put money if one is just into providing the money.  One has to be discreet enough in choosing the right partner and the appropriate properties to lend on.

Conclusion:

One has to be very careful when he or she hears that flipping houses is very easy.  Usually, there is the possibility of high priced sales pitch arriving soon.  One has to be realistic and rational as much as possible, and steer clear of cunning marketing techniques that take people for a ride.  Flipping is extremely difficult, and making huge money is difficult.  Also, running a business is a herculean task.  Performing things that are difficult and coming with results is the best prestige that could be accorded to a person.  It makes life a lot easier.  As flipping houses may not be very easy, it does not mean that you cannot carry it out.  It takes some amount of time and arduous work from the individual.

Dc Fawcett , the founder of the Virtual Real Estate Investing Club, provides a fair idea on how easy it is to make money flipping houses.  One can go through the blogs by him to understand the real estate scenario better.

 

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DC Fawcett Reviews – Real estate investing formula for flipping and renting properties

Are you planning to flip or rent your property but don’t know how to go about it? If it is so, your search for the guidance ends here. Before you make an offer on a property and approach a lender, you need to be aware of the terms of engagement before getting into the deal else, you may sell the property less than the expected amount. DC Fawcett gives you the Real estate investing formula for flipping and renting properties.

Dc Fawcett Tips – Real estate investing formula for flipping and renting properties

Real-estate-investing-formula-for-flipping-and-renting-properties

Although you might have purchased the property earlier, investment in real estate is different from buying a house for yourself. Dc Fawcett Says that, Buying a personal house is a more emotional undertaking as you would have felt proud that you have purchased a property in your name but it is equally painful to part with it in times of emergency wherein you need money. To succeed in this field, you need to understand the basic formula and research on the market which is the most important factor. Once you have got the amount in place, flipping the property becomes easier.

DC Fawcett - Real estate investing formula for flipping and renting

Maximum Allowable Offer (MAO) helps you to determine the exact price to be paid for buying or selling the property. It is generally considered as 70% of the After Repair Value (ARV) and the investor cannot pay more than that of the after keeping an account for the cost of your funding repairs, holding costs and resale commission and costs. Below is the example

ARV                                        $2,00,000     Value of property after repairs
Loan (Cost of Funding)             7,000     Origination fees, closing fees, Interest
Repairs                                       30,000     All expenses related to renovations
Holding Costs                             3,000     Insurance, Utilities, Taxes, HOA, other
Resale Fees                                 10,000     Realtor Fees (6%)
                                                $150,000   ARV minus costs to flip
                                                 x        .70
                                            $  105,600   Maximum Allowable Offer

 

In this scenario, profit of $95,000 ($2, 00,000 – $105,600)

DC Fawcett Real Estate - Maximum Allowable Offer

You can break 70% rule on the following conditions – Dc Fawcett Tips

  • Resale fees s exempted when you get a guaranteed in-built buyer.
  • When your cost of money is lower or you can access cheap cost.

The wholesaler uses this formula but adds the wholesale fees. They will set to 65% of the rule including their fees. In this case, it will be 1, 50,000 x .65 which results to $97,600 as a maximum allowable offer when you wholesale.

The other way of 70% Rule

All the investment properties that are fixed and flipped, needs a different amount of time, cash, and considerations. The 70% rule is the basic thing which builds up 30% profit margin and can be a great rule of thumb. However, the investors would look out for the property that can be easily flipped, ignoring the 70% rule.

Net Operating Income – DC Fawcett Real Estate Tips

The investors who are looking for the cash flow and the benefits of building wealth through passive rental income use net operating income (NOI) formula to derive the how much leverage is needed. The basic NOI formula is used when you purchase or refinance a rental property. NOI is calculated in the following way.

Rent                    $1000
Taxes                     -150
Insurance              – 75
Vacancy                -100     (10%- this will vary with turnover rate)
Repairs                   -80     (In this scenario it  is 8% which depends on the property.
Management      -100      (10% budget to pay yourself even if you self-manage)

 

Gross Operating Income $495. The gross operating income tells you how much mortgage the rental property can provide if you have to repay the loan from the profit you get on rental income. Mortgage calculator helps you to determine that.

DC Fawcett Real Estate – Tips on flipping houses

Do you watch Tv shows like Flip or Flop, Property Brothers and Love it or List it? Obviously then you have  a fair idea about what you will be reading in this article. Well for those who understand and also for the non viewers who are not aware, this article is about flipping homes and guidelines for flippers by Dc Fawcett, the owner of Paramount Digital Publishing, who instructs entrepreneurs in his educational institution and also on his blog in the internet on how to grow their business and also to generate different income streams.

DC Fawcett Reviews – Tips on flipping houses

 Dc Fawcett has years and years of experience in business and sales. After graduating from college he went to work for a company which sold websites. This job was not long lasting. He then went on to work for a concern which did dry cleaning business. But after working there for a year he wanted to be his own boss. So he started his own business . It was basically about investing in real estate. Then after doing this for many years he went on to find his own educational institution imparting knowledge on investing in real estate.

Dc-Fawcett - Reviews-tips-on-flipping-houses-600x300

Dc Fawcett is a specialist in the craft of wholesaling, rehabbing and cash flow investing in virtual real estate areas that he does not inhabit. He analyses time and again about the various flipping techniques and offers guidelines to flippers. Amy Fontinelle had written an article about his analysis on flipping for the blog Investopedia in June 2010.

Dc Fawcett’s review on Flipping

What is flipping?

Flipping is a process of reselling homes with a profit target in mind.  Flippers often buy Foreclosure homes for low rates in an auction and then end up reselling them at higher prices.

While just about any X or Y can buy and sell a property, there are risks associated with it as Dc Fawcett says. Flippers fix defects and some may even make changes in the basic organization of the home to better their chances of reselling it. But sometimes these defects involve huge amounts of money and take a very long time to mend complaints. Some defects may not be repairable. In this case the flipper faces a loss.  So Dc Fawcett analyses that profit making in flipping is not ensured.

Ripe flipping areas in 2010 according to Dc Fawcett

Although the value of real estate has decreased rapidly in many metropolitan areas in the first quarter of 2010, there are 3 cities which are still very lucrative for flippers. The 3 cities are San Diego, San Fransisco and Los Angeles. San Diego offers a savings of upto 46% on foreclosure. Flippers should be wary of San Diego’s high unemployment rates and new single family homes which can lower prices sharply. In San Fransisco, foreclosure savings are around 29%. Like San Diego, San Fransisco also witnesses many new single family homes and unemployment rates which the flippers have to be careful about. Los Angeles is exhibiting a foreclosure rate of about 0.38%.  High unemployment rates and new single family homes are factors to look out for in Los Angeles as well.

Dc Fawcett Cautions

Dc Fawcett analyses that flippers must face heavy competition from investors who are looking for rental properties and also from owners who are ready to buy inexpensive foreclosure homes just to win auctions or to save money.

Tips on Rental Property

Dc Fawcett – The Advantages In Owning a rental Property:

Compared to other forms of income the advantages of owning a rental property is less. However, everything goes on in the appropriate manner, you can earn a huge sum from this stream of income.

Dc Fawcett said that,You will be having the benefit of a direct income flow through a rental property. The monthly paychecks will give you an income that you get when you don’t mostly carry out any work. In cases the mortgage is lower than your sum got for rent there will be the advantage of a surplus.

DC Fawcett Reviews - The advantages In Owning a rental Property

All the form of investments comes with a risk and so does owning a rental property. But once you go with this, you may get some reward out of it. The property will see appreciation in due course and your equity investment is balanced. There is also the chance of getting considerable tax break. At the case of selling off your property these two aspects will boost your income. This may also happen when you refinance the property.

You will upgrade and maintain your property. The value of the property will be enhanced during this course action and this is called sweat equity. You may involve in repainting the property etc. to improve the value of the property at a reasonable financial cost. This will be useful when you sell it at a later stage.

When you are owing and having control of your rental property there is the advantage of independence attached to it. But again you will not be able to earn your livelihood through the profit gained from just one rental property. Having said that, many prudent investors own and manage a huge number of properties which in turn requires lot of commitment and hard work. But the key is that they are in a situation to act out independently.

Dc Fawcett Reviews – The Disadvantages In Owning a rental Property

Sometimes the tenants will leave the place in such a mess that you need to repaint it. You may be also put in a situation where in you have spend lots of money to make the property retain its original attraction.  Sometimes the tenants will even escape from paying the rents.

DC Fawcett Real Estate -The Disadvantages In Owning a rental Property

Not only do you need to have some cash for buying the property but should also have some money to manage it.According to Dc Fawcett, If the tenant has put your property in a mess you may require lot of money.

The tenant is on the advantageous side when you don’t carry out the required repairs. This may be owing to your financial woes. But here then the law is favorable to the tenant only. It becomes essential to consult a lawyer who is expert in real estate to go through your lease.

There are risks for a rental property including the vagaries of the market. The property may see a depreciation, a succession of bad tenants etc.

Do clarify the questions regarding tax with your accountant.

DC Fawcett Real Estate – MAO formula for wholesaling

DC Fawcett Real estate wholesaling is one of the ways to make good money. As a beginner, you might get the questions like how to create an offer on a property that guarantees a profit. The answer to this question is you need to give a small tweak into a real estate formula using Minimum Allowance Offer which in short is called MAO FORMULA. With the help of this formula, you can make a small adjustment.

DC Fawcett Real Estate -MAO-formula-for-wholesaling

MAO formula for wholesaling what you should understand

MAO is a rule of thumb network that enables the beginner real estate investor with a formula to determine a ceiling while making an offer to the sellers owning distressed property.

DC Fawcett has made a formula as follows

MAO = (ARV * Investor Discount) – Est. Repairs – Est. Closing Costs – Your Expected Profits as A Real Estate Wholesaler and tells you what all you need to understand.

Where ARV = After Repair Value

RE=Repair Estimate

WP=Wholesale Point

If you are not a wholesaler, there is no need for you to deduct the wholesale profit. In MAO, the landlords and rehabbers do the property analysis with an intention to purchase distressed properties at 70% of the actual value, which means 30% for a house if it is in a perfect condition. This discount gives a rehabber a margin of fixing and flipping and gives the rental property investor has a chance to get a positive cash flow.

DC Fawcett Reviews MAO formula

Dc Fawcett – Possible complications with MAO formula

The purpose of MAO formula is to keep you from paying more than what is required for the property. The same advantage becomes a disadvantage if you over-estimate the property value. You need to have an accurate knowledge about the property value and apply the local economic and financial conditions to fix the value of local properties.

The other mistake which people make is under-estimating the repairs which can prove fatal to the real estate investors. For this, you need to know the approximate time that it takes to estimate repairs.

One more difficulty of MAO while using the formula arises when the market conditions change. If the changes take place, the private lenders also revise the lending criteria downwards. You need to keep yourself updated about the developments taking place in the market. And stay on top of the things. Otherwise, you will be calling for trouble by ending up closing the deals at higher prices than the investors in your locality.

DC Fawcett Virtual Real Estate Wholesaling

This formula can be used quickly to make an attractive offer to the seller in which you can unfailingly earn profits, as a real estate wholesaler. You need to study and research the market conditions before making an offer.

Dc Fawcett Real Estate – How To Get Decent Deal on Flipped Houses

Flipped houses is a very competitive process and the returns could be very high for investors.  When you are going for a deal to purchase a home, take into account whether the house is being flipped.  There are certain glaring facts that reveal the truth that the house is being flipped.  The house is usually empty with no one occupying it, and few amends would have been made to make the property appear attractive.

Dc Fawcett Real Estate – How To Get Decent Deal on Flipped Houses

Dc Fawcett – Some aspects of flipped houses deal

  • Property records will help you make out that the house is indeed a flipped one. The real estate agent comes to your aid when you take up the process.  When you go through the previous listings you will get to know how long the seller retained the home, and you will also know the previous sale price.

  • The seller might have made vast changes to the property to make it look good. But do not be taken in by the external appearance. There might be flaws that you might have overlooked, and which spring as a surprise on close scrutiny.

  • Cheap finishes might have been done to the house to make it look good, but it might be something distractive such that the buyer does not make out the flaws.

 

DC Fawcett Real Estate - Some aspects of flipped houses deal

  • The priority when purchasing a residence is to know whether it has been done with permits. Only when the building possesses permit, it can be considered legal.  Documents supporting the fact that the house has been done with permits have to be furnished.  When work is done without proper permit, you might be inviting trouble.  It will make it difficult to obtain the financing and home insurance.

  • You might have done everything to ensure that the home is in good condition. Also, the house may look attractive and new, but you should not skip the process of home inspection. Certain things might not have come to your attention which a home inspector would find out.

  • When finding out the home’s fair market value, a real estate agent comes to your aid. Nowadays, home buyers have everything in the finger tips, but there are certain things which require the attention of a real estate agent.  Although the previous sale price is a considerable factor, it is not the only thing to place importance.  There are certain costs as the costs of renovation, the escrow which need to be considered.

  • You might need to make a comparison of the homes in the vicinity. There might be homes with similar attributes as the property that you are considering.  Although it is something lucrative when purchasing a flipped house, you need to pay extra attention to details.  When you meticulously follow the process, you would end up getting a great deal.

  • Also, make double sure of the vicinity in which you are purchasing the property. The vicinity might possess the potential growth which might not be in place yet. A good school at place, and other important landmarks would be lucrative when it comes to purchasing property in the vicinity.  Carrying out the homework will give you fair idea regarding how long you need to hold the property before flipping it.

  • You need to update the buyer with regard to the amends that have been made to the house. Paying attention to these small details and making the house up to date would help much in flipping the property.

    DC Fawcett Reviews - Some aspects of flipped houses deal

DC Fawcett – Real Estate Hack In Deals

DC Fawcett Real Estate

Selling the property pertaining to real estate is not as easy as selling the products and services as it has got to do a lot with the legal documents. If you are unable to handle the real estate deals effectively, it is very difficult to sell the property. Apart from hiring a real estate agent and taking professional help, you need to put efforts from your side as well. This is one of the reasons why many of them fail to close the deal. DC Fawcett gives you the tips for closing the sale.

DC Fawcett Real Estate - Real Estate Hack In Deals

Estate hack in deals

The first and the foremost thing are proper planning. You need to keep the necessary documents ready so it saves a lot of time when you get a good buyer. If you delay in this process, it can result in a loss. Here are some of the smart ways you can take the benefit of this information.

Keep the ownership document ready

You should know what are the documents needed for transferring the ownership to the buyer before hiring a real estate agent. The important documents are:

Deed

This is the document in which the seller transfers the ownership to the buyer. The deed differs from one state or country to another state or country. You need to submit the deeds to local country transfer so the person who is interested in owning your property will get to know that it has been transferred to the new buyer.

Sale Bill

This document includes the valuable assets that are going to be sold with the property. It may be light fixtures, appliances, air conditioners and other assets. These are listed in the contract between the seller and the buyer.

Seller Affidavit

It is similar to the sale bill, which confirms the seller’s previous ownership and declares title defects like leases, liens, outstanding contracts and other legalities which can create disputes in future.

Transfer tax declarations

It is the moral responsibility of every citizen to pay real estate taxes. The government decides the amount depending on the property’s purchase price.

Create a good impression on MLS

Many people consider MLS (Multiple Listing Source) as a reliable source. So it is important that you stand out on the MLS. There are numerous active members who have generated amazing impressions about their property deals. There are a lot of possibilities to get prospective and potential buyers. Offering something with the property creates the best impression to the buyers.

DC Fawcett Real Estate common tricks real estate agent use

Improve your ROI through staging

Staging increases the estate value and reduces the time in the market. Many homeowners and the real estate agents resort to staging as it has become a popular way to promote a home in real estate market. Professional home stagers work with home flow and make necessary changes to make it presentable to potential home buyers. Hence it adds the estate value which increases the ROI.

Invest in property investments

The look and feel of the property is more important to impress the prospective buyers. All the parts of the property should be in a good condition which reduces the buyer’s cost of renovation.

Conclusion

DC Fawcett concludes that Flipping and renting properties are good in their own way for the investors. Managing and owning rental properties is one of the several alternatives and it may suit few people. You have to have cognizance of your financial position and your inclination to take up this alternative while moving on with this move.

Dc Fawcett, the founder of the Virtual Real Estate Investing Club, gives some sound advice regarding investing money in rental properties. One could get a fair idea regarding the real estate scenario by going through his blogs.

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Discounted cash flow formula for real estate by DC Fawcett

Though discounted cash flow formula is popular and widely used, there are lots of misconceptions about it. In this topic, DC Fawcett intends to clear some of the misunderstandings about this concept and educates the people with some of the facts.

Discounted cash flow formula for real estate

To understand the discounted cash flow concept, you need to know the basic real estate cash flow. You need to analyze some of the factors before you go for it. These factors are

  • How much amount goes for the investment?
  • When does the amount go into the investment?
  • How much amount we get in this investment and
  • When do we get that amount?Discounted cash flow formula for real estate - dc fawcett

To answer these questions, you need to do more analysis so you can arrive at the right figures. They are

  1. Holding period –

    is generally assumed as the timing of cash flows occurred at the end of the year. In commercial real estate, the holding period has a standard variation from 5 to 15 years for the financial analysis.

  2. Initial investment –

    is normally shown as nil but it includes the acquisition costs required to buy an asset, deducting the mortgage proceeds if any. It can also be called as total cash out of hand required to buy the property.

  3. Annual Cash flow –

    Is taken as annual cash flows before tax for a real estate property. In other words, it is gross profit minus all the expenses and debt service. Negative cash flow means the money is going on investment. Positive cash flow means the amount is coming out of the investment.

  4. Sale Proceeds –

    represents the cash flow received after the property disposition. It shows the last period of the holding period in real estate cash flow.

What is discounted cash flow analysis?

Discounted cash flow analysis is a technique that is used in finance and real estate to discount the future cash flows to the present. Following are the steps for real estate valuation.

  • Visualize the cash flows that occur in future.
  • Establish the total return that is required.
  • Discount the cash flows to the present at the required rate of return.

Forecasting the expected future cash flows enables you to create its projection, known as real estate proforma. It puts all the elements in place which gives you the answer to the 4 basic questions of the real estate cash flow model, mentioned above. The investors will get the information about their total return for the project. In the case of an individual investor, it is the rate of return they want. The requited return for a corporate investor is the weighted average cost of capital (WACC). Ascertaining the discounted rate has always been a discounted cash flow. It includes accounting for the risks taken for the project compared to other alternative investment opportunities.

Conclusion

DC Fawcett says that Once you forecast the cash flows and establish a discount rate, the discounted cash flow analysis for the real estate project can be used to derive the internal rate of return and net present value.