Real Estate FAQs
Frequently Asked Questions about Real Estate…
What is ARV?
It is a term used in real estate investing know as after repair value.
What is Rehabbing?
Rehabbing a home is the process of completely re-doing a home. It can include tearing down walls, relocating plumbing/electrical, replacing the roof/siding, changing the house’s layout, etc... A full rehab completely transforms the house.
Do You Need A License To Wholesale Real Estate?
You do not need a license to wholesale real estate; you just need to be the principal buyer in the transaction. It is helpful to have specialized knowledge of the home buying and selling process, but there is no assessment required to begin.
What is Wholesaling?
Wholesaling houses is an exit strategy where investors find a discounted property, get it under contract, and then sell it to an interested buyer for a profit.
What is a fix & flip?
Fix-and-flip is the strategy of purchasing a property, renovating it, then selling it at a profit. Investors typically buy a property at a discount because of its condition.
What is Prehabbing?
Prehabbing is the happy medium between wholesaling and rehabbing. You’re buying homes and making mostly minor cosmetic improvements to the property using builder’s grade materials. The end product is a home that feels completely new, updated, fresh and clean with way less renovation costs.
What is a 70% rule?
The 70% rule states that an investor should pay no more than 70% of the ARV (after-repair value) of a property minus the repairs needed. The ARV is what a home is worth after it is fully repaired.
What is Due Diligence?
Due Diligence is the investigation and review of a property to determine any legal liability.
How Do I Finance My First Real Estate Deal?
You can always choose a conventional course of action by acquiring a loan from a traditional lender, i.e. big banking institutions. However, you can always opt for a private or hard money lender. Private lenders are less strict in regards to their loan requirements and therefore typically charge higher interest rates.
Can I Start Investing In Real Estate With No Money?
There is no way to avoid using money, but nobody ever said it had to be your own money. Therefore, it is entirely possible to invest in real estate without using any of your own money. Instead, prospective investors may borrow money from private money lenders to fund their deals. Gaining access to private money funds will come with fees and interest, but it is often the best way to acquire a deal.
What is a CAP Rate (Capitalization Rate)
Percent of cash return in the first year if the property were purchased for cash. The ratio of NOI to purchase price.
What is NOI (Net Operating Income)
Income after vacancy and expenses and before debt service.
What is Rent Ratio
(monthly rent / purchase price or market value). Should be 1.0% or more for acceptable cash on cash return with 75-80% loan. Mostly used for rental homes.
What is Gross Rent Multiplier
(purchase price or asking price / gross rents received from an investment). Mostly used for multifamily (apartment) properties.
What is Depreciation
Commercial is 39 years linear depreciation, residential (to include multifamily) is 27.5 years. This assumes all physical assets will predictably depreciate to a value of zero after this time, and the losses from this offset income on a tax basis. Depreciation is one of the main benefits of investment real estate ownership.
What is Cash on Cash Return
Percent of cash out of an investment in a year relative to the amount of cash invested. It does not consider time value of money. It is a very commonly used metric however, seldom used professionally.
What is Internal Rate of Return (IRR)
The annual rate of return that one receives on an investment for all of the capital and cash flows based on the net present value for each when deployed. It is the discount rate such that the sum of today’s investment and future cash flows have a net value of zero. It expresses in the form of an interest rate the value of a given investment in today’s terms. It is the most accurate and one of the most widely used ways of calculating and comparing multiple investments by professionals.
What is Average Annual Return
The annual rate of return that one receives on an investment for all of the capital and cash flows invested. It does not factor in the net present value of all monies that go into and out of the investment.