Investing in Maine Real Estate – Pulling the Trigger
When we initially moved up to the lovely town of Bangor Maine from the outskirts of Boston, we weren’t really sure what to expect but lucky for us, the move has been one of the best decisions that my wife and I have made as a family. It certainly depends on what your aspirations are for sure, but once we had our second child and our eldest was getting to become school age, we had a strong desire to get away from not only the Rat race of the larger Urban area but also had some hesitation in sending them to public schools in the area. So now that you get a feel for why we decided to head north to the middle of Maine in Bangor (Population ~ 32,000) let’s begin to talk real estate investing.
In order to brave the cold waters of real estate investing as a pure rookie requires a strong belief that it is the path to financial freedom, since the only way to begin learning is by pulling the trigger. One of the great things about investing in rental properties is that you are dealing with a tangible asset that has income producing potential. So one of the things that has worked well for me over the years is to get a really good handle on calculating the potential buy price of a property by utilizing the Income approach as follows;
Net Operating Income = Total Building Income – Total Building Expenses
Potential Buy Price of the Building = Net Operating Income/ CAP Rate (I’ll describe how to best get this objective number)
Example: Looking at a 4-Unit Property that generates $3000.00/monthly (I always take a 10% vacancy rate on Income) and has expenses of $1200/month (I always add 10% to any of the expenses supplied to me by the seller!)
So here is what I’d consider paying;
Net Operating Income (NOI) = ($3000 X 12 = $36,000)/($1200 X 12 = $14,400)
NOI = $21,600 Therefore if the local CAP Rate is 10% then the MAX offer price would be;
Max Offer Price = $21,600/0.1 = $210,600
Now let’s cover a few items here so that we can fill in the blanks so that we have the full story here! As you can well imagine this is simply a guideline and the dynamics of each and every transaction is different. Additional things to take into consideration when evaluating the Max offer price are things like Additional repairs, seller motivation, location, local market dynamics etc…. But when using this formula and being conservative on both he income and the expense side of the equation, you limit the risk of getting yourself into financial trouble by owning as asset that is worth less than you owe on it. (Not a good place to be)
CAP Rate defined: As noted above, this number is critical to accurately determining the potential buy price for a building or investment property, so how do we come up with a number here? The best way to do this until you simply have enough knowledge of an area is to get a listing of rental properties that have sold recently and back calculate the CAP rate from the equation above or NOI/Sold Price to get you the CAP rate for each property sold. Then you simply take a solid average of this number across a good mix of units based on size and location and bingo, you have a CAP rate to use in your equation!
Great so you want to make an offer!!! Sounds like the seller is motivated and ready to part with his lovely rental property and you are just the man/woman to take on the challenge…. so the next step is to go to your savings account to make sure that you have the necessary 20% of the purchase price tucked away for a rainy day. Well doing a little calculation, 20% of the $210,600 is a mere $42,000! Holy crap….. Raising kids and all the other expenses and I’m supposed to have $42,000 tucked away??? Let’s just say if you are anything like me when I started out, capital was hard to come by for sure. But the good news here is that if you have done your homework and the deal is solid, no need to walk away! Let’s talk about some options here that have worked well for me in the past.
How do I get my necessary downpayment???
- Owner Financing; This has been my go to strategy when adding properties to the portfolio which is why I’m listing here in the number 1 spot. This is simply when the current owner holds a “Note” or loan for a portion of the purchase price. So in the case of the example above, if the current owner is willing to “Owner Finance” 10% of the purchase price then you are only required to bring $21,000 to the closing table vs. $42,000! Not bad…. and not to brag here but simply to prove that you need to go ahead and ASK, the worst they can say is NO. There are some unique situations where I’ve had the current owner hold a note for the entire 20% and been able to walk away from the closing with a cheque in hand…..
- Wealthy Neighbor; By this I mean anyone at all that you might know that is perhaps a few years ahead of you with some savings. With the unknown of the stock market world and crappy returns from Bonds, what’s wrong with giving people an opportunity to make a solid 10-15% return for helping with the downpayment? NOTHING… Granted it is likely higher than you would like to pay, but making it worth the investors while to team up and not only will you secure a deal but you also open up doors for future investment if you get this one right.
- 401K (Quiet and Keep this confidential); If you happen to have some money tucked away in a 401K getting crappy returns and getting hammered with fees to make the financial institutions wealthy, you may be able to take a loan out in order to invest in your own wealth creation. You need to do the math necessary to justify the loan, but many times when considering the income, appreciation, equity being gained, and tax benefits of rental properties it quickly becomes a no brainer. (In the beginning that is)
We hope this article gives you some insight into the steps necessary to begin exploring real estate investing and one of the things that I always suggest to people who have shown a desire here is to begin doing evaluations on properties by practicing the above steps to determine pricing and play around even if you are not yet ready to “Pull the Trigger’ and then the real estate gods will drop one on your lap that you simply can’t resist and you will get it done. Wishing you the best in your mission of financial independence and remember if you have a strong why you will plow through all the obstacles in your way! A picture of mine below….