Evaluating a Real Estate Investment

Secyh62's picture
Rank: King Kong | 1,371

Alright so I don't know much about real estate other than what the CFA curriculum details and what I've read on this forum/google. I'm considering starting to invest in real estate provided the returns are adequate enough relative to the risk and illiquidity. Trying to look at it from all possible angles and have put together a list of questions I hoped some of you could help me with listed below in no particular order:

1.) I plan on running the numbers on the three states that myself and my potential partner are interested in (3 states that are within a driving distance that we would be willing to make). What would be my best source to compile some demographic data like population growth, income trends and what not? Plan is to compile these numbers on a state wide basis and from there come up with some target areas to look in and watch for new opportunities. So far I've really just looked at U.S. Census data but was curious if there is a better source. Somewhat related to that, is there like a Bloomberg for real estate investors at the professional level?

2.) As far as sourcing potential investments once target locations are established, what are some good resources to find properties? Obviously there are a lot of residential websites but what about commercial or listings that are targeted towards investors? So far I've found loopnet.com to be decent, anything similar to that?

3.) To derive NOI, I've got: Rental Income at Full Occ + Other Income - Vacancy/Collection Loss - Operating Expenses = NOI. What else goes into that? Operating expenses I'm assuming cover mortgage payment/property taxes, insurance, maybe like a contribution to a maintenance reserve account. What else is included in operating expenses assuming I would not use a property manager (have read quite a few posts against using a property manager and never had good experiences with them as a tenant in college)? Vacancy loss 5% a reasonable estimate? What would be a good % of the rental income to contribute to a maintenance reserve account?

4.) Why is cap rate a consideration in evaluating an investment? Wouldn't cash on cash return be what you would really judge the investment by? Also, does the growth of your equity get included in the cash on cash return? Most of what I read only mentions the NOI against your initial investment.

5.) Was considering at first forming an LLC with my potential partner but after reading more on it, seems like its better to finance it in my name (at least the first property, finance the next in his name) using an FHA loan as a primary residence and then taking out liability insurance. How does that work with primary residence, would I then be taxed as a resident of the town the property is in? What changes for you personally if you list it as a primary residence? Reason I ask is that I live at home and would most likely continue to do so for the immediate future so I wouldn't be physically living there and it wouldn't be an issue to get my mail there or pay that town's taxes or whatever I would have to do.

6.) When sourcing tenants, what can you legally require them to disclose? Can you run their credit, background check? What do people usually do to find and then screen their tenants? Would most likely try and avoid using real estate agents. In regards to real estate agents, when purchasing a property how does the commission work for the listing agent if I'm sourcing the property directly? From my understanding when someone sells a property the commission is like 5% and then the listing agent and the buyer's agent split that. Would the guy still just get 2.5% or would he keep the whole 5%, applies more to exiting the investment?

7.) In reference to commercial real estate loans and properties, how does that process differ from residential? What kind of down payment would you need and whats the spread on a commercial rate relative to a residential? If we hypothetically did start an LLC, would the lender evaluate our collective credit scores when coming up with a rate? Is personal credit score weighted as heavily, if at all, in a commercial loan?

Again pretty new to this and tried to answer as many questions as I could ahead of time before making this long post. Really appreciate any answers and advice you guys have. Have a good weekend!