When I first started investing, I felt like I had no idea what I was doing. The world of real estate sometimes seemed like a completely different language. Is there anyone who can relate?
It's natural to feel that way. Navigating the world of passive real estate investing can be like charting a course through uncharted waters. But remember, history has shown us that the most important opportunities come during economic downturns.
That means now is the time to learn, research potential investments, and prepare for a rebound. My first investment was a bond trade that promised a 13% return. That seemed like a good thing to me. But even more valuable than the reward was the education I received. I learned about crowdfunding and strategies for investing in real estate at a low cost. You now have a new investment tool that you can apply to other opportunities.
Just as sailors rely on a compass, star, and map, we real estate investors have our own guides. Today, we focus on his four key metrics that serve as your investment compass: cash flow, internal rate of return (IRR), equity multiple, and cap rate. These metrics are important strategies for real estate investing in tough economic times. These tools will help you make informed decisions while positioning yourself for success as the market turns.
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Key Metric 1: Cash Flow
We are in the midst of an economic winter. This means that many of us are experiencing periods of tight or non-existent cash flow. That's why you need to understand the importance of cash flow.
Cash flow is the income that a property is likely to generate after all expenses have been deducted. Our cash flow may not be positive right now, but understanding this metric can help us identify future opportunities.
During a recent Passive Real Estate Academy meeting, one of our community members asked an important question: And how do I calculate real estate cash flow?'' The best way to do both is to look for properties in areas with a history of resilience and growth. Consider the possibility of rent increases and expense controls. To calculate your potential cash flow, simply subtract your expenses from your rental income. Note that this formula does not include debts on real estate.
This downturn, when inventory stays on the market longer, is the best time to identify such properties.
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Key Metric 2: Internal Rate of Return
Investors are often driven by a common concern: What is the potential lifetime return of an investment? Internal rate of return (IRR) is a metric that answers that question.
IRR provides a comprehensive view of an investment property, detailing its potential performance over time when all cash flows and the time value of money are considered. This is especially relevant and important now, as our goal is to evaluate long-term investments that can survive the economic winter and thrive in the future.
At a meeting last fall, members of the Passive Real Estate Academy asked: What do you look for? And can you still find a deal? ” Here’s what to look for. A good IRR in this day and age is one that outperforms other investment options while taking into account the associated risks. The key is to find investments that have the potential for stable growth once the market recovers. If you do the math, his IRR for a successful investment will be more than 10%, and the best one will only be 18-20%.
Key Metric 3: Capital Multiplier
The capital multiplier tells you how much profit you can make on your total investment. As you can see, this is an important metric to understand.
It is calculated by dividing the total amount of distributions received from the investment by the total amount of invested capital. For example, if he deposited $100,000 in a trade and he got back $200,000, he would have doubled his initial investment and made a sizable profit of $100,000. In other words, his equity multiple will be 2.0x. The higher the equity multiplier, the better the investment opportunity.
How do you evaluate the right equity multiple during an economic winter? The answer lies in looking for passive real estate investments with a high potential for growth and recovery. Emerging market properties and properties with unique value-add opportunities tend to offer higher equity multiples once the economy recovers.
Key Metric 4: Cap Rate
In some markets, prices appear to be astronomical. How can you be sure that a good is priced accurately? The cap rate allows investors to determine whether a property is priced fairly by comparing the potential returns of comparable properties in the market. This is an indicator for determining. This allows us to assess the intrinsic value and income potential of a property, independent of market ebbs and flows.
The cap rate is calculated by taking the property's net operating income (NOI) and dividing it by the property's current market value.
When markets are volatile, understanding cap rates is more important than ever. At a recent gathering, a member of the Passive Real Estate Academy asked, “How do cap rates work in a down market?” That's a great question! If the market is in decline, real estate cap rates may increase. A higher cap rate usually indicates higher potential returns, but it can also indicate higher risk.
To consider risk, it is essential to analyze why cap rates are high. Is it due to market conditions, property location, or other reasons? Answering questions like these will help you compare properties in different markets and choose the one with the best promise of stable income as the economy recovers. I can.
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How to survive real estate investment during economic downturn
We now have an investor's version of guiding tools: a compass, a map, and a star. Although the current economic climate is challenging, it is also a time rich with learning opportunities and potential for future growth. Now is the time to build resilience in your real estate portfolio amid economic uncertainty.
The world of passive real estate investing is vast and full of opportunity, but it's essential to navigate it with the right tools at your disposal. You will be equipped with the knowledge to make informed decisions to maximize your profits with passive real estate investing.
As you explore real estate opportunities, keep adding tools to your tool belt. Join Passive Real Estate Academy and the many other communities and conferences available through Passive Income MD. There you can join, network and learn from a community of like-minded people. You will also receive regular updates on market trends, investment opportunities and strategies. We look forward to supporting you as we weather this economic winter together.
We hope to work with you in one of our communities soon. Until then, stay curious. And remember, the biggest investment you can make is in yourself.
Peter Kim, MD, Ph.D. passive income mdcreator of Passive Real Estate Academy, we provide weekly education through our Monday podcast, the Passive Income MD Podcast.join the community Passive Income Documents Facebook Group. And let us know what you have planned for the new year in the comments section below.
