Cash Is King - Cash Flow Is Emperor
Until the recent downturn, home prices in California had climbed to the point where they no longer bore any relationship to rental income potential. In many Californian neighborhoods a property that could only command $1800 in rent would sell for $800,000 because the driving consideration was appreciation potential. As a result of the correction in the market, the relationship between rent and price has become much more meaningful. In the stock world this relationship is called a price earnings multiple or a price earnings ratio (P/E Ratio). For example, if a stock is trading at $100 per share and the company is earning $10 per share, the P/E Ratio is 10. Home prices have dropped so dramatically that I have begun to apply the P/E Ratio approach to the analysis of rental properties and have found it to be a very powerful way to determine which investments going forward make the most sense. Part of the reason for this shift is that the severity of this market has made it exceedingly difficult to determine when properties will realistically begin to appreciate again. This uncertainty, combined with the tightening of the credit market, has made rent-to-price comparison critically important because investment properties must cash flow. Using the example of the property mentioned above, the calculation goes as follows: $1800 in monthly rent equals $21,600 per year. So, at a price of $800,000 that would yield a P/E Ratio of 37. The property featured in this newsletter several issues ago was $119,000 with rental potential of $1600. That is a P/E ratio of 6.2. Big difference. As future appreciation potential becomes increasingly more difficult to discern, P/E ratio analysis will become more important. Click here for our analysis of P/E ratios for a typical 3 Bedroom, 2 Bathroom detached house 1800-2000 square feet in the following 10 cities in Southern California: Irvine, Anaheim, Temecula, Hemet, Ontario, Covina, Pasadena, Mid-Wilshire Los Angeles, Burbank, Studio City
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LOL - Laughs OnLine
Borrower: "But I have a 750 FICO score."
Lender: "I don't care what your FICO is!"
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What Color Is Your Age? 
Recently, I was watching an interview of a man with autism who is considered an idiot savant because of his mathematical ability--a real life Rainman as it were. The interviewer would ask him to multiply two 4 digit numbers like 4965 times 3898 and he would instantaneously answer with the 8 digit product 19,353,570. Now, we have all heard of amazing abilities like this but what was interesting about this individual was his explanation of how he does it. He explained that numbers have characteristics that make them unique to him. For example, "42" might be tall, chubby and lavender; "87" might be short, skinny and burgundy; "38" mean and rude; "12" talkative and empathetic. Multiplication then was like gathering friends together. These numbers were his acquaintances and he had a lot of them. I'm lucky if I can get three guys together to join me for a game of pool. As he described the various numbers his fondness for this eclectic group of friends and associaties was quite apparent, and I thought isn't it incredible that no matter what the task, we perform it better if we care?
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Share If You Care
Our goal with this newsletter is simple: cover every important topic that might help homeowners and investors make more informed decisions concerning real estate. You can help in
two ways:
1) Send us any articles or information you come across that might be of interest to other readers
2) Forward this newsletter to anyone and everyone you
know that owns or plans to own real estate!
Sincerely,
Kwame J. Granderson
Equinaire
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Join Us For A Special FREE Saturday Webinar
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Topics include:
· How will the $700 billion bailout effect you?
· How key economic indicators help us better understand the real estate market.
Saturday, November 22
10 AM - 12 PM
Register by clicking Here
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Did You Know?
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Did you know that a snail can sleep for 3 years?
Did you also know what most people think of as the value of their property and what the county assessor uses for tax purposes are not necessarily the same?
Click here to read more
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Free 401k Investment Webinar
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How to use 401k's and IRA's to Purchase Real Estate
Learn How To...
1. Roll money from a 401k to a Self-Directed IRA
2. Buy property and pay NO tax on the income
3. Sell property and pay NO capital gains tax
Date: January 13, 2009
Time: 7PM - 8 PM
Register by clicking Here
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Investor Tip
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If you own multiple properties, consider using an umbrella insurance policy instead of carrying high-dollar liability coverage on individual policies.
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Need a Loan Modification?
Amerestart Can Help
Call 877.619.3258
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