Category Archives: Investing Basics

How to Quickly Determine the Value of Commercial Property for Sale

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The value of a commercial property for sale is determined by using some simple formulas that are based upon the amount of net operating income that the property produces each year. So when you are looking at a commercial property for sale, one of the first things that you’ll want to ask the broker for is the profit and loss statement.

Some brokers who have listed a commercial property for sale may refer to this profit and loss statement as an IPOD, or income property operating data sheet. Once you get the IPOD, or profit and loss statement, you can then compare the information provided by the broker or seller to your other sources to help determine what the real numbers are. The challenge when looking at any commercial property for sale is that the broker and/or owner will often tend to exaggerate the amount of income that the commercial property for sale produces while also trying to minimize the amount of operating expenses that are reported.

How to Determine the Value of a Property for Sale

The reason for this is simple. The value of any commercial real estate is based on the amount of net operating income the property creates each year. In fact, each additional dollar of annual income increases the value of the property by roughly ten dollars, depending on where the property is located, and how old it is. Note that this extra net income can come from either getting additional revenue in rents, or from reducing expenses by managing the property more efficiently.

Once you understand that owners of commercial real estate will tend to present unrealistic numbers in an attempt to get a higher price for their property you’ll understand better why it’s necessary when looking at any commercial property for sale to get to know the market you are investing in. When you know what the rental rates in an area tend to be or what the typical expense ratios are for a twenty-five year old apartment building then it’s much harder for the broker or owner of a commercial property for sale to attempt to pull the wool over your eyes.

Verifying the Income and Expenses

The first step in verifying the income of a commercial property for sale is to ask for the rent roll. The rent roll is a list of what each apartment, self storage unit, mobile home lot, or office space rents for. Make sure that you get the actual rent roll because the owner or broker of a commercial property for sale may try to give you a Pro-forma rent roll instead of the actual rent roll. Pro-forma means that there is an expectation, realistic or not, of getting higher rents than the property is currently getting. My response to this has always been, “If you raise the rents up to match the pro-forma, then we’ll use the higher income amounts, otherwise we’re going to base our valuation on what the property is currently producing in income.

When looking at the expenses from a commercial property for sale, remember that you’re trying to come up with the actual amount that it will cost you to operate the property rather than what the seller’s expenses have been. So while it’s helpful to know exactly what the seller’s costs have been, I’ve learned NOT to rely on the information provided by the seller when looking at a commercial property for sale because this information is almost always inaccurate.

A Simple Formula to Use for Expenses

The expenses will vary depending on the type and age of the commercial property for sale. For example, if you are looking at buying a Class C apartment building which is at least twenty-five years old, then the expenses will run between 45 to 50 percent of the collected income each month. The collected income, known as the Effective Gross Income, is what’s left after the cost of vacancies are subtracted from the total amount of rents on the rent roll from the commercial property for sale.

The final step in determining the value of a commercial property for sale is to divide the net operating income by the capitalization rate, which varies from about 6 to 12 percent depending on the type of property, the age, and the location of the commercial property for sale. The fastest way to get an idea of what capitalization rate you should be using when looking at a commercial property for sale is to ask another broker who is not involved in the transaction.

Using Escape Clauses to Limit Your Risk

Another way of protecting yourself when looking at any property for sale is to make sure that your purchase contract allows you a period of time to get out of the deal if you are not comfortable with anything that you find. Done properly, you can often tie up a property for 60 to 90 days so that you have time to accurately determine the real value. This makes it easier to look at commercial real estate, because you can get out if you have the right escape clauses.

Learn how to tie up any commercial property for sale for 90 days using a simple addendum when you get your Free Multiple Streams of Income Insider’s Guide at http://RealEstateInvestments.net/free-report

Peter Conti is a Wall St. Journal bestselling author who lives in Annapolis, MD with his wife, kids, and his dog, Snickers.

Article Source: http://EzineArticles.com/?expert=Peter_E_Conti

How recent grads can learn the investment ropes

How recent grads can learn the investment ropes

By Walter Updegrave

From CNN Money

(Money Magazine) — Question: I’m a recent college graduate who has a decent job that pays the bills. I also have around $10,000 in a savings account and contribute $100 a month to my 401(k). How should I begin to invest my money? Should I go to a broker? Manage it on my own? Help! –Sophia, New York City

Answer: Let’s see. You’ve managed to snag a job in an employment market that’s incredibly challenging, especially for recent grads. You’ve got a tidy sum tucked away in a safe place that can help you deal with emergencies and unexpected expenses. And you’re saving on a regular basis for retirement.

Hey, maybe you should be the one counseling new graduates.

Seriously, financially speaking at least, you’re off to a great start. The trick now is to build on the foundation you’ve already laid by assuring that the money you save throughout the rest of your career is invested in a way that gives you a reasonable shot at financial security.

Given all the turmoil in the economy, I can understand that you may feel some trepidation about venturing into the investing arena all alone. But if I were you, I’d at least consider going it on my own as opposed to working with a broker or other adviser.

Why? Well, assuming you’re not going to be investing big bucks, it’s unlikely you’re going to get much quality time and attention from an adviser. You’ll probably end up with a few perfunctory fund picks from some firm’s recommended list. That’s hardly the end of the world, but it’s not a very high bar for a reasonably intelligent and motivated person to match. And you could do worse, ending up with someone who does stay in touch, but only to move you from one investment to another, generating commissions in the process.

Besides, you’ve shown some pretty good instincts about your finances so far. So why not expand your repertoire of money moves to include some basic but effective investing strategies that can serve you well throughout the rest of your life?

The best-kept secret on Wall Street is that investing doesn’t have to be complicated. You don’t have to track the Dow every 10 minutes or pore over every pronouncement from the Federal Reserve. And you certainly don’t have to sift through each of the thousands of stocks, mutual funds and ETFs available to find decent investments. If anything, I’d say you’re better off keeping it simple.

What you do have to do in order to be a successful investor, though, is have a basic understanding of how the financial markets work and learn how to put together a portfolio of investments that can grow over the long-term without getting so obliterated every time the market takes a dive that you bail out.

There are a number of ways to gain that knowledge. A great way to start is by going to our Money 101 section, where you’ll find easy-to-read pieces on all the important aspects of personal finances. You can begin with theBasics of Investing, which will give you the lay of the investment land, so to speak. From there, you can move on to the lessons on mutual funds,stocks and bonds.

After that, you’ll want to turn your attention to the granddaddy of investing topics, Asset Allocation, which is a fancy term for spreading your money around so you don’t get wiped out should any one type of investment tank.

Other places you can go for a good grounding in investment basics are theUnderstanding Investing section of Mint.com and the Start Investing area of Morningstar’s site.

If you’re more into books, you might try The Little Book of Common Sense Investing by Vanguard founder and small investor advocate John Bogle;How A Second Grader Beats Wall Street by Allan “Dare To Be Dull” Roth; and That Thing Rich People Do by Kaye Thomas, whose Fairmark.comsite is also a font of sensible info on all things Roth.

What I like about this trio of authors is that, unlike many experts who spew out ultimately useless details on specific investments or tout some arcane strategy that works in hindsight, they actually inform you about investing principles. In short, they provide the proverbial net, not just a fish.

Of course, becoming a confident investor takes time and experience. So take it slow and move methodically. I recommend you start with mutual funds, and consider index funds in particular. If you’d like a few fund suggestions to help you get started, you can check out our Money 70 list of recommended funds.

You’re going to make mistakes along the way, so don’t get rattled when that happens. The key is to avoid making extreme moves, so that you’ll be able to recover reasonably quickly from missteps.

If you decide you prefer some help to going it alone, you’ve got several choices. Most major investment firms and mutual fund firms, including biggies like FidelitySchwab and Vanguard, have investment advisory divisions that will manage your investments for a management fee (say, 0. 5% to 1% a year) in addition to the underlying annual fees of the fund itself.

Or you might try hiring a financial planner on an hourly fee basis. The planner can help you create a basic portfolio and make some good low-cost fund recommendations. You can then take over from there. If you decide you need more help later on, you can consult the planner again for an hourly fee. At this point, only a small number of planners are willing to work under this kind of arrangement, but you can find some by going to theGarrett Planning Network or to an online service likeMyFinancialAdvice.com. The hourly cost for these types of services varies from planner to planner, but $150 to $250 is typical.

And don’t forget to check out your 401(k) plan for assistance. Most plans today offer some type of guidance, ranging from online calculators that show how different mixes of stocks and bonds affect your future retirement prospects to managed accounts, where you turn over your account to an outside investment firm that will create and manage your 401(k) money on an ongoing basis (for a fee, of course).

And if nothing else, many 401(k) plans offer the option of investing in atarget-date fund, which gives you a diversified portfolio of stocks and bonds in a single fund. These funds aren’t perfect. But they’re reasonable choices for investors who would do a lot worse on their own, and they’re certainly a decent place for someone like you to stash your retirement savings while you get your investment bearings.

So why not begin steeping yourself in the ways of the financial world now by checking out some of the resources I’ve mentioned? Even if you ultimately decide you prefer working with a pro to flying solo, the more you know about investments and markets, the more informed your financial decisions will be.

Investing 101: How Bonds Are Priced

Investing 101: How Bonds Are Priced

By Michael C. Thomsett

From Mint.com


Editor’s Note: Few things can kill a cocktail conversation like bond talk — and we are obviously not talking about the kind of bond preceded by “James.” Not only do most people think bonds are boring, they also find them incredibly confusing. If you want to be a smart investor, though, you should know where your money is going — and that includes understanding bonds and their most complex feature, pricing.

This week, MintLife presents the third article in our Investing 101 series, provided by Minyanville.com.

A bond is referred to as a debt instrument. The corporation or government issuing the bond promises to repay the full value of the bond, or par value, with interest and by a specific due date.

A 3% bond with a par value of $1,000 is a contract between the issuer and the bondholder, where the issuer pays annual interest of $30, or 3% of the par value. On maturity date, the par value of $1,000 is repaid.

Because bond interest rates are fixed, but market rates are constantly changing, bond values also change all the time. When interest rates are higher than that offered by a bond, that bond becomes less desirable. As a result, that bond will be worth less than its par value and sell at a discount.

If market rates fall below the bond’s fixed rate, the bond becomes more attractive and it starts selling at a premium.

For example, when a bond is at 102, it is worth $1,020, or 2% above par value. If a bond is at 97, it has been discounted to 3% below par value.

The changes also affect the yield on the bond.

No matter what its current market value, the bond always pays the same interest. A 3%, a $1,000 bond pays $30 per year:

Interest rate x par value – Interest              (3% x $1,000 = $30)

This so-called current yield is also calculated by dividing the interest paid per year by par value:

Interest ÷ Par Value = Interest rate              ($30 ÷ $1,000 = 3%)

If a bond is selling at a premium or discount, however, the nominal yield on that bond is going to be different.

For example, when that $1,000 par value is worth 102, or $1,020, the nominal yield is reduced:

$30 ÷  $1,020 = 2.9%

This is only a slight difference; but for institutional investors relying on bond yields for millions of dollars, it adds up to a lot of money.

If the bond is selling at a discount, on the other hand, the nominal interest rate is higher. For example, if a bond with par value of $1,000 is at 97, the calculation for nominal yield is:

$30 ÷  $970 = 3.1%

No matter how much a bond’s current value changes, at maturity the par value ($1,000 in these examples) is always paid. If you purchase individual bonds with the idea to hold them to maturity, in other words, you could only take into consideration the bond’s current yield.

But things get more complicated if you purchase bonds on the secondary market, at a premium or a discount.  In those cases, a more complex calculation of yield to maturity comes into play, including a combination of interest plus the net discount or minus the net premium. The adjustment is spread over the time remaining to maturity. So an investor buying a bond at premium or discount has to be concerned with three different versions of yield: Current yield, nominal yield, and yield to maturity.

Because debt investments are complex and contain a range of risks, most new investors will opt for money market or income mutual funds. In that way, they rely on professional management to pick bonds and other debts to include in a diversified portfolio.

Michael C. Thomsett is author of over 60 books, including Winning with Stocks and Annual Reports 101 (both published by Amacom Books), and Getting Started in Stock Investing and Trading (John Wiley and Sons, scheduled for release in Fall, 2010). He lives in Nashville, Tennessee and writes fulltime.

Investing 101: How Bonds Are Priced was provided by Minyanville.com.

Investors Still Stash $ for Retirement

Investors Still Stash $ for Retirement

By Joanne Kuster

Even the stock market’s wild gyrations in 2008 didn’t deter investors from funding retirement accounts.

According to a report on trends from Principal Financial Group Inc., 19.2% of investors participating in retirement programs increased 2008 contributions while 16.5% stopped or decreased contributions.

The report looked at about 44,000 retirement plans in 2007 and about the same number in 2008–all services of Principal.  In total, the average retirement account balance was down 28.5% in 2008, giving up most of the gains made in 2007. Investors under the age of 50 suffered the largest decrease in their accounts–32%.

7 Deadly Sins of Trading Stocks

7_deadly_sinsAll right, so they won’t kill you, but if you violate any of these stock market sins, you may kill your portfolio.

LUST

Sure, it’s pretty and shiny and brand new, and of course “all the other kids are investing!” But you should never fall in love with a stock without doing the research. Think of it as doing a background check on the new love of your life. Often, when the rest of the market is in love with a stock, you can take a contrarian approach and wait for that love to fade. There are exceptions of course, Google being one of the ones that pop to mind. Everyone lusted over this high priced behemoth from the IPO and sent the stock price soaring into the stratosphere. Had you loved that ride, you could have pocketed a pretty profit. But if you were in love with the stock, and held on too long, you would have learned one of the hard and fast rules of trading stocks. What goes up will come down. If you keep your stock lust in check, your portfolio should stay safe.

ENVY

You may want to play like the big players in the market, you may wish you had a huge portfolio that affected volume, and in some sense, could determine the direction of a ticker price on any given day. Stop wasting your time, effort and energy. You are not one of the big boys, who control hundreds of thousands of shares of stock. You may end up at that point in the future, especially if you are following the advice of a trusted professional and learn how to use options, but for now, your foray into a day trading career should not have room for comparing what you do to what “they” are doing.

You are growing your own portfolio in your own fashion using detailed research and analysis to be sure you don’t lose your nut. Envy is a wasted emotion. But that isn’t to say you shouldn’t have goals. You should watch what the giant funds are doing to determine if you can take a position on a stock and pull a profit. If your goal is to make $200 a day in the market as part of your day trading job, then learn how to read volume plays, and you could reach that point from other’s actions. That’s not stock envy. Just plan each entry and exit point carefully, which leads us to the next deadly sin tomorrow.

GREED

If you envy what other stock traders are doing, and you want what they have, you may take a position on a trade, and then feel consumed with an overwhelming feeling called Greed. We all know what greed feels like. We have some, and we want more, and rational thought be damned. When you execute your trade strategy, you need to have clearly defined entry and exit points to protect your profit and capital. Greed can make you hang onto a stock too long trying to make a little more on it. But when you do your research, and set your limits and stops so you walk away with set profits or loss, you are eliminating greed from your mindset.

Remove emotion from your investing mindset and you will be a successful trader. Another way greed gets us in trouble is through “hot tips.” Every message board is full of anonymous postings about the next big thing that’s going to skyrocket due to blah, blah, blah. Remember when I suggested getting advice from a professional you trust? Don’t trust any poster that doesn’t use their real name. Why would you take advice from “secret1122” or “chitownkilla07” telling you their inside secret on a stock? Greed. Here’s the thing, everybody has a hot stock tip, because they know the cousin of a neighbor who knows a guy who works on Wall Street and he heard . . .

The bottom line is for you to know your source. Now if your source is a neighbor, who has a cousin that was just laid off from a company’s factory, and they tell you this is the first of three or four rounds, hit the internet, research it quickly, and determine if that company is in trouble, and how it will affect the stock price. Just don’t get greedy when you place your orders.

SLOTH

You cannot be lazy and be a good stock trader. You may make some initial money following the advice and actions of others, but eventually you are going to need to learn the language so that you can get good at your trades. It’s all about control. Are you too lazy to take control of your financial destiny? Research is not hard, especially with the multiple tools available to you on the internet.

There is no excuse for sloth in stock trading. Would you move to a new country and never learn how to navigate the streets, where the best stores and pubs are located, or how to speak the language? Of course you wouldn’t. In fact, immersion is one of the best ways to get up to speed quickly on anything. One of the best ways to prevent yourself from being slothful when it comes to stock trade is to establish a schedule. Plan one hour of research before the market opens, and an hour or two after close.

Listen to what the talking heads are spewing, read the headlines and news stories, set your RSS feed for alerts based on your stock choices for the day, and stay on top of your trades. Even longer term trades need a little attention, since a badly timed trade or natural disaster can wreak havoc with your best laid plans. Your plan is what will make you a successful day trader, and no plan can exist without doing the legwork (or keyboard work!) It’s difficult to create a good workable plan if you let sloth take over. That’s not to say you can’t have days where you “check out” or take a vacation.

One of the attractions of a job trading stocks is the ability to control your work week, and hours based on your own personal goals. You could make your weekly profit goal (paycheck) in the first two days of trading, and relax for the next five, or you could have a set four day work week, or even a 4 hour work week that involves the actual placing of stops and limits, with the rest of the time belonging to you. Just remember, that kind of lifestyle isn’t for lazy people. It’s a reward for people who believe in hard work while they are working so that they can enjoy the fruits of their labor. There’s no laziness involved, just careful planning.

GLUTTONY

Have you ever been to a family dinner where all of your relatives are gathered and eaten so much food that you are miserable? Or gone to an all you can eat buffet and revisited the food bars so much you can barely waddle out to your car once it’s all over? That’s called gluttony, and it’s especially bad in a stock trade. But how can gluttony in a stock setting be bad, you ask? Doesn’t that mean you’re being stuffed with profit? Gluttony means you’ve forgotten the rules and limits you’ve set for your trade and you’ve thrown control out of the window.

Gluttony is what leads to a market like the one we are experiencing now, and what led to the hedge managed funds that plundered hundreds of thousands of 401K’s. It’s what keeps you in a trade too long, and makes you lose sight of the long term goal. You should make money in your stock trading career and our hope is you make a lot of money every day. But we suggest you make it through careful planning and execution.

If you are on a hot stock run, play it out, but stay on top of it so that greed doesn’t take over and you wreck your whole plan. There’s a difference between walking away and leaving money on the table and losing out on triple or quadruple profits because your plan and research didn’t have a contingency for it. Gluttony is one of those stock trading sins that has a very fine line. Learn to recognize the line, so that you can push away from the table before you’re stuffed to misery.

WRATH

Let me give you rule number one of trading stocks, and you need to put this up somewhere that you’re going to see every single day. You are going to lose money on a stock trade. It happens because the stock market is a lot like a living breathing creature that can take on a life of its own. You can plan, you can conduct research, and still hit a run of bad luck that can decimate your nut. You cannot get mad at the market, at your fellow traders who may be making money, or at your advisors.

Anger serves no purpose other than to fog your brain and make it more difficult to think of a way out of the downward spiral. In the 90’s there were a string of day trader shooting sprees based solely on wrath. Idiots were expecting to make millions and they wanted it overnight and didn’t want to put in the time, effort or research to make it happen, and when they lost money, they took it out on innocent people with violence.

Wrath has no place in the stock market. The harsh truth is maybe you are not cut out to be a day trader. Not everybody in the world can be a rock star, because not everyone can sing. And that’s okay. You don’t have to be a superstar trader to make money in the stock market but if you don’t have the patience, fortitude and discipline to realize that you will have bad days with the good, and the emotional maturity to handle a bad day, then go do something else.

Flip burgers with a smile, and be the best damn burger flipper the fast food joint has ever seen and you will rise in the ranks of that company like a rocket. But being a stock trader means taking the downs with the ups, and being a good trader means executing your heavily researched plan without the emotion of anger. You can’t control the weather, and you can’t control the market. You can only control how you react to the weather and the market, and it makes zero sense to be angry at either.

PRIDE

Especially now the market has shown us how the mighty have fallen. Pride is the source of many decisions that have an effect on our portfolios. Here’s the secret to keeping pride in check. You cannot know or control everything. Once you accept that secret, and take it to heart, you will open yourself up to a whole world of information. Pride prevents you from learning new things about stock trading, or to listening to information and knowing how to apply it to your trading plan.

Pride turns you into a “know it all” and you know what they say about people who think they know it all right? They annoy those of us who do. Just kidding, but seriously, if you approach every trade from the position that you will walk away from the transaction knowing more than when you went in, you will never have a bad trade.

You may lose money, but you will learn what not to do next time, which turns your loss of profit into an educational opportunity. So instead of losing money on the stock trade, you invested in your education. Pride can prevent you from learning, and lack of learning can make your nut disappear. Remember how you learned to ride a bike? You fell down a lot, until you learned to pedal and balance, and steer all at once.

Even as you were learning, you knew you were going to fall, and the wobbly struggle was trying to put it off for as long a possible. But still, you fell, and you kept trying, until know, riding a bike is second nature for most of us. Learning in the stock market is like that, except you need to keep researching and keep gathering information every day so that you wobble your way to profit time and time again. Don’t let pride keep you from making money. But don’t be so humble that you don’t celebrate your accomplishments either. Being a successful day trader and controlling your own financial destiny is something to be proud of.

[Article Source: Jacob Lindahl]