Date post: | 17-Jan-2017 |
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Real Estate |
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Greg Toschi CEO & Co-founder
Welcome to the Network
Fred Glick VP of Real Estate Ops Broker of Record
Qualifying a Buy and Hold Investment
Tucker Smith Marketing Coordinator
“Everyday skills can yield extraordinary returns.
- One of first four employees - Editor: ‘Build with Onerent’ (Blog)
- Market Research - Customer Research
Tucker Smith Marketing Coordinator
Fred Glick VP of Real Estate Ops
- Broker of Record for Onerent - CEO of Arrivva - Licensed Broker and Loan officer for # years
How This Might be Useful to You • If you inherited your property, and have never bought
one. • Don’t go through what I did. Use this as a starting point and
road map.
• If you’re looking to become more efficient at qualifying deals • Your time becomes more valuable as your portfolio scales.
This gives you a process that you can tailor to fit your needs.
• If you haven’t taken a finance class in the last 10 years • Everyone forgets math at some point. Even the most
seasoned investors might find, or rediscover a golden nugget.
Overview
Properties make money in 4 ways 1. Cashflow 2. Appreciation
Deal Funnel Process
Cashflow Analysis: In the Moment
Cashflow Analysis: Over Time
3. Asset Attainment 4. Tax Benefits
Deal Sorting Funnel
• Data overload • MLS, Redfin, Zillow, Trulia,
Investing Events, etc.
• Time = Money • The faster you close deals,
the longer your money has to work for you
Lead sources
Rules of Thumb Rent/Purchase Price
50% Rule
= 1.5% “Most properties that are over X% in this market usually generate positive cashflow”
States that at least half of your rental income is likely to be allocated to non-mortgage expenses (maintenance, insurance, or property management)
Rules of Thumb cont.
Vacancy Turnover • How long until I start getting paid? (Will I have to fix it up?) • Judgement call • Price, condition, lease terms, time of year, etc. • Average vacancy reports
Cashflow Analysis: In the Moment
Annual Property Operating Data (APOD)
• Can be thought of as a property balance sheet • Foundation for the rest of our
analysis • Annual Net Operating Income
Calculations that give insights to a property at a specific point in time
Cashflow Analysis: In the Moment
Annual Expected Income • Dictated by the market • Compare properties of similar size, condition, location, and
amenities • Mapliv.com
Vacancy Loss • % of Annual Expected Income • Lenders will want a figure • Safe estimates: 5% in average markets, 2% in hot
Gross Operating Income • Income generated by a property pre-operating expenses
Cashflow Analysis: In the Moment Operating Expenses
• Expenses associated with operating a property • Maintenance, utilities, and insurance • Mortgage payments and depreciation expenses do not count
Gross Rent Multiplier (GRM) • Used to estimate property operating expenses • Similar investment properties à produce similar incomes à
sell for similar amount à similar operating expenses.
Cashflow Analysis: In the Moment Property Value = $150,000 Annual Expected Income = $20,400 GRM = 7.5
• Your property is valued roughly 8 times higher than the yearly income it produces
Perform on similar properties in the market. Compare GRM’s to confirm that the prospective property’s asking price is fair. If the asking price is fair, then you can roughly equate their operating expenses to what yours will be.
Cashflow Analysis: In the Moment
Net Operating Income (NOI) • Cash produced by property if it
were paid off and tax exempt • Used in a lot of calculations
Start your analysis by forming an APOD • Creates loose operating budget
Cashflow Analysis: In the Moment Cap Rate • Expresses relationship between NOI and
property’s market value
Market Value = Investment Amount NOI = Return on Investment Cap Rate = Rate of Return
Expresses cap rate as a percentage
Check to see if asking price is fair
Target NOI based on desired Cap Rate and Market Value
Relationship can be manipulated to reveal a lot of info
Cashflow Analysis: In the Moment
Debt Coverage Ratio = 1.0 • You have exactly enough left to pay
the mortgage
Debt Coverage Ratio > 1.0 • Can pay mortgage + extra cashflow
Debt Coverage Ratio < 1.0 • Will have to pay some of mortgage
out of pocket
Debt Coverage Ratio • Can I pay my bills? • Shows how much money you have
available for Annual Debt Service w/o losing money • Remember 50% rule
Cashflow Analysis: In the Moment
Default Ratio • Shows lenders how likely a property is to defaulting on mortgage loans • Most want to see something below 80-85%, but it’s case-by-case depending
on the market conditions
Cashflow Analysis: Over Time
Time Value of Money • A dollar today is worth more than a dollar tomorrow • “Today dollars” have the potential to be invested and increase in
value • Due to inflation, the dollar’s buying power decreases as time
passes
Cashflow Analysis: Over Time
Compound Interest • Calculates interest for the next period of a loan • Based on principal + previously accumulated interest
Cashflow Analysis: Over Time
If inflation was 10% between years 1 and 2, then you’d actually have…
Present Value of a Future Cashflow
Tells you what your investment is worth in today’s dollars
Year 1: Invest $100 Year 2: Money grew to $109 r=discountrate(expecteddecreaseinbuyingpower)
I made $9 right? Not necessarily.
Cashflow Analysis: Over Time
Discounted Cashflow • Sum of present value of all future
cashflows • Calculated year by year with PV
equation • Use excel template
Cashflow Analysis: Over Time Net Present Value (NPV) • Closely related to Profitability Index regarding the amount you pay
for future cashflows • Am I going to reach my desired rate of return? (single property)
Profitability Index • Also shows rate of return of a property • Provides a ratio that makes it easy to compare multiple
properties
Cashflow Analysis: Over Time
Cashflow Analysis: Over Time
Property A produces
higher returns per dollar
Cashflow Analysis: Over Time Which loan is better? • Depends on how long you
keep the property, and how much you save each year on interest by taking the points • Use excel template
Calculating a Mortgage • Typically structured so that the
principal amount and interest payments are paid monthly over lifetime of loan
Calculating Points • Prepaid interest on mortgage
loans • 1 point = 1% of mortgage
Basics of Analyzing Appreciation Network
• Agents • Brokers • Property Managers • Other Investors
Basic Market Factors • Job Growth – Does it rely on a single industry? How stable
is that industry? • City expanding Infrastructure – “18-hour city” • Average Rent • Average Sale Price • Average Vacancy Time
Links Ebook + spreadsheet template
http://content.onerent.co/buyandholdguide
Building a Repeatable Model http://content.onerent.co/buyandholdguide/part2
Tax Strategy Guide http://content.onerent.co/buyandholdguide/part3
‘Build with Onerent’ http://blog.onerent.co
Rent vs Sell?
Greg Toschi CEO & Co-Founder
“The Bay Area still shows strong trends towards of a growing rental market.
Is The Bay Area Still On Top?
The San Francisco Bay Area is still in the top 5 fastest growing markets
Is The Bay Area Still On Top?
Bay Area rent growth is the strongest in the nation.
Why Are We Still on Top?
Why Are We Still on Top?
Purchasing trends of Millennials
Why Are We Still on Top?
The Current State of Real Estate Financing
“Hack your way into a better mortgage rate today.
Fred Glick VP of Real Estate Ops Broker of Record
The Standard Mortgage
Types of real estate financing: 1. Primary residence 2. Secondary residence (vacation) 3. Investing
The Standard Mortgage: Qualifications
How to get pre-approved 1. Property 2. Personal income and property income 3. Assets including reserves 4. Credit
The Standard Mortgage
Fannie Mae and Freddie Mac (1-4 unit residential financing) Maximum Mortgage
$625,500 $800,775 $967,950 $1,202,925
Units 1 2 3 4
Max Loan to Value
85 80 75 75
Down payment 15% 20% 25% 25%
Specific for Bay Area homes
Non Standard Mortgages
Available Programs - Stated income - Non warrantable condos - Low credit score - Over 4 units
Income calculations: - Debt service coverage - Recourse or non recourse financing - Interest only - Terms
Non Standard Mortgages
Income calculations: - Debt service coverage - Recourse or non recourse financing - Interest only - Terms
Hacking Your Mortgage, Legally!
How to buy a 1 or 2 unit property with 3.5% down payment • The “kiddy condo” • Use your relatives • No income, or assets needed Seller financing • Pay less for your down payment • Befriend your lender
Hacking Your Mortgage, Legally!
Free tax deductions from your seller • Negotiate hard • Get tax deductions for “points”
Owner & agent network
Owner & agent network
Rick Trevino Don Sung
Intero Real Estate
Colliers International
How we can help you