Five Markets for Buy and Hold Multifamily Investors

Thomas WinfieldJuly. 23, 2016

Prediction is very difficult, especially if it's about the future.---Niels Bohr

• This is not a solicitation or offer•Nothing in this presentation is meant to be Legal, Tax

or Financial advice•Consult your Lawyer for legal advice•Consult your Tax Advisor for Tax advice•Consult your Financial Advisor for Financial advice

Outline• Rationale and Selection Criteria

• Selected Markets

My Assumptions:

• Buy and Hold (3+ Years)• Multifamily Property• View of Market (MSA) rather

than submarket or property

Criteria for Selecting a Market• Population Growth

• Primarily from Net Migration• States With Large and Growing Populations

• Workforce• Income Growth• Educated Workforce

• GDP/GSP• Diversified Economic Base• Good Debt Rating

• RE Cycle Phase• Real Estate Prices Not Volatile

Virtuous Circle for Economic Growth

Population Growth

Talented Workforce

Increase in Job OpeningsIncome Growth

A Growing Population and Talented Workforce Creates a Demand for Real Estate

The Population of the South and West is Increasing Faster Than the Northeast and Midwest

Howdy Y’all

Follow the People

States with higher net migration are best for real estate investors

South and Western States With Population Growth

South

• Florida

• Georgia

• North Carolina

• South Carolina

• Texas

Western

• Colorado

• Utah

• California

• Nevada

• Washington

• Oregon

Follow the Money:Growth in State’s Gross Domestic Product (GDP)

South and Western States With GDP Growth

States With Large Percentage Increase in GDP Will See Greater Increase in Population

Median Household Income

Personal Income Growth is a Measure of Economic Growth

Educational Attainment-College Graduates

Educated people are less likely to be unemployed and more likely to earn more money.

State Business Climate As Measured by CNBC

CNBC Ranking Categories:• Workforce • Cost of Doing Business • Infra-structure • Economy • Quality of Life • Technology and Innovation • Education • Business Friendliness • Cost of Living • Access to Capital

CNBC Ranking State Best Ranking Worst Ranking

1 Utah Economy Access to Capital

2 Texas Economy Education

3 Colorado Workforce Cost of Doing Business

5 North Carolina Access to Capital Quality of Life

6 Washington Tech & Inovation Infrastructure

8 Georgia Infrastructure Quality of Life

10 Florida Economy Cost of Doing Business

17 Oregon Economy Business Friendliness

27 South Carolina Cost of Doing Business Education

32 California Tech & Inovation Cost of Doing Business

40 Nevada Infrastructure Education

Five Selected MarketsState Market Rationale

Georgia Atlanta Metro Good for Business; Gateway to South; Reasonable Prices; Growing GDP; Personal Income Growth

Colorado Denver Stable Economy; Educated Workforce

Utah Salt Lake City Stable Economy; Educated Workforce; Personal Income Growth

California Inland Empire Large and growing GDP; Innovators, Large Diverse Population, Educated Workforce

Washington Seattle Educated Workforce; Technology, Growing Personal Income

Hey! What about Texas and Florida

Atlanta Metro

• Home to 5.7 million people in 2015. The region’s population is projected to increase to 6.4 million residents by 2020

• Median household incomes $56,000• Median Home Price: $254,200• Unemployment: 4.6%• College Attainment: 33%• Net Migration Averaging 25,000

Annually• Rent Growth 2015-2016: 6%

Atlanta has Diverse Employer Base

EmployerDelta Air LinesEmory University / Emory HealthcareWal-Mart Stores, Inc.The Home DepotAT&TThe Kroger Co.Wellstar Health SystemsPublix Super Markets, Inc.USPS - Atlanta DistrictNorthside HospitalCoca-ColaUnited Parcel ServicePiedmont HealthcareCenters for Disease Control and PreventionChildren's Healthcare of Atlanta

Atlanta is the world headquarters of Coca-Cola, Home Depot, UPS, Delta Air Lines and Turner Broadcasting.

Atlanta Employment Growth

Atlanta’s employment

growth outpaces that of the US

Current Unemployment Rate is 4.6% vs. 4.9% for US

Atlanta Economy- Income

Source Moody’s Economy.com. US 2015 Median Household income is $54,000

Atlanta Multifamily Indicators

• Cap Rate 6.6%• Vacancy Rate 4.6%• Price Per Unit $78,000

Atlanta Pro and Con

Pros• Significant Population Growth

Due to Net Migration

• Educated Population

• Diverse Employer Base

• Income Growth Leading to Rent Increases

• One of World’s Busiest Airports• Within 2 hours Flight Time of 80%

of US Population

Cons• Late in the RE Cycle

• Experienced Rapid Growth Lately

• Cheap Land

• Influx of Out of State and Foreign Buyers

Denver Metro

• Home to 3 million people in 2015. The region’s population is projected to increase to 3.3 million residents by 2020

• Median household incomes $69,000• Median Home Price: $335,400• Unemployment: 3.3%• College Attainment: 42%• Net Migration 31,000 in 2015• Rent Growth 2015-2016: 5.6%

Denver Employer Base

1. U.S. Government

2. State of Colorado

3. University of Colorado Systems4. Denver Public Schools (DPS)5. City and County of Denver

6. HealthONE Corporation

7. SCL Health System

8. Centura Health9. Lockheed Martin Corporation

10. CenturyLink

11. Kaiser Permanente12. Denver Health

Denver has a large number of Government employees from Federal, State, County and City agencies. There are also a large number of healthcare workers

Denver Employment Growth

Denver’s Jobs Performance Has Performed Better Than the US

Denver Economy- Income

Denver’s Per Capita Income has grown, at the same time as the population has grown

Denver-Multifamily Indicators

• Cap Rate 5.5%• Vacancy Rate 5%• Price Per Unit $150,000

Denver Pro and Con

Pros• Highly Educated Workforce

• Recession proof Employer • Military Bases

• Transit point for Goods moving between Midwest and West

Cons• May be Later in the RE Cycle

• Need Better Employer Diversification• Oil Component is volatile • Government workers

Salt Lake City

• Home to 1.3 million people in 2015. The region’s population is growing at 1.05%, the 5th fasting growing metro.

• Median household incomes: $72,000• Median Home Price: $247,000• Unemployment: 3.6%• College Attainment: 32%• Rent Growth 2015-2016: 5.8%

Salt Lake City Employer Base

Largest employersState of Utah

Intermountain Health Care

University of Utah

Salt Lake County

Smith's Food & Drug Centers

U.S. Postal Service

Delta Air Lines

Novus Credit Services

Salt Lake City School District

Cordant Technologies

Qwest Communications

Zions First International Bank

Salt Lake City Corporation

PacifiCorp

Wells Fargo

Sears Roebuck and Company

Fred Meyer Stores

Salt Lake City has a similar employer base as Denver

Salt Lake City Employment Growth

Salt Lake City Income

Salt Lake City-Multifamily Indicators

• Cap Rate 5.5%• Vacancy Rate 4%• Price Per Unit $110,000

Salt Lake City Pro and Con

Pro

• Very Stable Economy• Performs Better Than US

• Good mix of organic as well as net migration population Growth

• Growing Technology Sector

• Still in Expansion Phase of RE Cycle

Con

• Weather

Inland Empire

• Home to 4.4 million people, by 2020 the region’s population is projected to increase to 5.2 million residents

• Median household incomes $55,000• Median Home Price: $254,200• Unemployment: 5.3%• College Attainment: 20.1%• Net Migration (2014): 5,120• Rent Growth 2015-2016: 5.9%

Inland Empire Employer Base

Name of EmployersCounty of Riverside, RiversideStater Bros. Markets, San BernardinoArrowhead Regional Medical Center, ColtonCounty of San Bernardino, San BernardinoNational Training Center, Fort IrwinU.S. Marine Corps Air, Twentynine PalmsAbbott Vascular, TemeculaMarch Air Reserve Base, Moreno ValleySan Bernardino City Unified School District, San BernardinoOntario International Airport, OntarioUniversity of California, RiversideClaremont Colleges, ClaremontUniversity of California, RiversideKaiser Permanente, FontanaRiverside Unified School District, Riverside

In addition to local employment, a large number of people in the Inland Empire commute to work in Orange and LA County

Inland Empire Employment Growth

Household Income

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Less than$10,000

$10,000 to$14,999

$15,000 to$24,999

$25,000 to$34,999

$35,000 to$49,999

$50,000 to$74,999

$75,000 to$99,999

$100,000 to$149,999

$150,000 to$199,999

$200,000or more

Distribution of Household Income

Ont Rvsd SB Cal

Inland Empire-Multifamily Indicators

• Cap Rate 5.5%• Vacancy Rate 4%• Price Per Unit $100,000

Pros and Cons of Inland Empire

Pros Cons

• Most land owned by State or Federal Government. This constrains building.

• Decreasing Gas prices will make it more affordable for commuters

• Ontario Airport ownership returned to the City of Ontario

• Land is cheap(er) so building will increase.

• A decrease in imports through the LA and Long Beach ports will have a negative impact on growth

• San Bernardino’s Poverty Rate.

Seattle

• Home to $3.6 million people, growing at a 2.4% rate. Fastest growing area in the Northwest

• Median household incomes $71,000• Median Home Price: $580,000• Unemployment: 4.8%• College Attainment: 25%• Rent Growth 2015-2016: 6.5%

Seattle Employer Base

Largest employersBoeing

Joint Base Lewis-McChord

Microsoft

University of Washington

Amazon

Providence Health & Services

Walmart

Weyerhaueser

Fred Meyer

King County Government

Seattle Employment Growth

Seattle Economy- Income

Seattle Multifamily Indicators

• Cap Rate 4.5%• Vacancy Rate 4.0 %• Price Per Unit $184,000

Seattle Pro and Con

Pro• Transit Point to Canada and Far

East

• High Tech Companies such as Microsoft and Amazon

• Still in the Expansion Phase of the RE Cycle

Con• Boeing has a large impact on the

economy

References

• Bureau of Labor Statistic (bls.gov)

• Forbes Magazine

• US Census Bureau

• Integra Realty Resources

• US Bureau of Economic Analysis

House Hacking for Multifamily Investors

Thomas WinfieldJuly. 23, 2016

For information purpose only. Not meant as a solicitation or offer.

Discussion Points• Benefits

• Scenarios

• Pros and Cons

What is House Hacking• A person purchases (or takes control of) a single family home or

multifamily property; lives in it; and rents out the other bedrooms or units.

Benefits• Reduce or Eliminate Housing/Rental Expenses

• Reduce Amount Needed to Acquire Property

• Method for Acquiring First Multifamily Property

• Lower Cost of Entry

• Tax Benefits

• Better Class of Tenants

• Easier (and less costly) to Manage and Maintain

House Hacking can be the first rung on your ladder to success.

Issues• Terms of the Loan/Financing

• How is Rental Income Determined/Counted

• How long do you have to live in the property

• What are the terms of use• Number of Occupants

• Long Term vs. Short Term Rental

• Qualifying for Loan• How is the Property Income Treated

• How much Reserve is needed

Hacking Without Owning

Hacking Without Owning - Currently Renting an Apartment or House

• Acquire Roommate(s) in your current Rental (House or Apartment)• Assume Landlord Allows

• Sublet part of property

• Joint Renters

Hacking Without Owning – Master Lease

Master Leasing

• Lease entire property from owner

• Move into a part of the property

• Take responsibility for Tenants

• Take responsibility for Expenses

• Excess Cash Flow belongs to you as income

Hacking While Owning or Controlling

Currently Own a Condo or House

• Rent out one or more bedroom

• Air BnB

• Move into an apartment and Rent out entire property

Multifamily Living

• Purchase 2-4 Units

• Live in one Unit

• Rent Remaining Units

• Accumulate Cash

• Sell/Rent Property

• Repeat Process

• Pro• Financing Similar to SFR

• Spread cost over more units

• More Favorable Tax Treatment

• Con• You’re a Landlord

Purchase Owner Occupied Multifamily Property-Trade Rent for Ownership

• My Current Rent $1500/Mo ($18,000/Yr)

• Goal: Purchase 3 Units, Live in 1 Rent out 2

• Purchase Price: $625,000

• 10% Down, FHA Loan

• Current NOI = $22,903

• Debt Service = $36,235

• Cash Flow = -$13,333

• Owner Unit = $10,800

• Effective Cash Flow = - $24,133

• Add in Prior Rent = $18,000

• Total Out of Pocket = $6,133

• Most Out of Pocket will be Recaptured through Tax Benefits

Year 1 Year 2 Year 3 Year 4 Year 5

Cash Flow ($24,133) ($15,913) ($14,980) ($14,018) ($13,028)

Add In Prior Rent $18,000 $18,000 $18,000 $18,000 $18,000

Total Out of Pocket ($6,133) $2,087 $3,020 $3,982 $4,972

Five Year Cash Flow Projection

Live in House Flipping

• Buy Single Family or Multifamily Property

• Live in Property While Fixing it Up

• Sell (or Rent) Property After Repairs are Made

• Repeat Process

• Pro• Replaces Rent with Mortgage

• Reduces Time Pressure on Flips

• Favorable Financing

• Con• Transaction Cost

• Minimal Tax Benefits

Lease Option-Control Property Until Purchase

• Comparable property worth $775,000

• This Property is underperforming• Vacancy Rate Is 15%• Expenses are 45%• Gross Scheduled Income = $74,700• NOI is $34,922• Debt Service is $32,451

• Offer• Lease for NOI of $40,000• Option for $5,000• Purchase Price $700,000

• Allocate $50,00 for Repositioning• Make Repairs and Upgrades• Get Vacancy Rate to 5%• Get Expenses to 35%

• After repositioned value $1,084,960• NOI of $54,248• Cap Rate of 5%

• Property now Properly Managed• Vacancy Rate Is 5%• Expenses are 35%• Gross Scheduled Income =

$81,576

• Action• Exercise option for $700,000• Obtain Loan for $705,000• Cash Flow of $21,000

Summary

Pro

• Good Approach for Entry Level Investor• Learn Management and

Maintenance

• Reduces Housing Cost

• Tax Benefits

Con

• Living with Tenants

• Moving Every Year

• You Need to Develop Basic “Handyman” Skills