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MASTERING THE SALE OFINVESTMENT PROPERTYNovember, 2015

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AGENDA Why work with investors? Understanding the Benefits Establishing Value (Setting the Price) Listing Investment Property Working with Investment Buyers Financing Options Contracts and Forms Wrap-up

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TYPES OF INVESTMENT PROPERTY Single Family Homes Condo’s 2 Family 3-4 Family Buildings 5+ Family Buildings Other

Commercial/Business Properties Mobile Home Parks Vacant Land

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WHY WORK WITH INVESTORS? Investors Buy More Often = MORE SALES Financial Decisions, not emotional ones = LESS

STRESS Investors need our services in BOTH up and down

markets = CONSISTENT SALES Investors eventually become SELLERS Investors who are building a portfolio will buy/sell

larger and larger properties. The market is prime for buying properties.

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WHAT ARE THEIR GOALS? Owner/Occupant – Wants to get ahead by buying a

home, but doesn’t want a large house payment

Family Need – College Savings Account for Child

Occupation – Wants to quit job and manage property

Recreation – Buy a Condo at the Lake for Rental

Dreams/Retirement – Doesn’t have a retirement plan or wants to supplement retirement income.

Net Worth – Wants to build assets and net worth.

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UNDERSTANDING THE BENEFITS Cashflow

Taxable Profit/Loss

Increasing Net Worth

Return on Investment

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CASH FLOW EXAMPLE $200K 4-FAMILY

Gross Rents $625 x 4units x 12mo $30,000Less Vacancy 5-10% $ 1,500Net Rents $28,500

ExpensesFixed Expenses

Taxes $ 2,400Insurance $ 1,200Sewer/Roads/Trash/Water $ 2,800

Maintenance Expenses 10-20% $ 4,500Total Expenses $ 10,900

Gross Income $ 17,600

Payment (P/I) 80% LTV, 5.0%, 30 year = $859/mo $ 10,307

Cash Flow $ 7,293

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CASHFLOW VS. TAXABLE PROFIT/LOSS

Gross Rents $__________Less Vacancy $__________

Net Rents $__________

ExpensesTaxes $__________Insurance $__________Swr/Roads/Trsh/Water $__________Maintenance Expenses $__________

Total Expenses $__________

Gross Income $__________

Less Payment P/I $__________

Cashflow $__________

Gross Rents $__________Less Vacancy $__________

Net Rents $__________

ExpensesTaxes $__________Insurance $__________Swr/Roads/Trsh/Water $__________Maintenance Expenses $__________

Total Expenses $__________

Gross Income $__________

Less Mortgage Interest $__________Less Depreciation $__________

Taxable Profit/Loss $__________

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CASHFLOW VS. TAXABLE PROFIT/LOSS

Gross Rents $ 30,000Less Vacancy $ 1,500

Net Rents $ 28,500

ExpensesTaxes $ 2,400Insurance $ 1,200Swr/Roads/Trsh/Water $ 2,800Maintenance Expenses $ 4,500

Total Expenses $ 10,900

Gross Income $ 17,600

Less Payment P/I $ 10,307

Cashflow $ 7,293

Gross Rents $ 30,000Less Vacancy $ 1,500

Net Rents $ 28,500

ExpensesTaxes $ 2,400Insurance $ 1,200Swr/Roads/Trsh/Water $ 2,800Maintenance Expenses $ 4,500

Total Expenses $ 10,900

Gross Income $ 17,600

Less Mortgage Interest $ 7,946Less Depreciation $ 6,545

Taxable Profit/Loss $ 3,109

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DEPRECIATION Not Actual Cash Expense

Tax Calculation Only

Based on the fact that Land Appreciates and Buildings Depreciate

Count 80-90% of the Sale Price as the Building Value and 10-20% Land Value

Depreciation Expense = Building Value / 27.5 yrs

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HOW REAL ESTATE IMPACTS NET WORTH

Cashflow is not the game we’re playing … The ultimate game is Net Worth

If you generate enough Net Worth, you can generate Cashflow

Balance Sheet Lists Assets and Liabilities Shows Net Worth

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BALANCE SHEET SHOWS NET WORTH

12/31/2015Assets Cash $ 20,000 Home $250,000 Car $ 20,000 Total Assets $290,000

Liabilities Home Loan $150,000 Car Loan $ 15,000 Credit Cards $ 10,000Total Liabilities $175,000

Net Worth $115,000

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NET WORTH IN 10 YEARS12/31/2015 12/31/2025

AssetsCash $ 20,000 $ 20,000

Home $250,000 $337,338

Car $ 20,000 $ 20,000Total Assets $290,000 $377,338

Liabilities Home Loan $150,000 $122,014

4 Family Loan Car Loan $ 15,000 $ 15,000 Credit Cards $ 10,000 $ 10,000

Total Liabilities $175,000 $147,014

Net Worth $115,000 $230,324

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IMPACT OF 4-FAMILY PURCHASE ON NET WORTH

4 family @ $200,000

New Loan $160,000

Downpayment $40,000 from Home Equity Loan

$5000 closing costs

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BALANCE SHEET WITH PURCHASE OF BUILDING ON 12/31/2015

12/31/2015 12/31/2015 after closingAssets Cash $ 20,000 $ 20,000 Home $250,000 $250,000 4 Family $200,000 purchase price $200,000 Car $ 20,000 $ 20,000Total Assets $290,000 $490,000

Liabilities Home Loan $150,000 $195,000 Home Eq Loan

$45,000 4 Family Loan $160,000 New Loan Amount Car Loan $ 15,000 $ 15,000 Credit Cards $ 10,000 $ 10,000Total Liabilities $175,000 $380,000

Net Worth$115,000 $110,000

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NET WORTH IN 10 YEARS12/31/2015 12/31/2025 12/31/2015

12/31/2025w/o 4fam w/o 4fam w/

4fam w/ 4famAssetsCash $ 20,000 $ 20,000 $

20,000 $ 20,000 Home $250,000 $337,338

$250,000 $337,338 4 Family $200,000

$269,870 Car $ 20,000 $ 20,000 $ 20,000

$ 20,000Total Assets $290,000 $377,338 $490,000

$647,208

Liabilities Home Loan $150,000 $122,014

$195,000 $158,617 4 Family Loan $160,000

$130,148 Car Loan $ 15,000 $ 15,000 $ 15,000

$ 15,000 Credit Cards $ 10,000 $ 10,000 $

10,000 $ 10,000Total Liabilities $175,000 $147,014

$380,000 $313,765

Net Worth $115,000 $230,324 $110,000$333,443

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WHAT ARE THE FINANCIAL BENEFITS OF OWNING RENTAL PROPERTY?

Appreciation – Increase in Building Value over time

Increase in Equity – Due to Loan Paydown

Cash Flow

Depreciation Tax Benefits

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EXAMPLE OF RETURN ON INVESTMENT

$200,000 Four Family w $40,000 down-payment.

What is the Return on Investment?

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RETURN ON $40,000 INVESTMENT Appreciation $200,000 x 3% = $ 6,000

Loan Paydown 1st yr $ 2,360

Cash Flow $ 7,293

Total Benefits $15,653

Return on Investment $15,653 / $40,000 = 39%

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RETURN ON INVESTMENT VS. TAXES PAID

Return on Investment = $15,653 Appreciation Loan Paydown Cash Flow

Taxes Paid on Actual Profit/Loss = $ 3,109 Income – Expenses – Interest - Depreciation

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HOW TO DETERMINE A BUILDING’S VALUE?

Gross Rent Multiplier considers rent only

Cap Rate considers rent and expenses

Cost per Unit

Cash on Cash Only considers cash flow

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GROSS RENT MULTIPLIER Gross Rent Multiplier (GRM)

= Sale Price / Annual Rents

One way to remember it … without any expenses, how many years of rent would it take to equal the cost of the building?

Which is better … a high GRM or a low GRM?

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GROSS RENT MULTIPLIER – 3546 MORGANFORD

Sale Price = $400,000

Annual Rents = $425 x 12 units x 12 months = $

61,200

Gross Rent Multiplier$400,000 / $61,200 = 6.53

GRM

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GROSS RENT MULTIPLIER – 3600 HEREFORD

Sale Price = $450,000

Annual Rents = $395 x 10 units x 12 months = $47,400$450 x 2 units x 12 months = $10,800Annual Rents $58,200

Gross Rent Multiplier$450,000 / $58,200 = 7.73

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GROSS RENT MULTIPLIER

Based only on the GRM, which of these buyers got the best deal?

Sale Price GRM 3546 Morganford $400,000 6.53 3600 Hereford $450,000

7.73

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GROSS RENT MULTIPLIER– GROUP EXERCISE

Based on the average GRM for 3546 Morganford and 3600 Hereford, what would you pay for 4205 Botanical with Annual Rents of $61,200?

GRM = Sale Price / Annual Rents

Sale Price = GRM x Annual Rents

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GROSS RENT MULTIPLIER– GROUP EXERCISE

Sale Price = Gross Rent Multiplier x Annual Rents

GRM for 3546 Morganford = 6.53 GRM for 3600 Hereford = 7.35

Average is (6.53 + 7.35) / 2 = 6.94 GRM

Rents for 4205 Botanical = $61,200

Estimated Value = 6.94 x $61,200 = $424,728

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GROSS RENT MULTIPLIER

What are the advantages and disadvantages of using the GRM?

Easy to compare similar properties

Does not consider the impact of expenses

Does not work with unlike properties

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CAP RATE

Net Operating Income(Income – Expenses)

(Price)

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CAP RATE – SAMPLE 1 Use the information provide by the listing

agent to determine the CAP Rate for 3546 Morganford

Income $61,200 Expenses $16,044 Net Income $45,156

Sale Price $400,000

Cap Rate 11.29%

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CAP RATE – SAMPLE 2 Use the information provide by the listing

agent to determine the CAP Rate for 3600 Hereford

Income $58,450 Expenses $10,805 Net Income $47,645

Sale Price $450,000

Cap Rate 10.59%

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CAP RATE Based on just the CAP rate, which property

was the better buy?Sale Price Cap Rate

3546 Morganford $400,000 10.59%

3600 Hereford $450,000 11.29%

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CAP RATE – GROUP EXERCISE

Based on the Average Cap Rates for 3546 Morganford and 3600 Hereford, what would you pay for 4205 Botanical?

Net Income / Sale Price = Cap Rate

and

Net Income / Cap Rate = Value

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CAP RATE – GROUP EXERCISE

Based on the Average Cap Rates for 3546 Morganford and 3600 Hereford, what would you pay for 4205 Botanical?

Average CAP Rate = (10.59% + 11.29%) / 2 = 10.94%

Net Income / Cap Rate = Value

$47,200 / 10.94% = $431,444

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CAP RATE Considers both Income and Expenses

Does not consider the effects of the loan

May not consider maintenance of building

Useful when comparing different types or ages of buildings.

What is the effect of Vacancies? What is the effect of Deferred Maintenance?

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COST PER UNIT Cost per ‘DOOR’

Used by Builders, Developers, and in “Product Specific” situations

For Builders, it’s always a comparison to how much money it would take to build a comparable unit

Developers don’t care about rents or condition, because they are changing the use of the building. They may look at Cost per Square Foot.

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COST PER UNIT – EXAMPLE 1

3546 Morganford

12 Family Building sold for $400,000

What is the Cost Per Unit?

$400,000 / 12 = $33,333 per unit

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COST PER UNIT – EXAMPLE 2

5847 Sunshine

8 Family Building sold for $480,000

What is the Cost Per Unit?

$480,000 / 8 = $60,000 per unit

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COST PER UNIT

Compare similar size units with similar features

Compare similar age buildings

Compare similar rents

Compare similar condition

Compute the Cost per Unit on Sold PropertiesUse several comps and average the results

Adjust for differences in your property

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CASH ON CASH$200,000 4-family, 80% LTV, $40,000 down

Income ($625 x 4 x 12 x 95%)$28,500Less Expenses (incl maintenance) $10,900Less Loan Payment $10,307= Cash Flow $ 7,293

Divided by Investment ($40,000) 18.23%

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CASH ON CASH Does not consider appreciation

Will change based on the financing

Used to compare real estate opportunities to non-real estate opportunities

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SUMMARY - COMPARING PROPERTIES

Gross Rent Multiplier considers rent only

Cap Rate considers rent and expenses

Cost per Unit

Cash on Cash Only considers cash flow

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HOW TO LIST RENTAL PROPERTY

Meet the owner at the building. Make sure they notify the tenants and bring keys for all units.

Make a list of maintenance items for the seller to address.

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HOW TO PREPARE A PROPERTY TO SELL View the exterior. Note all maintenance

issues ... clogged gutters, trash, muddy areas, broken fencing, peeling windows …

View the basements. Note all maintenance issues … debris, past sewer backups, dangling/loose wires, missing elec panel cover, dirty/missing furnace filters …

View the interior of all units. Suggest which unit you think should be shown. Note all maintenance issues …plaster/drywall repair, needs fresh paint, water stains on ceiling, torn carpeting, ripped vinyl floors, torn blinds. CLEAN any empty units.

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TIPS FOR LISTING RENTAL PROPERTY

While at the property, get all information needed to complete the MLS profile form. Measure the rooms for each floorplan.

Get information about the major systems Roof age and type Furnace and A/C age and type; Are there flu

liners? Electric upgrades? Is there any visible knob-n-

tube wiring? Type of Circuit Panel? Copper or Galvanized Piping Plumbing Stacks … PVC or Cast Iron

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TIPS FOR LISTING RENTAL PROPERTY Run title commitment and verify who needs to sign

documents? Is it owned by a LLC? Have the owner complete the Rental Property

Verification Form. Update Rent Roll for closing. Get Seller docs, including applications, leases, rent

rolls, occupancy permits, capital improvements, etc. Verify date rents are due Verify who owns the appliances. Find out status of occupancy permits, especially for

vacant units. Discuss which seller disclosure form to use. Get tenant names and telephone numbers and

arrange for showings.

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TIPS FOR LISTING RENTAL PROPERTY Bring comps with multiplier or cap rates. Use

this data to establish a suggested price for the subject property. Adjust for deferred maintenance.

Get the listing contract signed. What to emphasize in the MLS Remarks

Things that make a property easy to rent Things that keep revenues high Things that make a property easy to maintain Things that keep expenses low

Email the listing to your investor prospect list …

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WORKING WITH BUYERS Focus on Buyer’s Capacity and Goals Condition – Is Buyer doing own maintenance? Location – Close to Buyer’s workplace or

home? Goals – Cash Flow vs. Appreciation Time Required – High tenant turnover, Rent

Collections, etc. Cash Required – Deferred Maintenance and

Vacancies at time of purchase?

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HOW TO FINANCE RENTAL PROPERTY

Owner/Occupant SFR, FHA 96.5%, VA 100% Conventional 95%

LTV 2 family, FHA 96.5%, VA 100%, Conventional 85%

LTV 3-4 family FHA 96.5%, VA 100%, Conventional 75%

LTV

Non-Owner/Occupant Single Family, Conventional 75% LTV 2-4 Family Building - Conventional 70% LTV

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HOW TO FINANCE RENTAL PROPERTY

Rates are Score-Driven

75% of Rents are counted as Buyer Income PITI is counted as a Buyer’s Debts

Appraisals are a little higher for non-owner/occupant single family and $400-500 for Multifamily Properties

Reserves – 2-6 months required unless only one owner/occupied property.

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WRITING A GOOD CONTRACT

Residential vs. Special Sale Contract

Utilities Occupancy Inspections Building Inspections

How to Pick the Closing Date

Occupancy Issues Owner Occupant Who Rents Vacant Units? Loan Requirements

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WRITING A GOOD CONTRACT

Rental Property Rider

1. Buyer contingency to receive and approve information

2. Delivery of lease documents and deposits at closing

3. Seller transfers leases and Buyer indemnifies Seller for security deposits at closing

4. Seller shall not modify leases without written consent of buyer between contract date and closing

5. Contingency to review remaining units (not viewed)

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WHAT TO LOOK FOR IN A LEASE?

Expenses paid by Owner

Can a tenant create a lien on the property? Sewer and in some areas … water and trash

Lead Hazard Notification for Tenants

Term of Leases – Automatic Extensions?

Late fees

Who maintains the appliances?

Who pays legal fees to enforce the lease?

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MANAGING THE INSPECTIONS Building Inspections

Consider knowledge and resources of Buyer Full Inspection vs. Systems only?

Municipal Inspections Can these be skipped? Clarify in contract, if necessary

FHA/VA Loans – Same general criteria as SFR

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CLOSING ACTIVITIES Changing the Utilities – “leave on”

agreements

Notification of Tenants – SLAR form

Original Leases, Keys to New Owner

Transfer of Section 8 Leases

Verification of Rents, including past due rents and proration dates. Clarify with client that seller can still collect past due rents.

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1031 EXCHANGE

Lets owner sell investment real estate and purchase investment real estate without paying taxes on the sale.

Lets a seller buy a property more suited to their needs/capabilities

Lets a seller combine the equity from 2 or more properties and buy a larger property …‘leverage up’

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MASTERING THE SALE OF RENTAL PROPERTYSUMMARY1. Look for a need … what will rental prop

provide?2. Help identify the best type of property for

your client, based on time, skills, money, desire.

3. Look at properties, pick the best one4. Set an offer price based on the comps 5. Get advice from professionals – inspectors

and accountants6. Let client get their property ‘stable’ and then

help them buy another one. 7. Exchange as appropriate

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THINGS I’VE LEARNED

4 family properties are often the best type of investment for a first time buyer

Better Cash Flow than SFR, 2fam or 3fam

Overhead spread over more units

30 year fixed financing is available

Smaller % of building is vacant at one time

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THINGS I’VE LEARNEDLower Cost/Unit creates higher revenues

$ 30,000 $450/unit/month 5.55 GRM$ 50,000 $625/unit/month 6.67 GRM$100,000 $900/month 9.26 GRM$200,000 $1500/month 11.11 GRM

$200,000 (4 x $50,000) invested in 4 family4 x $625 x 12 $30,000/yr

$200,000 Single Family $1500 x 12$18,000/yr

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THINGS I’VE LEARNEDLower Cost/Unit creates higher revenues

Lower Cost/Unit properties require more management

Rent rates are directly impacted by Supply and Demand

Seems to be independent of Geographic location

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THINGS I’VE LEARNEDCondition and updates DO matter

Tenants stay longer = LESS TURNOVER

Units rent quicker = FEWER DAYS/VACANCY

Tenants with better credit can rent anywhere, so they are more particular. Tenants will bad credit or a bad landlord reference will accept worse condition because they are limited as to where they can live. FEWER EVICTIONS AND COLLECTIONS

Put the improvements into living space as each unit becomes vacant. Do not wait until you are ready to sell.

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THINGS I’VE LEARNEDYou can buy too many properties

You can leverage too much

Paying loans down or off reduces risk and provides for better cash flow

1031 Exchanges are not complicated

Every year, sell your worst property and refinance your worst loan

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THINGS I’VE LEARNED

Rental Property is a long term strategy to grow Net Worth

Net Worth creates options and ultimately provides for Cash Flow

If we rely solely on our jobs, we will have to continue working to provide the cash we need.