Lunch & learn presentation final
- 1. Residential Income Property Investing SCV Chamber Lunch and Learn June 15, 2012
- 2. Residential Income Property Investing Phil Levy and Joey Levy SCV Chamber Lunch and Learn June 15, 2012
- 3. Introduction • Investing in residential income property has become a significant sector of the residential housing market. • Today’s presentation will profile this marketplace and provide a framework for engaging in this business. • Information presented is nationwide in scope unless otherwise disclosed. • Please jot your questions down on the index cards. A Q&A session will be held after the formal presentation. Phil Levy & Joey Levy, REALTORS® 3
- 4. About Us – Phil Levy, REALTOR®, CDPE, CIAS • 30 years in the insurance business principally in senior financial management roles include CFO • BBA Finance (University of Miami), MSM Accounting (FL International University), CPA • 10 Years in the Santa Clarita Valley • 4 Years serving the community in real estate – Joey Levy, REALTOR®, CDPE • BA in Media Arts (University of Arizona) • 4 years servicing the community in real estate. • Heavily involved in the community affairs through JCI and other organizations. – Our objective is to provide a business oriented approach to our clients’ realty needs.
- 5. Overview • Trends driving the opportunity for residential income property investing. • The investment perspective – Historical comparisons – Unique benefits • creating generational wealth • Finding Properties • Analytical framework • Assembling a team Phil Levy & Joey Levy, REALTORS® Intero Real Estate Services 5
- 6. Trends Driving the Opportunity • Market Overview* – $3 trillion market – 21 million rental units – 52% of the residential rental unit – Increasing rents throughout the recent recession and recovery – According to the Charfin Institute the median income of investors in 2011 was $86,100 & 39% made less than $75,000. *Corelogic Market Pulse – April 11, 2012 Phil Levy & Joey Levy, REALTORS® 6
- 7. Trends Driving the Opportunity • Recent report by the Demand Institute of the Conference Board – Worst is probably over for the housing market – Consumers lost $7 trillion from housing assets since 2006 – Lack of listing inventory with multiple offers along with increasing numbers of closed sales. – Presence of investors competing for deals to provide rental units – 2 to 3 year oversupply of existing homes – 14% of all housing units were vacant in 2011 & 13% of mortgages were distressed. Phil Levy & Joey Levy, REALTORS® 7
- 8. Opportunity – As the economy (hopefully) recovers demand for housing will be driven by rental properties rather than owner occupied. – Still 80% of Americans believe that buying a home is their best long term investment • Rental Demand – Multifamily construction is recovering with a 54% increase in starts in 2011 over 2010 – but still at a historically low level – Median asking rent increased 19% between 2005 and the 1Q2012 June 15 2012 Phil Levy & Joey Levy, REALTORS® 8
- 9. Opportunity • Rental Demand Drivers – Former homeowners who defaulted. Need to rent until restoration of credit and finances – Young adults (18 to 34 year old heads of households. • >50% expect to rent. • 68% lower net worth than contemporaries of 1984 • Ed note: Effect of student loans and reduced employment outlook • Still living with parents. Doubled up households account for 20% of all households for the next 5 years. – & 31% of this age group are still living with parents June 15 2012 Phil Levy & Joey Levy, REALTORS® 9
- 10. Opportunity cont • Rental demand drivers – New immigrants – expected to reach 1.2 to 1.6 million per year by 2017 – JOBS will absorb existing inventory and increase overall housing demand over the next 2 to 3 years • Demand will be driven by rentals . • Ed note: Oversupply hinders starts and therefore construction job growth. June 15 2012 Phil Levy & Joey Levy, REALTORS® 10
- 11. Historical Comparisons Comparative Annual Percentage Yields 6 Month Negotiable 10 Year Treasury S&P 500 Year CD's* Notes* Dividend** 2000 6.59 6.03 1.21 2001 3.66 5.02 1.38 2002 1.81 4.61 1.80 2003 1.17 4.01 1.55 2004 1.74 4.27 1.67 2005 3.73 4.29 1.75 2006 5.24 4.80 1.76 2007 5.23 4.63 2.03 2008 3.14 3.66 3.24 2009 0.87 3.26 1.98 2010 0.44 3.22 1.79 2011 0.42 2.78 2.06 Average 2.84 4.22 1.85 Data Sources: * www.federalreserve.gov/releases/h15/data.htm **http://www.multpl.com/s-p-500-dividend-yield/table Phil Levy & Joey Levy, REALTORS® 11
- 12. Historical Comparisons S&P 500 – 2000 - 2011 Overall Price Yield 2000 through 2011 = -5.8% (1,394.46 to 1,312.41) Chart Source: MSN Money Central Aggregate Ave per Yr Appreciation -5.88% -0.53% Dividend Yield 1.85% Total 1.32% June 15 2012 Phil Levy & Joey Levy, REALTORS® 12
- 13. Historical Comparisons • Mutual Funds – 10 Year Yield through 2011: -5.30% (all funds). • –Source: http://screen.morningstar.com/FundSearch/FundRank.html – Paying expense loads for someone else to manage your money. • Wide range of expense loads – Tax management needed for potential unexpected capital gains. – It’s tough to consistently beat the market June 15 2012 Phil Levy & Joey Levy, REALTORS® 13
- 14. Historical Comparisons Comparing the stock market valuations to real estate S&P 500 has lost value 13 years in the past 41 years Source: S&P 500 data: http://moneycentral.msn.com/stock_quote?symbol=$inx June 15 2012 Phil Levy & Joey Levy, REALTORS® 14
- 15. Historical Comparisons Real estate has lost value 4 years in the past 41 years Phil Levy & Joey Levy, REALTORS® 15
- 16. Historical Comparisons Appreciation of 20.4% since 2000 despite Excludes cash flow negative economic factors factors from rental income Source: HUD Historical Data: www.census.gov/indicator/www.newsreconst.pdf June 15 2012 Phil Levy & Joey Levy, REALTORS® 16
- 17. Historical Perspective SCV SFR's Median Prices Median Price 700,000 Apr/2006, 643,000 600,000 500,000 400,000 Apr/2003, 369,900 300,000 April /2012, 375,000 200,000 Jan/2000, 235,000 100,000 0 Jan/2000 Jan/2001 Jan/2002 Jan/2003 Jan/2004 Jan/2005 Jan/2006 Jan/2007 Jan/2008 Jan/2009 Jan/2010 Jan/2011 Jan/2012 June 15 2012 Phil Levy & Joey Levy, REALTORS® 17
- 18. Historical Perspective Source: Core Logic Market Pulse for April 2012 June 15 2012 Phil Levy & Joey Levy, REALTORS® 18
- 19. Unique Benefits • Positive cash flow before income taxes – Reinvest in other properties • Leverage – Potential to borrow against equity to acquire additional properties – Potential to increase return if borrowing rate and costs are below the “CAP” rate (gross return) • Tax advantages – Deductibility of all related cash expenses – Capitalize improvements Phil Levy & Joey Levy, REALTORS® 19
- 20. Unique Benefits - Tax Treatment Deductible Expenses • Advertising • Legal Fees • Cleaning & • Local Transportation Maintenance Expenses • Commissions • Long distance travel • Depreciation • Losses • Employees, Contractors, • Professional Services Non-Employed Staff • Repairs • Insurance • Utilities • Interest June 15 2012 Phil Levy & Joey Levy, REALTORS® 20
- 21. Unique Benefits - Tax Treatment Capitalize Phil Levy & Joey Levy, REALTORS® 21
- 22. Unique Benefits-Tax Treatment • Depreciate – Initial Investment • Excluding the portion attributed to the land – Capitalized improvements • 29.5 years for single family units • Opportunity to defer gains using IRC Section 1031 – Leverage up or diversify holdings • Holdings pass to heirs with step up in basis and possibly no tax effect June 15 2012 Phil Levy & Joey Levy, REALTORS® 22
- 23. Unique Benefits • Choice of level of involvement – Use a property manager • If time is a challenge • Buffers tenants • Source of expertise in tenant selection and proeprty management – Self manage- use agent to list and contract tenants • Build generational wealth – Generate positive tax advantaged cash flow – Use of leverage – Reinvest with tax deferred gains June 15 2012 Phil Levy & Joey Levy, REALTORS® 23
- 24. Finding Properties • First Step – determine objectives – Financial objectives and capacity • Buy and Hold • Buy, Refurbish and Resell (i.e. “flipping”) • Identify financial resources and capabilities – Preferred property types, sizes, age, configuration – Locations June 15 2012 Phil Levy & Joey Levy, REALTORS® 24
- 25. Finding Properties • Explore Sources of Purchase Money (financing) – Savings or reinvestment of other assets – Pension or IRA’s through Self Directed IRA’s – Financing – Lenders will approve loans for qualified borrowers • Typically conventional loans with >=25% down • Or hard money – Quite expensive – Should be used only for interim financing – Purchase money financing makes for a weaker offer • Financing and appraisal contingency • Slower to close escrow • Marketplace is currently quite competitive for buyers Phil Levy & Joey Levy, REALTORS® 25
- 26. Finding Properties • Principal Sources of Properties – Multiple Listing Service • The principal marketplace for real estate – Trustee Sales – For Sale by Owner • Not currently playing a significant role in this marketplace • Lack of professional agency involvement can hinder due diligence and closing Phil Levy & Joey Levy, REALTORS® 26
- 27. Finding Properties • MLS – Accessing the data • Web searches e.g. REALTOR.com, Zillow, Trulia, Yahoo Finance, Redfin pull data from the MLS. – Not always current • Direct access to the MLS provided by an agent (e.g. Listingbook or agent’s website) – MLS Principal Sale types • Standard Sale – owner has equity and can sell without bank’s approval Phil Levy & Joey Levy, REALTORS® 27
- 28. Finding Properties – MLS Principal Sale Types cont • Short Sale – Owner has negative equity and needs lender(s’) approval. – May take 2 months or more for approval – Lender may or may not approve at the contract price • REO (Real Estate Owned) – Property has been sold at a public trustee sale and the title has reverted to the lender rather than a third party. – Typically shorter contingency periods – 10 days – Expire by default unless Buyer provides a written objection – Typically Seller pays no inspection or repairs Phil Levy & Joey Levy, REALTORS® 28
- 29. Finding Properties • Trustee Sales – Title to the property is sold at a public trustee sale. – Public auction – anyone can bid – Wining bid must pay 100% cash at the time of the auction. – Condition of the property is generally not subject to inspection Phil Levy & Joey Levy, REALTORS® 29
- 30. Finding Properties – Trustee Sales – Transaction is not subject to disclosures on the condition of the property or surrounding area. – Title insurance is not available to cover the Buyer’s interest • Bidder should review a prelim title report ($380) – Some liens survive the trustee sale » Property taxes or IRS Liens (for a limited period) » Liens that existed prior to the deed of trust – Determine extent of past due property taxes from County Treasurer’s website. – Verify that the deed of trust is in first position! – Title insurance is available to the subsequent purchaser through a standard sale – Lender’s title insurance is available for cash out financing Phil Levy & Joey Levy, REALTORS® 30
- 31. Finding Properties – Trustee Sales • Trustee Sales cont – Potential for acquiring properties significantly below market. – Buyer needs a thorough understanding of: • Market values • Rental or resale potential • Potential fix up costs – perhaps $20 per sf or more • Due diligence procedures Phil Levy & Joey Levy, REALTORS® 31
- 32. Finding Properties – Trustee Sales • Trustee Sales cont – Evaluation of Valencia “Flips” from 2011 • 3/2 single family in zip code 91355 • 14 properties sold to 3d parties at trustee sales in 2011 • 7 were subsequently resold at the time of the evaluation (March 2012) • Average holding period was 83 days & average projected return on gross investment was 1.9% Phil Levy & Joey Levy, REALTORS® 32
- 33. Finding Properties – Trustee Sales • Trustee Sales cont • Projection assumptions – Acquisition Costs - $6,000 – Rehab costs - $17.50 per sf – Selling costs – 7% of resale price – Monthly carry $800 (property tax, HOA fees, insurance, utilities) – Delinquent Property Taxes - $0 • This example uses hypothetical projection assumptions and lacks statistical significance. – Trustee Sales Conclusion – Acquisition through trustee sales is highly speculative – Services are available to assist investors to acquire such properties • Run prelim • Provide condition reports (external) • Physical bidding service Phil Levy & Joey Levy, REALTORS® 33
- 34. Analytical Framework • Acquiring income properties requires the same inspections and disclosures as a principal residence (assuming acquiring through the MLS) – Title – Inspections (property and termite) – HOA docs – Natural Hazard Zone Disclosure – Smoke and CO1 detector – Water heater bracing – Neighborhood – Schools – Etc. Phil Levy & Joey Levy, REALTORS® 34
- 35. Analytical Framework • It also requires a quantitative evaluation of the reasonable expected return 1. Estimate the required investment – purchase, closing, refurbishment and financing costs. 2. Estimate the operating results – detail to follow 3. Estimate the cash reserve equivalent to 6 months operating expenses 4. Evaluate the exit strategy. Compare the total expected investment to the top range of the comparable sales. Phil Levy & Joey Levy, REALTORS® 35
- 36. Analytical Framework Total Investment - Gross 76,813 Expected Operating Results Financial Values Ratios Scheduled Rent 13,440 Vacancy - Gross Operating Income 13,440 Operating Costs (6,134) Net Operating Income 7,306 9.51%Cap Debt Service* - Cash on Cash Rtn before Net Cash Flow 7,306 9.51%Income Tax Phil Levy & Joey Levy, REALTORS® 36
- 37. Analytical Framework Operating Costs Factors Frequency $Annual Management Fee Pct - pct of annual rent 10.0% 1 1,344 Property Tax - pct of value 2.1% 1 1,505 HOA per Month - 12 - Insurance 500 1 500 Maintenance Landscaping Maint 40 12 480 Trash - 1 - License 225 1 225 Water 40 12 480 Homeowner Warranty 400 1 400 Gas - 12 - Other 1,200 1 1,200 Subtotal Operating Costs 6,134 Phil Levy & Joey Levy, REALTORS® 37
- 38. Analytical Framework • Objective: structure an offer that provides a reasonable expectation of meaningful positive cash flow and return before income taxes. – Appreciation of value or future rent increases is excluded from consideration - may be expected but not assured. – Appreciation of value is a valid frame of reference for comparing alternative investments – i.e. which is most likely to increase in value in the future. Phil Levy & Joey Levy, REALTORS® 38
- 39. Assemble a Team • REALTOR® – expertise in helping investors identify suitable properties – capability of financial evaluation properties – function as a “quarterback” • Lender • Title • Escrow • Appraiser • Inspector • Insurance www.jpscvrealty.com 39
- 40. Assemble a Team • Tax Advisor (e.g. CPA) • Legal Advisor – Most appropriate way to hold title – Liability protection – Partnership agreements if applicable • Contractors – Painting, flooring, roofing, plumbing, electrical, HVAC, cabinetry, windows, window coverings • Property Manager • Exchange Intermediary www.jpscvrealty.com 40
- 41. Conclusion • Investing in Residential Income Property is a viable strategy for building wealth. • Expertise and a disciplined structure for finding and evaluating properties are critical to success. – Objective is to generate positive current cash flows and returns before income taxes. • To find out more and learn whether this might be a strategy for you – contact us! Phil Levy & Joey Levy, REALTORS® 41
Editor's Notes
- #5: Before we get started
- #9: 2011 multifamily starts were 178,200 vs 370,000 average between 1980 an 2007
- #13: Notice the volatility
- #14: Note the similarity of the 10 year yield of the S&P 500
- #15: Notice the volatility in the S&P 500 (i.e. the Market)
- #16: Notice the reduction in volatility compared with the S&P 500.
- #17: Caution: potential appreciation is not an analytical driver – it’s cash flow.
- #18: Similarity in the curve with the previous chart
- #19: Cite the source to provide an idea of the range of pre-tax returns. But this is not based upon empirical data rather it is based upon a model of assumptions including a 70% property discount on the acquisition price. In reality in Northern LA county the cap rate will probably run 4.5% to 9% if objectively evaluated.
- #20: Will discuss generating positive cash flow shortly.
- #23: See CPA for more info – i.e. passive loss rules
- #27: We’ll discuss the MLS and Trustee Sales in more detail
- #29: Standard and short sales typically get a 17 day contingency period which must be released in writing. Need update on last month’s sales – Standard – Short Sale REO -
- #32: Fix up: Will go into more detail shortly
- #34: More info on bidding service – see me separately.
- #37: Various sources for rental data – few empirical mostly “asking” rents