Holding Properties for Cash Flow and Equity Growth 3 Hour CE Course Written and Presented by Carl Schiovone National Trainer and Performance Coach (631) 750-1563 CarlSch@optonline.net www.carlschiovone.com www.eastcoastreia.net
Today s Agenda Why the Rent to Hold Business model? Why real estate now? Selecting the right property and market Getting the unit ready for service Selecting and managing Tenants Turning this model from an investment to a business Creating your Action Plan for success Please help make this course interactive ask questions add your comments and share your experiences!
High skill level will increase your sales business Assist your office as an expert Why do RE Professionals need to know this stuff? Advise your Clients properly Sets the stage to participate as an Investor
Why Have Investors as Clients? Audience? Balance out your client portfolio Investors will purchase challenging properties Looking for many transactions = many commissions Touch time is much less than retail Active in all market cycles Can close quickly - Usually all cash Get referrals or share in commissions when they are investing out of your market area You will learn from them! They may bring you in on some deals
Why the Hold to Rent Model Now! Poor Performance of Wall Street Homeowners reverting back to renting High Market Rents Banks willing to Lend Many Great Investment Opportunities Low Cost of Capital Low Vacancy Rate = Low Risk Copyright 2016 by Carl Schiovone. All rights reserved
Snapshot of Historical Vacancy Loss Rates Source: www.census.gov Lenders will typically use a 10% Vacancy Loss when underwriting loans Occupancy Rate is the inverse of Vacancy Rate. A 10% vacancy rate is a 90% occupancy rate
Be Careful Using National Data National and Metropolitan Statistical Area (MSA) data may not apply to your investment location Use local resources to see how your market is doing Commercial Real Estate Brokers Property Managers and Management companies Other Investors Campus housing administrators Section 8 housing program managers Local media, data, and news MLS Real Estate Investment Groups
Debt Pay Down Wealth Creation Tax Benefits Market Appreciation Hold to Rent IRC 1031 Tax Exchange Cash Flow Organic Appreciation Leverage
Poor Management and Maintenance Wrong Property and Area Poor Cash Flow A solid Risk Mitigation Plan can overcome many risks! Legal Issues Obsolescence Tenants Risks Buy and Sell in the Right Markets
Is The Hold to Rent Model for You? Considerations Time Availability Capital Skill Investment Goals Risk Tolerance People Skills Interest
Which Path Works for You? Cash Flow & Equity Growth This path creates wealth and long term security Your money works for you! Hold to Rent Private Lender Passive Investing Transactional Income This path creates a job for you You work for your money If you don t work you don t get paid! Wholesaling Active Investing REIT Private Placement Tax Liens and Deeds Selling Real Estate Rehab & Flip Joint Venture
Terminology - Equity The difference between market value and the total debt on the property Example: $100,000 Property value - $80,000 Debt =$20,000 Equity Positive Equity - Market value is more than debt (Conventional sale) Negative Equity Market Value is less than debt (Short Sale)
Terminology - Cash Flow The money that is left after all expenses are paid Total Rent Received Total Expenses = Cash Flow Terminology Positive Cash Flow - Cash Flow higher than expenses Negative Cash Flow Cash Flow lower than expenses Breakeven Cash Flow Cash Flow equal to expenses
Taxes Permitting Debt Service Utilities Property Management Service Contracts Tenant Turnover Property & Liability Insurance Tenant Performance Factors Affecting Cash Flow Repairs and Improvements
Selecting Your Rental Property Don t get caught up in the emotion! Selection Criteria Location Layout and features Safe Do the numbers Work? Affordability Market Demand Not every property will work!
Local verses Out of the Area Investing Which is Right for You? Considerations: Can you achieve your financial goals locally? If you can t, look elsewhere Can you afford your backyard? Local markets will allow you to manage properties Out of area investing will allow you to benefit from hot and emerging markets
Create Your Investment Radius You are here! 30 minutes away 60 minutes away This is your Investment Radius become an Expert here!
What are Tenants Looking For? Rent rate Security required Clean, functional, and safe housing School district Fenced yard Layout Allow pets Number of bedrooms and baths Try to buy the home with the most bedrooms for your budget! Many rent subsidized programs pay based upon the number of bedrooms Access to public transportation and shopping Past tenant history or credit may affect their choices
Getting Prepared Your Biggest Investment is in Yourself! Having the right skill set is vital to your success! Continuing Education is only a small piece Formal education will make you a living; self-education will make you a fortune. -Jim Rohn Copyright 2016 by Carl Schiovone. All rights reserved
Building Your Support System Have Your Team Ready to go before making offers! SBA and SBDC Attorney Title Company Property Inspectors and Managers Insurance Agent Your Network Accountant Business Coach Banker and Financial Advisors Contractors
Getting Your Finances Ready Where is your investment capital coming from? How much will you have? How much debt can you carry? This will determine what markets you can afford! Get your personal and business credit cleaned up Have proof of funds ready to go Copyright 2016 by Carl Schiovone. All rights reserved
The Capital Stack The total amount of Capital available is $350,000, this is your Spend Plan Your Invest. Capital $50,000 Junior Debt or Equity (2 nd mortgage) $100,000 Senior Debt or Equity (1 st mortgage) $200,000 Copyright 2016 by Carl Schiovone. All rights reserved
Cash Flow and Equity Analisis Financed verses Cash Purchase Example Assumptions: Properties have a minimum 3 bedroom 1 bath Property cost $175,000 or less Annual Taxes: $8,000 or less Estimated rent rate is $2,200/month w/o utilities Landlord Insurance Policy (no Flood): $1,800 Conventional Mortgage Down Payment: 30% (higher for Investors) 30 Year term Interest rate 5% fixed (higher for Investors)
Cash Flow and Return on Investment Analysis All Cash Purchase Purchase Price $175,000 Scheduled Gross Income ($2,200/month) $26,400 Expenses: - Vacancy Loss (10%) $2,640 Taxes $8,000 Effective Gross Income $23,760 Insurance $1,800 - Total Expenses $9,800 Down Payment Net Operating Income $13,960 Closing costs 3% $5,250 - Debt Service N/A Total Capital Invested $180,250 Cash Flow Before Taxes $13,960 ROI ROI No Vacancy Loss 7.74 % 9.2 %
Financed Purchase Price $175,000 Scheduled Gross Income ($2,200/month) $26,400 Expenses: - Vacancy Loss (10%) $2,640 Taxes $8,000 Effective Gross Income $23,760 Insurance $1,800 - Total Expenses $9,800 Down Payment (30%) $52,500 Net Operating Income $13,960 Closing costs 6% $7,350 - Debt Service $7,884 Total Capital Invested $59,850 Cash Flow Before Taxes $6,076 ROI ROI No Vacancy Loss 10.15% 14.5 %
Cash verses Financed Considerations Equity verses Cash Flow goals Borrowing allows you to leverage other peoples money You can purchase multiple properties Equity Stripping can provide some asset protection In the previous example, you can finance three properties for the same total investment as one all cash purchase All Cash 1 Property Financed 3 Properties Cash Flow $13,960 $18,228 ROI 7.82% 10% Can you get approved for a mortgage? If you can t how to leverage your property equity if paying all cash? How many loans can you get? Talk to your CPA and Attorney before making these decisions
What Kind of a Return Should I Expect? Factors to consider Hold Period Cash invested Investor or Partner expectations Equity Cash Flow Value add Exit strategy Copyright 2016 by Carl Schiovone. All rights reserved
Sources of Investment Capital Savings Retirement accounts Self-Directed IRA s (learn about this option) Hard Money Lenders Private Lenders Partners (Joint Ventures and Business partners) Conventional loans Equity lines of credit Cross collateralization Sellers financing You must have an exit plan from higher costs loans to lower cost loans Copyright 2016 by Carl Schiovone. All rights reserved
Hold to Rent Sub-Models to Consider Class A to D markets (price barometer) Student Rentals SRO s (Single Room Occupancy) Special needs housing (veterans, safe homes, etc.) Vacation Rentals Condo s Rent subsidized programs Housing Choice Voucher Program - Section 8 Other government programs Mixed use
Selecting Your Market and Property Class Class A Newest building Latest and most comprehensive amenities Professional white collar workers Most expensive Homeownership transition Class B Building 5-15 years old Amenities not latest Blue collar workers Homeownership transition
Class C Building older than 15 years Limited amenities and deferred maintenance Lower income and income subsidized programs Class D Lowest cost/highest risk Oldest buildings among market Little to no amenities Poor condition of building Poor management Very low income No other options for tenants Higher crime What Class is Right for you? - Capital - Risk tolerance - Product availability
Getting the Property Ready for Service How far to take improvements Change your Flip reference Market based Clean Safe Reliable Functioning Remove any safety hazards Make sure you have a comprehensive checklist Add smoke and Carbon Monoxide detectors per code Apply for your Renters permit if required Get minimum housing requirements from town
Purchasing a Occupied Property Advantages May be helpful or required for financing No start up delays Earn immediate Cash Flow No or minimal Make Ready costs Is there good Cash Flow and Equity? Risks/Concerns Are the tenants performing well the current owner will say of course they are! Honor existing Leases Are the rent rates and terms where you want them? May cost more May not be convenient to make improvements Any new Tenants or Lease-ups must be approved by you Deferred maintenance and safety issues A comprehensive due diligence review is required
Purchasing an Occupied Property Utility Bills Service Contracts Eviction Search Violations Clean Title Lease and PM Review CO Tenant Screening and Performance Payment History Deposits
Tenant and Property Management Options Self-Managed Do you have the time? Do have the skill and process? Do you understand Fair Housing Law? Are you local to the property Sales Representative On your payroll to manage properties (may not need RE License) Hire a Property Manager Property Management Company Real Estate Broker Make sure they are legal and insured
Property Management Resources, Certification, and Training IREM (Institute of Real Estate Management www.irem.org) CCIM (Certified Commercial Investment Members www.ccim.com) CRB (Council of Real Estate Broker Managers www.crb.com) Remember talk to Other Investors in the area Brokers PM companies Copyright 2016 by Carl Schiovone. All rights reserved
High Level Process for Selecting PM companies Search for PM companies in area Make Contact and request PM information Contract review and due diligence Visit companies being considered Visit buildings currently under management Make final decision Each of these blocks can have several sub-tasks Don t Invest if you can t find PM companies You must have backup PM options! Enter into contract Transfer management to PM company
What are Your Getting for Your PM Fee s You will see an industry rate of 4-14% of collected rents! Marketing for Tenants MLS fees Tenant Screening and selection Collecting rents Manage move in /move out Managing past dues Lease renewal Maintenance and repair Eviction Compare all of the PM companies benefits together to see what you are really getting
Minimizing Property Management Headaches Let someone else do it! Utilities should be paid by Tenant when possible Sub-metered Ratio Utility Billing System (RUBS) Utility accounts in Tenants name Some companies may not let you do this Consider having maintenance contracts included in rent Landscaping Pest Heating and cooling Have rents direct deposited Make quality repairs with quality materials
Single Family or Multi-Family -What is best for You? Single Family Low entry point price Most new investors feel more comfortable with SF Is this the Place to learn? Easy to sell off in pieces Harder to manage properties all over town Harder to finance multiple properties (Blanket Mort.) Must have multiple properties to mitigate vacancy Hard to add value Value based upon the Comparison Method Multi-Family 5 units and up Higher entry point (lower unit cost) Easier to manage Other units will cover vacancy Easier to finance than multiple SFH Many loan products available Property income is critical Easier to raise private capital Creative financing Earn fees by Sponsoring Projects Invest in hot and emerging markets Easy to add value Value based upon the income it produces
Terminology Capitalization Rate (Cap Rate) The Cap Rate is used to measure the relationship between the Net Operating Income and the property sales price or value, it is also used as a gross indicator to evaluate investment risk. Net Operating Income NOI = All received income - All operational expenses (except debt service) The Cap Rate is expressed as a percentage as follows: Cap Rate = Net Operating Income (NOI) / Value of Property The lower the Cap rate, the lower the perceived risk and lower return expectations The higher the Cap Rate, the higher the perceived risk and higher return expectations By transposing this equation, you can also determine the value of a property Value = NOI / Cap Rate Copyright 2016 by Carl Schiovone. All rights reserved
Buying a Value Add Property - What is it? A property that is not performing as well as it should be and you feel you can improve the financial performance Financial and Physical Improvements Rent rates that are below market level Vacancy is too high Turn-over is too high Expenses out of control Past due rents Out of control Tenants Poor physical condition (Organic Appreciation) Additional Income Opportunities Add a Laundry Charge for parking Charge for Storage Cell Tower Signage There is great upside potential when purchasing Value Add Properties! Copyright 2016 by Carl Schiovone. All rights reserved
Multi-Family Value Add Example Before Financial Improvement efforts $300,000 (Value of Property) = $30,000 (NOI) /10% (Cap Rate) Assumption: $5,000 increase in your NOI After Financial Improvement Efforts $350,000 (Value of Property) = $35,000 (NOI) / 10% (Cap Rate) With a $5,000 annual improvement in the property performance you get a $50,000 increase in the value of the property! This is Why MF is so popular with Real Estate Investors! Copyright 2016 by Carl Schiovone. All rights reserved
Get Your Hold to Rent Business Process Based Develop Standard Operating Procedures (SOP s) and Documents for all repetitive things you do! Running your front office Marketing Managing Security Tenant Selection and Screening Move in / Move out inspection Evaluating a new rental property Repair checklist Due Diligence Checklist Late notice Tenant Application Billing
Establishing Your Make Ready Budget Help from your Contractors Get estimates (a few of them) Contractors can also assist you in design and layout options Having layouts priced utilize home improvement store services Leverage from prior project costs Having a standard price list
Don t Over Improve. Keep It Clean, Safe, and Simple! Copyright 2015 by Carl Schiovone, all rights reserved
Marketing Your Rentals On-line ad sites Listed with local Housing Authority Off college housing coordinators Listing with Broker Make sure they understand the rental business Be careful of on-line scams! Check on-line listing services Check on property often Have security system
Tenant Selection Unfortunately, the signs of a bad tenant are not so obvious!
Tenant Screening and Selection Use a Tenant Screening Services or PM Background checks Employment and income Credit Criminal Child Predator list Terrorist They may have systems already in place They understand the laws You can create Pass/Fail acceptance criteria Make sure to adhere to all Fair Housing Laws when selecting Tenants
Will You Allow Pets? Understand the laws of Support Animals Pros and cons Understand the pet clause in Landlord and Tenant insurance policy Prohibited breeds and size Require extra security and insurance Premiums for Landlord and Tenant policies may increase 68% of U.S. households own a pet. Source: The American Pet Products Association. Estimated 4.5 million people are bitten by dogs each year and about 885,000 require medical attention. Source: CDC
The Lease Critical Elements Term of Lease (year month to month) Amount of rent Rent due date and late policies Security Occupants Property Access Language on renewal Landlords Responsibilities Tenant Responsibilities Legal fees What is included Do not create your own Lease or purchase off the shelf Have your Attorney prepare this!
Tenant Selection and Screening Process Provide Safe and Quality Home Be sensitive to their situation Listen to what Tenants are saying Why do they want to leave Keeping Turnover Low Rent rate and features compared to market options
Tenant Turn Over Cost The cost incurred from when a tenant moves out to when a new tenant moves in Number one cost after Debt Service Tenant Turn-Over impact includes: Loss of rent while vacant How will you cover expenses? Repair and replacement costs Broker marketing costs to get a new tenant Maintenance and utilities Security Vandalism Insurance Companies Don t Like Vacant Properties!
Tenant Conflict Address problems quickly and firmly Document issues and discussions Set the tone early in the relationship Don t loose your cool Operate within the law Try to work problems out Get the assistance of case workers if applicable Be companionate to their challenges If they have gone Stale get them out fast Don t renew or terminate lease Pay them to leave Eviction Copyright 2015 by Carl Schiovone, all rights reserved
Walk Through Inspection Process Walk through inspection Before move-in Lease up Move out If you suspect anything Have a Property Condition Checklist make part of your SOP s Appliances Windows and doors Plumbing/heating/cooling Acknowledge and document conditions and findings found Take pictures as required
Risk Mitigation Properly Insured Landlord Policy Structure and improvement coverage Loss of income Liability (may be a separate policy) Flood Insurance (consider this even if not required by lender) Renters Insurance* Protects Tenants from personal property loss in and away from home (Landlord policy will not cover their losses) Liability coverage (medical and legal) May cover living expenses if home becomes inhabitable Affordable $150-200/year You can build it in their rent payment Require Copy of Policy! * Average renters personal property is $20,000 source: Esurance.com
Risk Mitigation Asset Protection How are you holding Title? Personal Name Corporation LLC Trust Get advise from your Attorney and Accountant Consider borrowing impact when using entity
Scaling Your Business -Leverage Your Equity Purchase Property Sell or leverage Equity Prepare for Service Stabilize and Optimize Select Tenant
Consider IRC 1031 Tax Exchange to defer Capital Gains Tax Make sure to speak with your Tax Advisor Market Property Optimize Occupancy Preparing to Sell Make sure to plan properly to set the stage for a successful sale! Raise rents to market rate Make sure Books are up to date Tune-up Property
Leverage the Knowledge of Your Network Don t re-invent Be open to others feedback Invest in the right guidance Bring on your Professional Support Team early in your development or expansion Doing it right the first time will save you time, money, and even keep you out of trouble The cost to cure is always higher after the damage is done! Copyright 2016 by Carl Schiovone. All rights reserved
Suggested Action Plans Develop your investment capital spend plan Address any credit issues you may have Implement your networking and marketing plan and follow-up with contacts made Establish your investment criteria Start evaluating properties and making offers Join and attend your local REIA and other business organizations Put together your educational development plan Consider operating as a Buyers Agent (make sure you are protected with an agreement) Copyright 2016 by Carl Schiovone. All rights reserved
Suggested Action Plans Create your process to evaluate properties Develop your skill set and learn to evaluate properties yourself Secure your banks and Private Lenders Understand their criteria Get your business documents created Visit properties Estimate make ready costs (bring in a contractor as required) Determine Your Maximum Allowable Offer (work with your Realtor ) Have offers presented and negotiated Join your local Landlord Association
Suggested Action Plans Complete the on-line SBA tutorial on Business Plans, SBA Loans, and other business topics (www.sba.gov) Meet with the Small Business Development Center near you (www.sbdc.gov) Create a your Business Plan draft Start writing and it will evolve Development of your SMART goals Work with your Business Coaches, Support Team, and Mentors Work the plan Request Section 8 Landlord Package Copyright 2016 by Carl Schiovone. All rights reserved