AAII Los Angeles Chapter Saturday Meeting Investment Seminar at the Skirball Center, September 15, 2012 TODD RUBINSTEIN S ENIOR PARTNER Rubinstein Group at TOLD Partners 818-601-7200 ToddR@told.com ToddR@realtor.com
Goals for Real Estate Investment Seminar 2 Diversify Your Portfolio Types of Real Estate Market Trends & Statistics Acquisition & Investment Analysis Pitfalls & Common Misperceptions Sourcing Properties & Opportunities
Why invest in real estate? 3 Portfolio diversification Most investment portfolios are made up of stocks and bond investments through pension, 401ks, and IRAs. 15% - 25% of portfolio should be real estate Higher ROI Cash flow & equity build up o Monthly or quarterly income
Why Real Estate? Diversify S&P 500 & NASDAQ Composite 1994-2012 4
Types of Investment Properties & Assets 5 Commercial Office, Retail, Industrial Single Family (SFR) - 1 Unit Residential Income - 2 4 Units Multi-Family (MFD) 5+ Units / Apts Notes Mortgages & Trust Deeds
6 How Much to Invest TYPES OF HOUSING PROPERTY SFR 2-4 units 5+ units Notes mortgages & trust deeds
7 Advantages of the Multi-Family Investment Provides stable and growing income for retirement Economies of Scale Increase in property values not needed to realize a return Rents cover expenses and mortgage so value of property is of no immediate consequence Tax advantages Depreciation Principal pay down increases equity Price appreciation increases equity
8 Advantages of Multi- Family Investment Favorable Tax Treatment Probate or Trust - Stepped up basis Property acquired for $250k and is worth $1,000,000 at time of death, no tax for heirs on $750k gain. IRS 1031 Deferred Exchange defer taxes on gain from sale Always consult a tax professional
Market Trends & Statistics Los Angeles 9
Market Trends & Statistics Los Angeles 10
Market Trends & Statistics Los Angeles 11
Market Trends & Statistics Riverside 12
Market Trends & Statistics Riverside 13
Market Trends & Statistics Riverside 14
Market Trends & Statistics Comparison: Newport Beach & Fresno 15
Market Trends & Statistics Mortgage Rates 30Y Fixed & 10Y Treasury 16
Market Trends & Statistics Mortgage Rates 30Y & 15Y Rates vs Fed Funds Rate 17
Market Trends & Statistics Unit Completions Net Absorption Vacancy 18
Market Trends & Statistics Apartment Supply & Vacancy Trends 19
Market Trends & Statistics Apartment Cap Rate Trends 20
21 Market Trends & Analysis Why invest NOW? Low interest rates Limited supply and increased demand Homeownership rate lower Baby Boomers retiring & Gen Y eschew homeownership Increasing rental rates Decreasing vacancy rates
Acquisition & Investment Analysis 22 Criteria for Acquisition Location & Condition (Classes A, B, C) Investment Metrics (What is our ROI?) Initial Investment & Financing Completing the Investment Analysis
23 Acquisition & Investment Analysis Location & Condition Urban, Suburban, Ex-urban, Rural Class A, B, C Zoning Employment Conditions Crime Statistics Investment Metrics (ROI) Keys to Determine Value GRM - Gross Rent Multiplier Price per Square Foot, Price per Unit IRR Internal Rate of Return Cash on Cash Return (Pre-tax Return) Cap Rate Capitalization Rate
24 Acquisition & Investment Analysis CAP RATE Cap Rate or Capitalization rate is one of the best real estate valuation approaches and is used as a primary measure for institutional sized properties in Multi-family sector as well as other Commercial sectors. This is a direct income approach: value equals net operating income divided by cap rate. The Cap Rate is made up of 3 components. They are: NOI or Net Operating Income and Value. Knowing any two will help you figure out the third. If you want to determine the cap rate of a property first look at the NOI. It does not include things like debt service, depreciation and capital expenditures; it simply reflects the buildings capacity to generate income. Cap Rate = (NOI divided by market value) or the cap rate for a quadplex listed and priced at $750,000 with an NOI of $55,000 is 7.33 (.0773 (7.33%) = ($65,000/$750,000) If you do some research and find that for this type of property, in this location, at this time, the current market cap rate is 8.25% then you can determine what the value of the property is: ($55,000/.0825 = $667,000).
25 Acquisition & Investment Analysis Initial Investment & Financing Cash Equity Direct acquisition one or two partners Portion of investment vehicle PP REITs / TICs / FDOs Syndication group of investors Debt 1 st deed trust 2 nd deed trust Hard money loans Bridge or mezzanine financing
26 Acquisition & Investment Analysis Alternative Sources of Funds ERISA (Employment Income Retirement Security Act of 1974) Federal law that sets minimum standards for pension plans in private industry. Set up option for self-direction in plans. Self-Directed Vehicles - IRAs Roth & Traditional KEOGH SEP IRA 401 (k) 3rd Party Administration (Custodians) Disqualified Parties Family Spouse Lineal Descendent Fiduciaries Allowable: Investing in many forms of RE
27 Acquisition & Investment Analysis Cash Flow Analysis: Los Angeles CA 90003 Property size: 2,100 sf Number of units: 4 Short Sale - Seller owned short payoff (Pending escrow) Purchase Price: 245,000 Down Payment: 25% Down Payment: $61,250 Closing Cost Estimate: $5,513 Total Cash investment: $66,763 Amount financed: New Loan $183,750 Interest Rate: 4.5% Loan Term (yrs): 30 due in 10 years Payment (P&I): $980.80 mo (fully amortized) Tax & insurance: $345.00 mo Price per Unit: $61,250 Price Per Square Ft: $116.67 (2,100 sf) Scheduled Gross Inc (SGI): $34,800 Gross Rent Multiplier (GRM): 7.04 Net Operating Income (NOI): $21,924 Cap Rate: 8.95% Return on Investment (ROI): $10,154 Cash on Cash Return aft Debt: 16.58% LA Rent Control
28 Acquisition & Investment Analysis Cash Flow Analysis: Palmdale CA 93550 Property size: 7,332 sf Number of units: 11 REO - Bank owned Acquisition (Closed) Purchase Price: $390,000 Down Payment: 35% Down Payment: $136,500 Closing Cost Estimate: $8,775 Total Cash investment: $145,275 Amount financed: New Loan $253,500 Interest Rate: 5.75% Loan Term (yrs): 30 due in 10 years Payment (P&I): $1,479.36 mo (fully amortized) Tax & insurance: $615.00 mo Price per Unit: $35,455 Price Per Square Ft: $53.19 (7,332 sf) Scheduled Gross Inc (SGI): approx $82,800 Gross Rent Multiplier (GRM): 4.71 Net Operating Income (NOI): Actual $49,680 Capitalization Rate: 12.74% Return on Investment (ROI): $31,928 Cash on Cash Return aft Debt: 21.98% Non-Rent Control
29 Acquisition & Investment Analysis Cash Flow Analysis: Sherman Oaks CA 91403 Property size: 10,760 sf Number of units: 7 Std Sale - Developer owned Active Sale Purchase Price: $2,200,000 Down Payment: 25% Down Payment: $550,000 Closing Cost Estimate: $27,500 Total Cash investment: $577,500 Amount financed: New Loan $1,650,000 Interest Rate: 4.5% Loan Term (yrs): 30 due in 10 years Payment (P&I): $8,360.31 mo (fully amortized) Tax & insurance: $3,000.00 mo Price per Unit: $314,286 Price Per Square Ft: $204.08 (10,780 sf) Scheduled Gross Inc (SGI): approx $180,000 Gross Rent Multiplier (GRM): 12-13 Net Operating Income (NOI): Actual $102,960 Cap Rate: 5.15% (broker states 4.80%) Return on Investment (ROI): $2,636.28 Cash on Cash Return aft Debt: 0.46% (1.21% if assumable loan) Non-Rent Control* Assumable non-recourse loan of $1,270,000 @ 5.95% locked for 7.5 yrs.
Pitfalls & Common Misperceptions 30 o Poor Acquisition Strategy o Faulty Investment Analysis o Management Issues
31 Wrong location investor tolerance Pitfalls & Common Misperceptions Poor Acquisition Strategy & Faulty Investment Analysis Bad timing Chasing market up feeling left out Chasing market down can t let go Lack of analysis Too much cash to acquire asset High entry and exit price Inappropriate financing Rate, fee, term, and covenants Risk vs Reward poor understanding Incoherent strategy no road map Short, mid or long term hold Breakeven is not acceptable No budget - for contingencies, rehab, or reposition Bad advice or incompetent team
32 Pitfalls & Common Misperceptions Management Issues Property Management o o o o o o o Tenant screening Quarterly or semi-annual property check Leasing and resident retention Proper eviction procedures Accounting 3 Ts Tenants, Toilets, & Trouble Rent control Other Important Management Issues o o o Self managed screening, leasing, bills, & books On-site mgmt on-site manager req for 16 or more units. CA state law - CCR Title 25 sec 42 Off-site - property management company
Sourcing Properties & Opportunities 33 MLS RE agent relationship Online sources Auctions general Trustee Sale auctions Notice of Defaults (NOD) Notice of Trustee Sales (NTS) REO properties (bank inventory) Bank rolls, relationships, or tapes Bankruptcy Court Letters to owners off market Property Mgmt Companies Ads, marketing, email campaigns Condition distressed / fixer Location less desirable Seller issues financial / relo REOs bank or lender owned Short Payoffs or Short Sales Bankruptcy sales Dissolution of marriage Dissolution of partnerships Value added Density plays assemblage or upzone
Questions 34
Further Reading, Research & Links 35 National Apartment Association - http://www.naahq.org/ Multi-Housing News Online http://www.multihousingnews.com/ Multi-Family Executive Magazine - http://www.multifamilyexecutive.com/ Institute of Real Estate Management - http://www.irem.org/ Apartments for Sale - http://apartmentsforsale.com/ Freddie Mac - http://www.freddiemac.com/ Fannie Mae http://www.fanniemae.com/ Dept of Housing & Urban Development - http://portal.hud.gov/hudportal/hud Investors Guide to Private Money Lending - http://www.privatemoneylendingguide.com/ Globerex - http://www.globerex.com/ Inman News - http://www.inman.com/ Globe St.com - http://www.globest.com/ CoStar Group http://www.costar.com Loopnet.com - http://www.loopnet.com/ Redfin http://www.redfin.com/ Zillow - http://www.zillow.com/ Realtor.com - http://www.realtor.com/ Homes.com - http://www.homes.com/
If you want a copy of this presentation, a glossary of commercial real estate terms, and the Apartment Outlook reports for 2012, then send me an email. TODD RUBINSTEIN S ENIOR PARTNER Rubinstein Group at TOLD Partners 818-601-7200 ToddR@told.com ToddR@realtor.com