Getting started - 1-4 unit Getting started - 1-4 unit Residential StrategiesResidential Strategies

David BarrDavid BarrRealtor / investorRealtor / investor

Presentation OutlinePresentation Outline

• Why invest in residential propertyWhy invest in residential property

• Types of residential propertyTypes of residential property

• Financial strategies and structuresFinancial strategies and structures

• Considerations for investingConsiderations for investing

• Evaluating deals – cash flow is king!Evaluating deals – cash flow is king!

• Owning and managing the propertyOwning and managing the property

• Exit scenariosExit scenarios

Why invest in residential Why invest in residential propertyproperty

• To create an additional source of To create an additional source of moneymoney– Monthly income from rentsMonthly income from rents

•Cash flow after all expensesCash flow after all expenses

– AppreciationAppreciation• Increase in building value over timeIncrease in building value over time

– Tax benefitsTax benefits•Depreciation provides tax deductionsDepreciation provides tax deductions

– LeverageLeverage•Use the equity to buy more propertyUse the equity to buy more property

Why invest in residential Why invest in residential propertyproperty

• The tenants pay for the building and you The tenants pay for the building and you get all the benefits of ownershipget all the benefits of ownership

• Unlike the stock market, values never go Unlike the stock market, values never go to zero – real estate always increases in to zero – real estate always increases in value over timevalue over time

• 90% of all self made millionaires did it by 90% of all self made millionaires did it by investing in real estateinvesting in real estate

• Wealthy families own lots of real estate to Wealthy families own lots of real estate to preserve their wealthpreserve their wealth

Types of residential Types of residential investmentsinvestments

• Single tenant Single tenant – Single family homesSingle family homes– TownhomesTownhomes– Condo’sCondo’s

• Multi tenantMulti tenant– Duplex’sDuplex’s– Tri-plex’sTri-plex’s– Four plex’sFour plex’s

• Rehab and flipRehab and flip

Single tenant investmentsSingle tenant investments

• Single family homesSingle family homes

• TownhomesTownhomes

• CondosCondos

• Lots of inventory to Lots of inventory to choose fromchoose from

• You can rent $50,000 You can rent $50,000 to $500,000 homesto $500,000 homes

Single tenant investmentsSingle tenant investments

• Pro’sPro’s– Easy to financeEasy to finance– Can find one in your neighborhoodCan find one in your neighborhood– Get higher rents than apartmentsGet higher rents than apartments– Lots of foreclosures availableLots of foreclosures available

• Con’sCon’s– More maintenanceMore maintenance– Greater financial risk if tenant moves outGreater financial risk if tenant moves out– Getting a great buy can take time – need to Getting a great buy can take time – need to

find desperate sellersfind desperate sellers

Multi tenant buildingsMulti tenant buildings

• DuplexDuplex– Two rental unitsTwo rental units

• Tri-plexTri-plex– Three rental unitsThree rental units

• Four plexFour plex– Four rental unitsFour rental units

Multi tenant buildingsMulti tenant buildings

• Pro’sPro’s– Less financial risk if one tenant moves outLess financial risk if one tenant moves out– Less maintenance – one roof, yard, etc.Less maintenance – one roof, yard, etc.– Higher building value appreciates more each yearHigher building value appreciates more each year

• Con’sCon’s– Costs more to buy – need more down paymentCosts more to buy – need more down payment– Future value is determined by income you haveFuture value is determined by income you have– More tenants and toiletsMore tenants and toilets

Financing makes it easyFinancing makes it easy

• If a building has less than 5 rental units If a building has less than 5 rental units you can use conventional financingyou can use conventional financing

• Anything from single family to a 4-plexAnything from single family to a 4-plex

• This makes these investments the This makes these investments the easiest to buy for the common investoreasiest to buy for the common investor

• A multitude of financing programs, 20% A multitude of financing programs, 20% to zero percent down loansto zero percent down loans

Financing from the bankFinancing from the bank

• Typical loans are for 80% - 95% of the Typical loans are for 80% - 95% of the purchase price – need 5%-20% downpurchase price – need 5%-20% down

• Interest rates on rental property are Interest rates on rental property are higher than owner occupied propertyhigher than owner occupied property

• Your credit score is very importantYour credit score is very important

• The zero down loans are becoming The zero down loans are becoming extinctextinct

• Lenders are becoming more difficultLenders are becoming more difficult

Financing without a bankFinancing without a bank

• Who needs a bank?Who needs a bank?

• Seller financing can work greatSeller financing can work great– Contract for DeedContract for Deed– Lease option to purchaseLease option to purchase– All terms are negotiableAll terms are negotiable

• Trade for other properties, boats, Trade for other properties, boats, cars etc.cars etc.

Pick your area firstPick your area first

• Identify the best neighborhood for Identify the best neighborhood for you to invest inyou to invest in

• Best if it is 15 minutes from where Best if it is 15 minutes from where you liveyou live

• Even if it is a great deal, driving an Even if it is a great deal, driving an hour to fix something at midnight is a hour to fix something at midnight is a bummerbummer

Look on paper before Look on paper before drivingdriving• If a property does not cash flow then If a property does not cash flow then

why buy it?why buy it?• You need a way to quickly evaluate You need a way to quickly evaluate

the hundreds of opportunities the hundreds of opportunities availableavailable

• Helps you in determining the true Helps you in determining the true value of a rental propertyvalue of a rental property

• You can use it to set a sale price or You can use it to set a sale price or negotiate a better dealnegotiate a better deal

Information neededInformation needed

• Purchase pricePurchase price• Building income Building income

– rent, laundry, parking, etc.rent, laundry, parking, etc.

• Financing termsFinancing terms– Interest rateInterest rate– Percentage downPercentage down– Type of loan (fixed rate, ARM)Type of loan (fixed rate, ARM)

• Expenses – Tax, utilities, insurance, Expenses – Tax, utilities, insurance, etc.etc.

What it tells youWhat it tells you

• If the property will cash flowIf the property will cash flow

• Your tax savingsYour tax savings

• Potential appreciationPotential appreciation

• Return on investmentReturn on investment

• CAP rateCAP rate

• Net Operating Income (NOI)Net Operating Income (NOI)

• All of the above help you make your All of the above help you make your decisiondecision

Example –S Minneapolis Example –S Minneapolis duplexduplex• $249,900 asking $249,900 asking

priceprice

• Income $23,490/yrIncome $23,490/yr

• Expenses $6250/yrExpenses $6250/yr

• FinancingFinancing– 20% down20% down

• Cash flow Cash flow $4,360/yr$4,360/yr

3200 Blaisdell Ave S, Minneapolis

Example - Minneapolis Four Example - Minneapolis Four plexplex

• $299,900 purchase $299,900 purchase priceprice

• Income $31,740/yrIncome $31,740/yr

• Expenses Expenses $10,130/yr$10,130/yr

• FinancingFinancing– 20% down20% down

• Cash flow $3585/yrCash flow $3585/yr

Purchase Price $334,900.00 Percent of DownCash Invested $33,490.00 10%

# of units Rents2br 1 $895.002br 1 $900.002br 1 $925.002br 0 $0.00Garage 0 $0.00

Loan to Value Percentage 80%Principal Amount: $267,920.00 P &I $1,457.80Interest Rate: 6.5000% Term in Months: 1,000.00Principal Amount: $33,490.00 P &I $251.32Interest Rate: 9.0000% Term in Months: 1,000.00Total Monthly Payment 1,709.12Land Value $50,235.00 YEARS:Personal Property $16,745.00 5.0 $3,349.00Building Value $267,920.00 27.5 $9,742.55Total Depreciation $13,091.55Annual Rent $32,640.00Less Vacancy $0.00 0%Gross Operating Income $32,640.00

Real Estate Taxes $2,682.69 Advertising $100.00Utilities $0.00 Admin/Legal $100.00Caretaker $1,200.00 Snow and Lawn $100.00Maintenance $500.00 Insurance $1,800.00Total Expenses $6,482.69Operating Expense Ratio 20%

Gross Operating Income $32,640.00Operating Expense $6,482.69Net Operating Income $26,157.31Minus Debt Service $20,509.47Cash Flow Before Tax $5,647.84Annual Debt Service $20,509.47Minus: Interest $17,414.80Equals Principal Deduction $3,094.67

Net Operating Income $26,157.31Minus Interest ($17,414.80)Minus Total Depreciation ($13,091.55)Taxable Income ($4,349.04)Tax Bracket 35%Tax Savings $1,522.16

Appreciation 5% $16,745.00Return on Investment 80.65% Cap Rate 7.81%(w/appreciation)Return on Investment 13.79% Cash on Cash 16.86%(w/out appreciation)

Improving cash flowImproving cash flow

• Get a lower interest rate when financingGet a lower interest rate when financing• Separate utilities – make tenants pay for Separate utilities – make tenants pay for

the heat and electricthe heat and electric• Ways to increase rentWays to increase rent

– Buy a building with low rentsBuy a building with low rents– Make improvements to justify rent increasesMake improvements to justify rent increases– Add bedroomsAdd bedrooms– Coin operated laundryCoin operated laundry– Rent garagesRent garages

Play with the variablesPlay with the variables

• Change the purchase price to fit your Change the purchase price to fit your goalsgoals

• Modify the income & expense Modify the income & expense numbers to match your plans for the numbers to match your plans for the buildingbuilding

• See what a new interest rate or See what a new interest rate or change in loan terms can do to help change in loan terms can do to help or hurt youor hurt you

Owning and managementOwning and management

• Now that you own it what do you do?Now that you own it what do you do?• Run a tight shipRun a tight ship

– Watch all your expensesWatch all your expenses– Manage your tenants so they know the rulesManage your tenants so they know the rules– Do what you sayDo what you say

• Maintain the propertyMaintain the property– Nice clean buildings rent better and keep Nice clean buildings rent better and keep

tenants happytenants happy• It is a job, not just an adventure!It is a job, not just an adventure!• Don’t like doing it, hire a property Don’t like doing it, hire a property

managermanager

Protect your wealthProtect your wealth

• Separate your investments from Separate your investments from personal propertypersonal property

• Put properties in corporation or trustPut properties in corporation or trust

• Keep up education on tenant lawKeep up education on tenant law

• Use the right paperwork – document Use the right paperwork – document everythingeverything

• Track your financial position Track your financial position constantlyconstantly

Exit ScenariosExit Scenarios

• Typical investor keeps buying more Typical investor keeps buying more properties properties

• SF – MF – Apartments – CommercialSF – MF – Apartments – Commercial

• Use 1031 exchanges to defer taxes and Use 1031 exchanges to defer taxes and increase returnsincrease returns

• Buy and hold is best way to get richBuy and hold is best way to get rich

• Build a portfolio that you can live off cash Build a portfolio that you can live off cash flow and keep building equityflow and keep building equity

• Give them to your kids - trustsGive them to your kids - trusts

Thank You for your interestThank You for your interest

• I can send you a free copy of this I can send you a free copy of this presentation and cash flow presentation and cash flow spreadsheetspreadsheet

• E-mail me at E-mail me at dbarr@rhsrealty.com

• Or call me at 763-746-3828Or call me at 763-746-3828