2015 02-04 - understanding appreciation - a guide to building wealth in real estate
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Transcript of 2015 02-04 - understanding appreciation - a guide to building wealth in real estate
Understanding Appreciation:A Guide To Building Wealth In
Real EstateJames Orr
Upcoming Classes• Property Management: Leases – Brian Williams• Wednesday February 11th, 2015 6 PM to 8 PM
• Contract To Buy and Sell Real Estate – James Orr• Wednesday February 18th, 2015 6 PM to 8 PM
• Property Management Mastery – Brian Williams• Wednesday February 25th, 2015 6 PM to 8 PM
• House Selling Strategies – James Orr• Wednesday March 4th, 2015 6 PM to 8 PM
Upcoming ClassesPlease RSVP early since seating is limited:
• http://NCREIG.com• http://Facebook.com/ncreig
IMPORTANT NOTE: If you’re not going to attend, please remove your RSVP so someone else can attend.
Introductions• How long will it take a $250,000 property to be worth
$1,000,000 in our local market?• BONUS QUESTION: If you put 20% down ($50,000)
what is your average return on investment per year once it gets to $1,000,000
Wealth• This presentation is called “A Guide To Building Wealth”• What is wealth?
• an abundance of valuable possessions or money.• the state of being rich; material prosperity.• plentiful supplies of a particular resource.• Rich Dad’s definition of Wealth:
• The definition of wealth is the number of days you can survive without physically working (or anyone in your household physically working) and still maintain your standard of living.
• For example, if your monthly expenses are $5,000 and you have $20,000 in savings, your wealth is approximately four months or 120 days.
• Wealth is measured in time, not dollars.
Wealth• So, using Rich Dad’s definition there are two ways to
build wealth:• Cash Flow and/or• Appreciation
• To “use” appreciation, you need to:• Refinance and pull cash out, or• Sell the property
What do you call it when you buy something hoping that it goes up in value?
Speculation
So… isn’t that what appreciation is?
Yes
Which ones of these are speculative?
Appreciation Cash Flow
Debt Pay Down Tax BenefitsROI
Buying Conventional 20% Down
Appreciation ≈ 15% Cash Flow ≈ 5%
Debt Pay Down ≈ 5.5%
Tax Benefits ≈ 14.55%
ROI ≈ 40%
Assumptions
Mean3.500%2.000%2.000%2.000%2.000%2.000%2.000%2.000%2.000%
Monte Carlo
RTO Rent Appreciation Rate:Rent Appreciation Rate:
Utilities Inflation Rate:HOA Inflation Rate:
Property Taxes Infl Rate:
Repair Inflation Rate:
Yearly Appreciation Rate:RTO Purchase Price Increase Rate:
Hazard Insurance Inflation Rate:
250,000$ 250,000$
20.0%50,000$
200,000$ 5.000%(1,073.64)$
1,600$ -$
1,500$ 1,200$
-$ -$ -$ -$
2,000$ 4,000$
56,000$ 256,000$
33.00%0.00%12.00%2.00%
5,000$ 2.00%
2,000$ 7.00%
Tenant Buyer Turnover Cost:
Seller Concessions:
Subsequent TB Down Payment %:
Maintenance Reserve:Property Management:
Vacancy Percentage:Years Between Tenant Buyers:
Initial Tenant Buyer Down Payment $:
Suggest Initial Maintenance Account:
Yearly Property Taxes:
First Mortgage Rate:
Yearly Hazard Insurance:Yearly HOA:
First Mortgage PI Payment:
Extra Monthly Option Fee:
Total Investment Buying ALL CASH:
Initial Tenant Buyer Down Payment %:
ARV:Purchase Price:
Down Payment %:Down Payment $:
First Mortgage:
Traditional Sell With Agent Cost:
Traditional Loan Closing Costs:Total Initial Investment:
First Make Ready:
Monthly Owner Utilities:
Fund Initial Reserve Account:
Fair Market Rent:
Basic Assumptions
What is “Normal” Appreciation?
Source: National Association of Realtors
http://www.realestateabc.com/graphs/natlmedian.htm
National Data Summarized• From 1968 through 2004
• My Fort Collins, Loveland and Windsor data is 1996 to present• See reference slide at end to see my data
• From data on previous slide:• Average = 6.41• Median = 5.85• Standard Deviation = 3.30
• Case-Schiller claims 3.4% annually from 1987 to 2009• Another website claiming National Association of Realtors
as source claims 5.4% annually from 1968 to 2009
Median Sales Price/Total Sq Ft 2014
$125+7.31%
$112+9.91%
$109+11.52%
Fort Collins Loveland Windsor
http://jamesorr.com/appreciation-rates/
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
$320,000
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Fort Collins Appreciation RatesSo
ld P
rice
in T
hous
ands
Perc
ent C
hang
e Ye
ar O
ver Y
ear
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
$320,000
$60
$70
$80
$90
$100
$110
$120
$130
$140
$150
Fort Collins Appreciation Rates
Average $ Median $ Average $/Sq Ft Median $/Sq Ft
Sold
Pric
e
Sold
Pric
e/To
tal S
q Ft
New Assumptions
Mean Standard Deviation Low 25th %ile Average Median 75th %ile High3.500% 2.000% -3.18% 2.19% 3.54% 3.55% 4.92% 10.47%2.000%2.000% 2.000% -6.50% 0.70% 2.02% 2.06% 3.39% 8.57%2.000%3.000% 2.000% -3.58% 1.68% 3.00% 3.02% 4.33% 10.45%3.000% 2.000% -5.07% 1.63% 2.99% 2.99% 4.32% 10.77%3.000% 2.000% -3.84% 1.67% 3.04% 3.03% 4.42% 10.73%3.000% 2.000% -3.33% 1.70% 3.04% 3.05% 4.37% 9.99%3.000% 2.000% -5.06% 1.65% 2.99% 3.01% 4.33% 9.97%
Monte Carlo
Coming Soon
Coming SoonRTO Rent Appreciation Rate:Rent Appreciation Rate:
Utilities Inflation Rate:HOA Inflation Rate:
Property Taxes Infl Rate:
Repair Inflation Rate:
Yearly Appreciation Rate:RTO Purchase Price Increase Rate:
Hazard Insurance Inflation Rate:
From “The Intelligent Investor” by Benjamin Graham
References• http://jamesorr.com/appreciation/• By City:• http://jamesorr.com/fort-collins-appreciation-rate/• http://jamesorr.com/loveland-appreciation-rate/• http://jamesorr.com/windsor-appreciation-rate/