2015 02-04 - understanding appreciation - a guide to building wealth in real estate

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Understanding Appreciation: A Guide To Building Wealth In Real Estate James Orr

Transcript of 2015 02-04 - understanding appreciation - a guide to building wealth in real estate

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Understanding Appreciation:A Guide To Building Wealth In

Real EstateJames Orr

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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

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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.

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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

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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.

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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

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What do you call it when you buy something hoping that it goes up in value?

Speculation

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So… isn’t that what appreciation is?

Yes

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Which ones of these are speculative?

Appreciation Cash Flow

Debt Pay Down Tax BenefitsROI

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Buying Conventional 20% Down

Appreciation ≈ 15% Cash Flow ≈ 5%

Debt Pay Down ≈ 5.5%

Tax Benefits ≈ 14.55%

ROI ≈ 40%

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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

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What is “Normal” Appreciation?

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Source: National Association of Realtors

http://www.realestateabc.com/graphs/natlmedian.htm

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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

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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/

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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

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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

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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:

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From “The Intelligent Investor” by Benjamin Graham

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James Orr

Phone: (970) 225-6989Fax: (888) 714-4596

[email protected]://JamesOrr.com