Real Estate Packages
MAAP “Core Four” Pillars
Asset Class Summary
Bought at Auction
• Saves SO much time• Not shotgunning low-
ball offers• Short-sales take 2-3
times as long• Don’t have to get
money to the courthouse in 24 hours
Rehabbed
• Financing fix up• Not keeping crews on
budget• Try to get a contractor
to finish the job• Don’t over-improve• Don’t have to supervise
Tenants in Place
• Cash flow now• Most important tenant
is the first one• 12-24 month leases• Managers screen for
quality
Property Managers
• Find the best in the area• Does the heavy lifting• Day-to-day tenant
interface• On staff maintenance• Only paid when tenant
occupied
Melbourne Street, SLC
• Purchased in 1992 for $87,500– Rents $1,300– Net $1,000
• Cash on cash $12,000/$87,500 = 13.7%• 1996 appraised for $240,00• 2008 appraised for $390,000• 2012 worth $230,000
The Power of Leverage• Increases returns 3-4%• Allows buyer to secure double the properties• “Non-Recourse” lending • Based on the property only
– No application– No collecting from the borrower– Required financing if using retirement dollars
• Banks don’t like it – 1 national bank says they do it– Minimum loan sizes, deny deals for whatever reason
• Our vendors have it
How to value properties
• Property Tax notice• Values estimated by neighborhood area• Every 2-3 years
• Online Data • Zillow is common
– Pulls data from public records like property tax, or sales in area, not accurate, includes short sales and foreclosures
• Appraisal-best and closest
How to value properties
• Appraisers\Appraisal report– Comparable Sales– Income Approach– Replacement cost
How to value properties-Comparable Sales
Comparable Sales-subjective• 3 “like” properties sold in last 6 months• Distance within a mile• Adjustments for differences
– No garage vs 2 car– Covered patio vs no pation– Lot size– Number of bathrooms– Number of bedrooms
How to value properties-Income Approach
Value based on the income-commercial properties– Income approach-Melbourne Street, SLC• Net income $10,000• Divide by a common rate of return (cap rate)
• At 8%– $10,000\.08 = $125,000 value
• At 6%– $10,000\.06 = $166,666 value
How to value properties-Replacement Cost
• Replacement cost• How homeowners insurance looks at a property• $80 per square foot x square footage• Deduct depreciation• Value of lot added on
Melbourne Street SLC• 1600 sq ft upstairs x $80 = $128,000• 1600 sq ft downstairs x $40 = $64,000 totals $192,000
– Add the land
• Significant remodel creates “effective age” estimate
How do our vendors value properties?
• Cost to build comparison• Florida condos, what would I pay down the street• Instant equity
• Replacement cost-cuts out non-market type sales• How homeowners insurance looks at a property @ $80\ft• Replacement cost is a watermark for value over time.• If we can get a property in the $40-50\ft, it is a good price
Significant remodel creates “effective age” estimateChange out plumbing, HVAC, electrical, windows, kitchen in a 100 yr
old property, how old is the property?
Newer properties 10-14%
14.2% return Doubles every 5 yrs
Year 0 $60,000
Year 5 $120,000
Year 10 $240,000
Year 15 $480,000
Year 20 $960,000
Year 25 $1,920,000
Real Estate Returns HopeCan start with less money, same result
Returns safely secured
People understand the risks
Loans are repaid in 4-5 years
To compound, we need to reinvest the rents
Gives people returns high enough to get back on track
People understand the risks
18% return Money doubles every 4 years
Year 0 $30,000
Year 4 $60,000
Year 8 $120,000
Year 12 $240,000
Year 16 $480,000
Year 20 $960,000
Year 24 $1,920,000
Cornerstone of a portfolio
Ideal Portfolio Contents