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TODD RUBINSTEIN S E N I O R P A R T N E R
R u b i n s t e i n G r o u p a t T O L D P a r t n e r s 8 1 8 - 6 0 1 - 7 2 0 0
T o d d R @ t o l d . c o m T o d d R @ r e a l t o r . c o m
AAII Los Angeles Chapter Saturday Meeting Investment Seminar at the Skirball Center, September 15, 2012
Goals for Real Estate Investment Seminar
Diversify Your Portfolio
Types of Real Estate
Market Trends & Statistics
Acquisition & Investment Analysis
Pitfalls & Common Misperceptions
Sourcing Properties & Opportunities
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Why invest in real estate?
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
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Why Real Estate? Diversify
S&P 500 &
NASDAQ Composite
1994-2012
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Types of Investment Properties & Assets
Commercial – Office, Retail, Industrial
Single Family (SFR) - 1 Unit
Residential Income - 2 – 4 Units
Multi-Family (MFD) 5+ Units / Apts
Notes – Mortgages & Trust Deeds
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How Much to Invest
TYPES OF HOUSING
PROPERTY
SFR
2 -4 units
5+ units
Notes – mortgages & trust deeds
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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
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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
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Market Trends & Statistics
Los Angeles
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Market Trends & Statistics
Los Angeles
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Market Trends & Statistics
Los Angeles
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Market Trends & Statistics
Riverside
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Market Trends & Statistics
Riverside
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Market Trends & Statistics
Riverside
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Market Trends & Statistics
Comparison:
Newport Beach
& Fresno
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Market Trends & Statistics
Mortgage Rates
30Y Fixed &
10Y Treasury
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Market Trends & Statistics
Mortgage Rates
30Y & 15Y Rates
vs Fed Funds
Rate
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Market Trends & Statistics
Unit Completions
Net Absorption
Vacancy
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Market Trends & Statistics
Apartment Supply
& Vacancy Trends
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Market Trends & Statistics
Apartment Cap Rate
Trends
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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
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Acquisition & Investment Analysis
Criteria for Acquisition Location & Condition (Classes A, B, C)
Investment Metrics (What is our ROI?)
Initial Investment & Financing
Completing the Investment Analysis
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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
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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).
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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 1st deed trust 2nd deed trust Hard money loans Bridge or mezzanine financing
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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
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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
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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
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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.
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Pitfalls & Common Misperceptions
o Poor Acquisition Strategy
o Faulty Investment Analysis
o Management Issues
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Pitfalls & Common Misperceptions
Wrong location – investor tolerance
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
Poor Acquisition Strategy
&
Faulty Investment Analysis
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Pitfalls & Common Misperceptions
Property Management
o Tenant screening
o Quarterly or semi-annual property check
o Leasing and resident retention
o Proper eviction procedures
o Accounting
o 3 Ts – Tenants, Toilets, & Trouble
o Rent control
Other Important Management Issues
o Self managed – screening, leasing, bills, & books
o On-site mgmt – on-site manager req for 16 or more units. CA state law - CCR Title 25 sec 42
o Off-site - property management company
Management Issues
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Sourcing Properties & Opportunities
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
• 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
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Questions
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Further Reading, Research & Links
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/
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T O D D R U B I N S T E I N S ENIOR PARTNER
Rubinstein Group at TOLD Partners 818-601-7200
[email protected] [email protected]
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.