Residential Income Property Investing Presentation - Santa Clarita Velley Chamber of Commerce - June 15, 2012

1. Residential Income Property Investing
SCV Chamber Lunch and Learn
June 15, 2012

2. Residential Income Property Investing
Phil Levy and Joey Levy
SCV Chamber Lunch and Learn
June 15, 2012

3. Introduction
• Investing in residential income property has become a
significant sector of the residential housing market.
• Today’s presentation will profile this marketplace and
provide a framework for engaging in this business.
• Information presented is nationwide in scope unless
otherwise disclosed.
• Please jot your questions down on the index cards. A
Q&A session will be held after the formal presentation.
Phil Levy & Joey Levy, REALTORS®
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4. About Us
– Phil Levy, REALTOR®, CDPE, CIAS
• 30 years in the insurance business principally in senior financial management
roles include CFO
• BBA Finance (University of Miami), MSM Accounting (FL International
University), CPA
• 10 Years in the Santa Clarita Valley
• 4 Years serving the community in real estate
– Joey Levy, REALTOR®, CDPE
• BA in Media Arts (University of Arizona)
• 4 years servicing the community in real estate.
• Heavily involved in the community affairs through JCI and other
organizations.
– Our objective is to provide a business oriented approach to
our clients’ realty needs.

5. Overview
• Trends driving the opportunity for residential
income property investing.
• The investment perspective
– Historical comparisons
– Unique benefits
• creating generational wealth
• Finding Properties
• Analytical framework
• Assembling a team
Phil Levy & Joey Levy, REALTORS®
Intero Real Estate Services
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6. Trends Driving the Opportunity
• Market Overview*
– $3 trillion market
– 21 million rental units
– 52% of the residential rental unit
– Increasing rents throughout the recent recession and
recovery
– According to the Charfin Institute the median income
of investors in 2011 was $86,100 & 39% made less
than $75,000.
*Corelogic Market Pulse – April 11, 2012
Phil Levy & Joey Levy, REALTORS®
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7. Trends Driving the Opportunity
• Recent report by the Demand Institute of the
Conference Board
– Worst is probably over for the housing market
– Consumers lost $7 trillion from housing assets since 2006
– Lack of listing inventory with multiple offers along with
increasing numbers of closed sales.
– Presence of investors competing for deals to provide rental
units
– 2 to 3 year oversupply of existing homes – 14% of all
housing units were vacant in 2011 & 13% of mortgages
were distressed.
Phil Levy & Joey Levy, REALTORS®
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8. Opportunity
– As the economy (hopefully) recovers demand for
housing will be driven by rental properties rather than
owner occupied.
– Still 80% of Americans believe that buying a home is
their best long term investment
• Rental Demand
– Multifamily construction is recovering with a 54%
increase in starts in 2011 over 2010 – but still at a
historically low level
– Median asking rent increased 19% between 2005 and
the 1Q2012
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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9. Opportunity
• Rental Demand Drivers
– Former homeowners who defaulted. Need to rent
until restoration of credit and finances
– Young adults (18 to 34 year old heads of households.
• >50% expect to rent.
• 68% lower net worth than contemporaries of 1984
• Ed note: Effect of student loans and reduced employment
outlook
• Still living with parents. Doubled up households account for
20% of all households for the next 5 years.
– & 31% of this age group are still living with parents
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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10. Opportunity cont
• Rental demand drivers
– New immigrants – expected to reach 1.2 to 1.6
million per year by 2017
– JOBS will absorb existing inventory and increase
overall housing demand over the next 2 to 3 years
• Demand will be driven by rentals .
• Ed note: Oversupply hinders starts and therefore
construction job growth.
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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11. Historical Comparisons
Comparative Annual Percentage Yields
6 Month
Negotiable 10 Year Treasury S&P 500
Year CD's* Notes* Dividend**
2000 6.59 6.03 1.21
2001 3.66 5.02 1.38
2002 1.81 4.61 1.80
2003 1.17 4.01 1.55
2004 1.74 4.27 1.67
2005 3.73 4.29 1.75
2006 5.24 4.80 1.76
2007 5.23 4.63 2.03
2008 3.14 3.66 3.24
2009 0.87 3.26 1.98
2010 0.44 3.22 1.79
2011 0.42 2.78 2.06
Average 2.84 4.22 1.85
Data Sources:
* www.federalreserve.gov/releases/h15/data.htm
**http://www.multpl.com/s-p-500-dividend-yield/table
Phil Levy & Joey Levy, REALTORS®
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12. Historical Comparisons
S&P 500 – 2000 - 2011
Overall Price Yield 2000 through 2011 = -5.8% (1,394.46 to 1,312.41)
Chart Source: MSN Money Central
Aggregate Ave per Yr
Appreciation -5.88% -0.53%
Dividend Yield 1.85%
Total 1.32%
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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13. Historical Comparisons
• Mutual Funds
– 10 Year Yield through 2011: -5.30% (all funds).
• –Source: http://screen.morningstar.com/FundSearch/FundRank.html
– Paying expense loads for someone else to manage
your money.
• Wide range of expense loads
– Tax management needed for potential unexpected
capital gains.
– It’s tough to consistently beat the market
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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14. Historical Comparisons
Comparing the stock market valuations to real estate
S&P 500 has lost value 13 years in the past 41 years
Source: S&P 500 data: http://moneycentral.msn.com/stock_quote?symbol=$inx
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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15. Historical Comparisons
Real estate has lost value 4 years in the past 41 years
Phil Levy & Joey Levy, REALTORS®
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16. Historical Comparisons
Appreciation of 20.4% since 2000 despite
Excludes cash flow
negative economic factors factors
from rental income
Source: HUD Historical Data: www.census.gov/indicator/www.newsreconst.pdf
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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17. Historical Perspective
SCV SFR's Median Prices
Median Price
700,000
Apr/2006, 643,000
600,000
500,000
400,000
Apr/2003, 369,900
300,000 April /2012, 375,000
200,000
Jan/2000, 235,000
100,000
0
Jan/2000 Jan/2001 Jan/2002 Jan/2003 Jan/2004 Jan/2005 Jan/2006 Jan/2007 Jan/2008 Jan/2009 Jan/2010 Jan/2011 Jan/2012
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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18. Historical Perspective
Source: Core Logic Market Pulse for April 2012
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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19. Unique Benefits
• Positive cash flow before income taxes
– Reinvest in other properties
• Leverage
– Potential to borrow against equity to acquire
additional properties
– Potential to increase return if borrowing rate and
costs are below the “CAP” rate (gross return)
• Tax advantages
– Deductibility of all related cash expenses
– Capitalize improvements
Phil Levy & Joey Levy, REALTORS®
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20. Unique Benefits - Tax Treatment
Deductible Expenses
• Advertising • Legal Fees
• Cleaning & • Local Transportation
Maintenance Expenses
• Commissions • Long distance travel
• Depreciation • Losses
• Employees, Contractors, • Professional Services
Non-Employed Staff • Repairs
• Insurance • Utilities
• Interest
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21. Unique Benefits - Tax Treatment
Capitalize
Phil Levy & Joey Levy, REALTORS®
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22. Unique Benefits-Tax Treatment
• Depreciate
– Initial Investment
• Excluding the portion attributed to the land
– Capitalized improvements
• 29.5 years for single family units
• Opportunity to defer gains using IRC Section 1031
– Leverage up or diversify holdings
• Holdings pass to heirs with step up in basis and
possibly no tax effect
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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23. Unique Benefits
• Choice of level of involvement
– Use a property manager
• If time is a challenge
• Buffers tenants
• Source of expertise in tenant selection and proeprty
management
– Self manage- use agent to list and contract tenants
• Build generational wealth
– Generate positive tax advantaged cash flow
– Use of leverage
– Reinvest with tax deferred gains
June 15 2012 Phil Levy & Joey Levy, REALTORS®
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24. Finding Properties
• First Step – determine objectives
– Financial objectives and capacity
• Buy and Hold
• Buy, Refurbish and Resell (i.e. “flipping”)
• Identify financial resources and capabilities
– Preferred property types, sizes, age, configuration
– Locations
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25. Finding Properties
• Explore Sources of Purchase Money (financing)
– Savings or reinvestment of other assets
– Pension or IRA’s through Self Directed IRA’s
– Financing
– Lenders will approve loans for qualified borrowers
• Typically conventional loans with >=25% down
• Or hard money
– Quite expensive
– Should be used only for interim financing
– Purchase money financing makes for a weaker offer
• Financing and appraisal contingency
• Slower to close escrow
• Marketplace is currently quite competitive for buyers
Phil Levy & Joey Levy, REALTORS®
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26. Finding Properties
• Principal Sources of Properties
– Multiple Listing Service
• The principal marketplace for real estate
– Trustee Sales
– For Sale by Owner
• Not currently playing a significant role in this
marketplace
• Lack of professional agency involvement can hinder due
diligence and closing
Phil Levy & Joey Levy, REALTORS®
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27. Finding Properties
• MLS
– Accessing the data
• Web searches e.g. REALTOR.com, Zillow, Trulia, Yahoo
Finance, Redfin pull data from the MLS.
– Not always current
• Direct access to the MLS provided by an agent (e.g.
Listingbook or agent’s website)
– MLS Principal Sale types
• Standard Sale – owner has equity and can sell without
bank’s approval
Phil Levy & Joey Levy, REALTORS®
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28. Finding Properties
– MLS Principal Sale Types cont
• Short Sale – Owner has negative equity and needs
lender(s’) approval.
– May take 2 months or more for approval
– Lender may or may not approve at the contract price
• REO (Real Estate Owned) – Property has been sold at a
public trustee sale and the title has reverted to the
lender rather than a third party.
– Typically shorter contingency periods – 10 days
– Expire by default unless Buyer provides a written objection
– Typically Seller pays no inspection or repairs
Phil Levy & Joey Levy, REALTORS®
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29. Finding Properties
• Trustee Sales
– Title to the property is sold at a public trustee
sale.
– Public auction – anyone can bid
– Wining bid must pay 100% cash at the time of the
auction.
– Condition of the property is generally not subject
to inspection
Phil Levy & Joey Levy, REALTORS®
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30. Finding Properties – Trustee Sales
– Transaction is not subject to disclosures on the condition
of the property or surrounding area.
– Title insurance is not available to cover the Buyer’s interest
• Bidder should review a prelim title report ($380)
– Some liens survive the trustee sale
» Property taxes or IRS Liens (for a limited period)
» Liens that existed prior to the deed of trust
– Determine extent of past due property taxes from County Treasurer’s
website.
– Verify that the deed of trust is in first position!
– Title insurance is available to the subsequent purchaser
through a standard sale
– Lender’s title insurance is available for cash out financing
Phil Levy & Joey Levy, REALTORS®
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31. Finding Properties – Trustee Sales
• Trustee Sales cont
– Potential for acquiring properties significantly
below market.
– Buyer needs a thorough understanding of:
• Market values
• Rental or resale potential
• Potential fix up costs – perhaps $20 per sf or more
• Due diligence procedures
Phil Levy & Joey Levy, REALTORS®
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32. Finding Properties – Trustee Sales
• Trustee Sales cont
– Evaluation of Valencia “Flips” from 2011
• 3/2 single family in zip code 91355
• 14 properties sold to 3d parties at trustee sales in 2011
• 7 were subsequently resold at the time of the
evaluation (March 2012)
• Average holding period was 83 days & average
projected return on gross investment was 1.9%
Phil Levy & Joey Levy, REALTORS®
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33. Finding Properties – Trustee Sales
• Trustee Sales cont
• Projection assumptions
– Acquisition Costs - $6,000
– Rehab costs - $17.50 per sf
– Selling costs – 7% of resale price
– Monthly carry $800 (property tax, HOA fees, insurance, utilities)
– Delinquent Property Taxes - $0
• This example uses hypothetical projection assumptions and lacks statistical
significance.
– Trustee Sales Conclusion – Acquisition through trustee sales is highly
speculative
– Services are available to assist investors to acquire such properties
• Run prelim
• Provide condition reports (external)
• Physical bidding service
Phil Levy & Joey Levy, REALTORS®
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34. Analytical Framework
• Acquiring income properties requires the same
inspections and disclosures as a principal residence
(assuming acquiring through the MLS)
– Title
– Inspections (property and termite)
– HOA docs
– Natural Hazard Zone Disclosure
– Smoke and CO1 detector
– Water heater bracing
– Neighborhood
– Schools
– Etc.
Phil Levy & Joey Levy, REALTORS®
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35. Analytical Framework
• It also requires a quantitative evaluation of the
reasonable expected return
1. Estimate the required investment –
purchase, closing, refurbishment and financing
costs.
2. Estimate the operating results – detail to follow
3. Estimate the cash reserve equivalent to 6 months
operating expenses
4. Evaluate the exit strategy. Compare the total
expected investment to the top range of the
comparable sales.
Phil Levy & Joey Levy, REALTORS®
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36. Analytical Framework
Total Investment - Gross 76,813
Expected Operating Results
Financial
Values Ratios
Scheduled Rent 13,440
Vacancy -
Gross Operating Income 13,440
Operating Costs (6,134)
Net Operating Income 7,306 9.51%Cap
Debt Service* -
Cash on Cash Rtn before
Net Cash Flow 7,306 9.51%Income Tax
Phil Levy & Joey Levy, REALTORS®
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37. Analytical Framework
Operating Costs Factors Frequency $Annual
Management Fee Pct - pct of annual rent 10.0% 1 1,344
Property Tax - pct of value 2.1% 1 1,505
HOA per Month - 12 -
Insurance 500 1 500
Maintenance
Landscaping Maint 40 12 480
Trash - 1 -
License 225 1 225
Water 40 12 480
Homeowner Warranty 400 1 400
Gas - 12 -
Other 1,200 1 1,200
Subtotal Operating Costs 6,134
Phil Levy & Joey Levy, REALTORS®
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38. Analytical Framework
• Objective: structure an offer that provides a
reasonable expectation of meaningful positive
cash flow and return before income taxes.
– Appreciation of value or future rent increases is
excluded from consideration - may be expected
but not assured.
– Appreciation of value is a valid frame of reference
for comparing alternative investments – i.e. which
is most likely to increase in value in the future.
Phil Levy & Joey Levy, REALTORS®
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39. Assemble a Team
• REALTOR®
– expertise in helping investors identify suitable properties
– capability of financial evaluation properties
– function as a “quarterback”
• Lender
• Title
• Escrow
• Appraiser
• Inspector
• Insurance
www.jpscvrealty.com
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40. Assemble a Team
• Tax Advisor (e.g. CPA)
• Legal Advisor
– Most appropriate way to hold title
– Liability protection
– Partnership agreements if applicable
• Contractors
– Painting, flooring, roofing, plumbing, electrical, HVAC, cabinetry,
windows, window coverings
• Property Manager
• Exchange Intermediary
www.jpscvrealty.com
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41. Conclusion
• Investing in Residential Income Property is a
viable strategy for building wealth.
• Expertise and a disciplined structure for
finding and evaluating properties are critical
to success.
– Objective is to generate positive current cash
flows and returns before income taxes.
• To find out more and learn whether this might
be a strategy for you – contact us!
Phil Levy & Joey Levy, REALTORS®
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