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In Real Estate YOUR GUIDE TO INVESTING IN REAL ESTATE 2020 EDITION INCLUDES MARK BARRY APARTMENT REPORT Nick Krautter City & State Real Estate SellPDX Team Principal Broker in Oregon 35 NE Weidler Portland, 503-901-8100 Oregon 97232 [email protected] INVESTING IN REAL ESTATE P a g e | 1 Unique Benefits of Real Estate ............................................ Page 2 Positive Leverage ............................................................... Page 3 Your Real Estate Team ....................................................... Page 4 Distressed Properties ......................................................... Page 6 Investment Case Study and APOD ...................................... Page 7 Appendices ........................................................................................................ Page 13 Mark Barry Apartment Report .................................................................................... 13 Nick Krautter 35 NE Weidler, Portland OR 97232 Principal Broker in Oregon (503) 901-8100 Sellpdx Team at City & State Real Estate [email protected] INVESTING IN REAL ESTATE P a g e | 2 1. Leverage: You can use debt to acquire larger properties and increase your cash-on-cash return in properties with positive leverage. [I’ll explain these terms in detail later in the report]. Residential: Up to 97%-100% if owner occupied, 80% if investment Commercial: Up to 90% LTV owner occupied 75%-80% if investment Apartments: Up to 80% LTV 2. Insurance: If it burns down you can rebuild it, often with income replacement for investment property while re-building. 3. Depreciation: You can depreciate the value of the building over the course of 27.5 years for residential and 39 years for commercial. This helps shield income from taxes. Using cost segregation, you can sometimes accelerate the depreciation. 4. Income: You can rent the property and collect income and this happens regardless of shifts in the market and property values. 5. Tax Deferral: Using a 1031 exchange you can defer taxes when trading like-kind properties. “Like-kind” simply means real estate in the USA held for business or investment purposes. Nick Krautter 35 NE Weidler, Portland OR 97232 Principal Broker in Oregon (503) 901-8100 Sellpdx Team at City & State Real Estate [email protected] INVESTING IN REAL ESTATE P a g e | 3 One of the main reasons to use debt is to create positive leverage. Positive leverage exists when the cost of money [your interest rate on your loan] is lower than the return on your investment. This is also known as a “cash-on-cash” return. Your cash-on-cash return is calculated by dividing the net income after debt service by the actual cash investment [ex. Down payment]. Example: You buy a $500,000 apartment with a 6% return. Scenario #1: Pay Cash: Your cash-on-cash return is the same as the return on investment, 6%. $500,000 invested, $30,000 annual income = 6% In scenarios #2 and #3, the interest rate on a loan is 4% with a 30 year term. Scenario #2: 50% Down: Cash-on-cash return goes to 8% $250,000 invested, $20,000 annual income = 8% Scenario #3: 25% Down: Cash-on-cash return goes to 12% $125,000 invested, $15,000 annual income = 12% As you can see, using positive leverage in this current real world scenario can take a 6% return and double it a 12% return. Nick Krautter 35 NE Weidler, Portland OR 97232 Principal Broker in Oregon (503) 901-8100 Sellpdx Team at City & State Real Estate [email protected] INVESTING IN REAL ESTATE P a g e | 4 Real Estate Broker: A good broker should be the main point of contact in your team. They need to know market trends and have a solid understanding of the continual changes in contracts, lending, disclosures, and types of inspections. When selling, your agent should have a good and current track record of success and use the latest tools and technology. To market my listings, I use HD video tours, a professional photographer and a listing syndicator which ensures that my listings are on nearly every website that deals in real estate. A good broker will help you sell quicker and identify good deals when buying. Real estate brokers charge a commission when selling but typically there is no fee when you buy a property. Lender: If you want to use leverage you need a lender or banker that can give you access to all the different lending programs. The speed at which these loan programs change is unbelievable so it is imperative that your lender be up to date on a weekly basis. Lenders charge “points” which is a percentage of the loan amount. Real Estate Attorney: A good attorney can help with contracts but also with the more difficult issues like easements, partnerships, LLC agreements, syndicates, tenants in common and more. The more complicated and larger the deals get the more you’ll need a great attorney. Attorneys are paid hourly, typically $300-$500 an hour, unless they are on a retainer. CPA: Since there are huge tax benefits to owning real estate having a CPA (Certified Public Accountant) that can help you take advantage of all of them will increase your return on investment. CPA’s typically charge a flat fee or hourly rate. Nick Krautter 35 NE Weidler, Portland OR 97232 Principal Broker in Oregon (503) 901-8100 Sellpdx Team at City & State Real Estate [email protected] INVESTING IN REAL ESTATE P a g e | 5 Title and Escrow Company: These companies insure title to real estate and offer escrow services. In some states title and escrow/closing are separate or done by attorney’s. Escrow services typically charge a flat fee and insurance is based on the value of the property that is being insured. Property Management: Many investors love the idea of real estate but don’t want to deal with calls from tenants and leasing up properties. This is where a property manager can take a lot of the headaches out of owning real estate. Managers typically get paid a percentage, 5%-10% for long term and 20%-30% for vacation rentals, of the gross rents to screen tenants and manage the property. Contractor: If you plan to buy a value add property you will need a good contractor to give you a realistic expectation on how much money and time it will take to get the property rentable. This knowledge is essential if you want to compare a fixer to a well maintained investment. Inspector: You’re going to need a couple different inspectors when you buy a property. The main inspector is the home inspector who looks are the structure and systems and the fire/life safety of a home. You will also likely need environmental inspectors for things like lead based paint, radon gas, and underground oil tanks. If there are some more specific issues with a property you might be talking with a HVAC (heating and cooling) company, electricians, plumbers, or roofers. Architect: If you want to build a new home or do a sizable renovation or addition you’ll need an architect. Architects draw up plans of what you have (as-builts) and then create the plans of what you’re going to build. The builder and city will need the plans for permits and to know what to build. Nick Krautter 35 NE Weidler, Portland OR 97232 Principal Broker in Oregon (503) 901-8100 Sellpdx Team at City & State Real Estate [email protected] INVESTING IN REAL ESTATE P a g e | 6 While the distressed property market is smaller as a percentage of available property it can still be a great way to invest. Right now in Portland the distressed market is around 5% of all property sold. But what do distressed properties really mean to you as an investor? REO (aka) Bank Owned: 1. Condition: Many REO (real estate owned by a bank) properties are in pretty rough shape. They almost always have the water and heat turned off so do not expect a warm fuzzy feeling when looking at an REO. These houses might also have fixtures and appliances missing so factor that into what you are willing to spend. 2. Disclosure: Banks are exempt from giving the buyer a property disclosure. Make sure you get a thorough inspection of the property. 3. Shorter inspections and higher costs: To inspect a home you need the utilities on and that cost is passed on to the buyer with most REOs. 4. Financing: Some banks offer financing deals on REOs but many don’t treat these any differently. If you are using a loan make sure there are not broken windows or holes in walls – this will cause problems with an appraisal unless you are getting a rehab loan or paying cash. 5. Look at all properties: Just because it says REO does not mean it is the best deal – look at all available properties before making a decision. Short Sales: A short sale is where a lender agrees to let a seller sell their home for less than what is owed on the property. That is the basic idea but the reality is much more complicated and the process often takes quite a bit longer than a traditional 30 day close. Expect 30-120 days for a response from the lender and accept that many short sales end up in foreclosure even if they receive offers. Patience is the name of the game. Many banks also try to put restrictions on what you can do with the property once you own it, so make sure to carefully review all contracts. Nick Krautter 35 NE Weidler, Portland OR 97232 Principal Broker in Oregon (503) 901-8100 Sellpdx Team at City & State Real Estate [email protected] INVESTING IN REAL ESTATE P a g e | 7 To illustrate the value of investing in real estate I’m going to share a story of a triplex I own in North Portland.
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