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Slide 4-1
Helping Clients &
Customers Make the
Right Choices
CHAPTER 4
Slide #-2Slide 4-2
Choosing a LocationWhat are the advantages of your market compared to others?
For investment For retirement For vacation
Slide 4-3
Selection Factors
Climate Outdoor Activities Cost of Living & Taxes Housing Options Entertainment Shopping Tourism Safety & Security Infrastructure and Services Local Attitudes
Slide 4-4
•
Is Every 2nd Home an Investment?
Most 2nd homes purchased as a combination1 in 4 plan to convert 2nd home to primary
home after retirementTwo reasons for investing
Income value appreciation
Align investor expectations with market ?
Slide 4-5
Provide information to help buyers evaluate and compare investment options
Do not offer investment advice
Help Investors Make Informed Decisions
Slide 4-6
Is It a Bull or a Bear Market?
Bull Rising stock prices pull
money into the market More cash available for
investment as investors seek to diversify
Bear Money flows out of
falling market May flow into real
estate for safety and value appreciation
Slide 4-7
APOD or CFA
Annual Property Operating Data
A snapshot viewEstimate of income, expense, and net profit on an annual basis
Cash Flow AnalysisA moving viewEstimate of income,
expense, and net profit on an annual basis
?
Slide 4-8
Investment Value
Return On Investment (ROI)Cap Rate = Net Income ÷ Price
?
Slide 4-9
NAR Code of Ethics“REALTORS® shall not…
provide specialized professional services concerning a type of property or service that is outside their field of competence”
Investment AdviceSEC
Unlawful to offer compensated investment advice about securities unless qualified and registered as an investment adviser
Slide 4-10
Significant percentage of cash buyers, particularly high-end properties
Mortgage interest deductible on combined debt of $1 million on primary and one other home
Same LTV and DTI ratios as primary home mortgages
High down payment requirements
Financing Facts
Slide 4-11
When the property is located in another area or state, it may be best to seek mortgage financing through local banks. Local loan officers will know the market. The buyer might look to a local branch of their home bank for financing.
Use Local Lenders for Financing
Page 72
Slide 4-12
Lenders use investment-property underwriting standards when rental income is needed to cover payments,
Higher interest rates and down payment compensate for risk of vacancies
If too many condo units in a development are rented, difficult to obtain financing
Help buyers align expectations with realities
Rental Income
Slide 4-13
Rent second home for income
At retirement sell primary home, pay off and
refurbish 2nd home
Or
Sell both properties and purchase a new home
Rental Home to Retirement Residence
Slide 4-14
Not available for financing second homes or investment properties
FHA & VA Financing
?
Slide 4-15
Contract Contingencies
Financing
Appraisal
Inspections
Slide 4-16
90-day time limit on home acquisition debt
Seller financing
Second mortgage on primary home
Balloon, interest only
Home equity
Private mortgage
Finance Strategies
Slide 4-17
Fee simple
Joint, severalty
Co-ownership
Corporation
Ownership
Partnership Trust
Privacy protection of assets estate planning easily transferrable
Slide 4-18
Co-Ownership
Usage Assignment: each co-owner has exclusive use of the property for a specific number of days
Pay-to-Use: each co-owner pays a pre-agreed usage fee for each day or week of use ?
Slide 4-19
Less expensive than ownership
No responsibility of upkeep
No real estate taxes, utilities, or maintenance expenses
Flexibility through exchange programs
Time Share Ownership
Buyer receives the right of property use for a specific period of time but not an actual ownership interest
No value appreciation Difficulty to sell or
exchange low-end or off-season time shares
Management and upkeep dependent on the sponsor
Limits on schedule and duration of occupancy
Slide 4-20
Less expensive than outright or co-ownership Extended usage periods Better usage-to-cost ratio than a time share Can guarantee prime time or high season
occupancy Onsite management
Fractional Ownership
Deeded interest and extended occupancy
Slide 4-21
Non Equity Model Similar to time share No value appreciation Partial refund if member
leaves May be difficult to
recover deposit if too many members want out
Non Equity Model
Affluent buyers, luxury propertiesHigh upfront deposit
Equity Model Ownership of a % of
portfolio of properties When member resigns,
refundable fee adjusted in line with portfolio’s value
Destination Club
Slide 4-22
Putting it All Together
Help buyers:Clarify objectivesChose the right propertyNavigate the processUnderstand localityAlign seasonal versus year-
round expectationsFit with future lifestyle and
income?
Slide 4-23
1. How far?2. How much?3. Why?4. Wants/needs?5. How often?
5 Questions to Ask
Slide 4-24
Investment Buyers
Help investors: Clarify goals Evaluate properties Align expectations for income,
ROI, appreciation, personal use Understand locality Understand insurance needs
Photo courtesy of Ted Jones, Senior Vice President-Chief Economist, Stewart Title
Slide 4-25
Attracting Renters
Help investors:Tune in to what attracts
rentersMake the property
attractiveUnderstand maintenance,
upkeep, refurbishment needs
Slide 4-26
If buying furnished, an estimate from a local furniture store helps indicate the portion of the purchase price for furnishings.
Budgeting for Furnishings
Slide 4-27
Provide a Rental History
Helps the investor budget for income and expense
Anticipate expenses for unique needs Provide a list of contacts for property
repairs and maintenance
Slide 4-28
Investor’s Usage Policies
No smoking?Pets?Occupancy limits?Co-owners’ requests for additional time?Reserve personal time to maximize rentals
Slide 4-29
Ask Questions
•To Get the Right Answers!•Case Study!