Handout: Math, Math. (And only then, Location)

The three most important words in real estate

Math, Math.(And only then, Location)

Betty Kincaid, PMN

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Why work with investors?

Easier Sale Repeat business Referral business Pre-qualified Less emotional involvement


My action plan

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My action plan

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1._______________________________________________________

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3._______________________________________________________

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5 reasons to invest in real estate today

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Rate of Return: How much can my money make in any given time frame?

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Benefit #1:Tax Shelter

• Depreciation-A non-cash deduction from taxable income based on the economic life of the improved real property.

• Passive loss rules– Since 1986, all real estate

investments are considered passive .

– Investors are limited to $3,000 of real estate losses.

– You get around the passive loss rule if you meet the requirements of an active real estate investor or real estate professional


Depreciation: A non-cash deduction from taxable income.Residential real estate improvements have an economic life of 27.5 years.


Benefit #1:Tax Shelter

• Long-term capital gain tax– 2011-2012 (0/15%)– 2013 (10%/20%)– Recapture of depreciation (25%)

• Tax deferred exchange– Defers capital gain and recapture

of depreciation.– Replacement property must be of

equal or greater value.– Strict time lines must be followed


Benefit #2:Leveraged Growth

• Offer the ability to borrow large sums

– You can borrow 40-50% against stocks, 50-60% against bonds.

• At fixed interest rates• For long periods of time• Compound growth

– Use the power of leverage to accelerate your return

– Earn return on borrowed $$


Benefit #3:Cash Flow

• Income– Buy a property that cash flows from day 1.

• Appreciation– Make your money going in. Buy under

market.

• Gain in value due to owner expertise– Improve the property then gradually raise

the rental rates.

• Loan amortization– The tenant pays the mortgage. As the

mortgage decreases, the owner’s equity increases.


Disadvantages

• Lack of liquidity• Loss of value due to market• Management requirements• Legislation• Unexpected expense

We learned all about the first 2 these last fewyears. Values aren’t guaranteed but, if you buy at the best possible price, are conservative with leverage and keep your properties rented; then you’ll be okay.The decision to self-manage your property or hire a professional usually comes down to time and expertise. You can learn what you need to know to be a great property manager but, you can’t buy more time.Join a professional organization who monitor and lobby against unnecessary and potentially harmful regulations.It’s always prudent to maintain a reserve account for unexpected expenses.


What could go wrong?

• LiabilityYou need a landlord policy and an extended liability policy of at least $1 million. You should hold each investment property in a separate LLC or use a series LLC

• VacancyEven in the best market, you’ll need time to turn the property over between tenants. Cleaning, painting and minor repairs can take up to a month, so calculate that into your estimates.

• RepairsUnless you’re buying a new home, you’re going to have minor things to fix. Get a home warranty to handle the big things like air conditioners and plumbing issues. Inspect your properties annually.

• Tenant IssuesYou’re looking for good people who’ll pay their rent and won’t trash your house. When you qualify a tenant, look for a stable job and housing history. It’s worth forgoing a rent increase to keep a good tenant for another year (Remember, you lose up to a month every time a tenant turns over).


Commercial Property•Office•Retail•Medical•Industrial•Vacant/Speculative

•Warning: If the transaction is outside your expertise, ask for help

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Specialty Property•Vacation rentals•Timeshare•Tenant-in-common•Auctions, tax certificates, etc

•Warning: If the transaction is outside your expertise, ask for help

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Residential Property

•SFR•Condos•1-4 Family

You know how to do this•Find the properties that match the criteria•Also do a search for comparable rents

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Buy and sell

Cash rules Know your numbers

Be flexible Plan for contingencies

Buy and hold

Long term Maximum equity

Increase net worth Appreciation & cash flow

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When Analyzing Property

What rents and sells best Realistic appreciation rate Realistic vacancy rate Reasonable fair market rent Reasonable operating expenses Realistic projected sales costs


Talking to your client

What’s their objective?Cash flowAppreciationTax ShelterBusiness Use

What Return are they looking for?What type of property do they want?

Single familyMulti-familyRetailOfficeMedicalOther

Self or Professionally Managed?

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Capitalization rate

Net Operating Income ______________

Sales Price

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The rate of return the investor can expect to get from the property.

Not dependent on financing.


Gross Rental Income-

Operating Expenses___________________

Net Operating Income

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Net Operating Income

The annual amount of cash generated by the property.


Cash on Cash return

Net Operating Income −

Debt service payments=

Income before Taxes_________________Total Cash at Closing

The rate of return the investor can expect on his cash investment

Completely dependent on financing

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Property #14128 Story RockLas Vegas, NV 89115MLS# 1189472

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Let’s do the math


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Compare Investments:

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Compare Investments:2.2% 5-year CD:After 5 years you earn $1,649.17 in interest and pay $461.76 in taxes, leaving $1,187.41 in net interest earned.$1,187.41 divided by 5 years equals $237.48 in net interest earned per year.$237.48 net interest per year divided by the total cash invested of $14,525 equals an annual return of 1.63%.

Property #1 (pages 23-25)NOI $5,151 less $2,036 in annual interest payments equals $3,115 in taxable profit.$3,115-$1,573.27* annual depreciation=$1,541.73 in taxable income.$1,541.73 X .28 equals $431.76 in taxes.$2,221 of cash flow after debt service less $431.76 paid in taxes equals $1,789.24 annual after tax income. $1789.24 net income per year divided by total cash invested of $14,525 equals an annual return of 12.32%Plus $894 in equity/debt reduction

*The depreciation figure is based on an improvement value of $43,265 (85% of the sales price) divided by 27.5

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Property #26027 Crumbling RidgeHenderson, NV 89011 MLS# 1147814

Property #3391 Umbria WayHenderson, NV 89014 MLS# 1131668

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Recommended Reading

The Millionaire Real Estate InvestorGary Keller

Rich Dad, Poor DadCash Flow Quadrant

Robert KiyosakiFlip: How to Find, Fix and Sell Houses for Profit

Rick Villani

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