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Investment Home Seminar: Flipping is for Pancakes
- 1. { Presented by: McGrath Real Estate Services, MVB Mortgage, New World Title, & National Capital Corporation Flipping is for Pancakes. …how to be a savvy real estate investor
- 2. What makes a good investment property?
- 3. How does the investment perform as a business? Do an operating analysis! Understand your risks and liabilities and how to manage them. Flipping is for Pancakes! …not houses!!
- 4. If you are already represented by a Realtor/broker, discuss your ideas with them, this is not intended to solicit your business if you have already hired representation. McGrath Real Estate has a niche as a property management firm that serves the investor. Discuss with a Realtor
- 5. Making a sound investment choice is quite simple. Watch out for myths, misinformation, and distractions. THE BASICS
- 6. Gross Rent Multiplier (GRM) … lower is better! Capitalization Rate (Cap Rate) … higher is better! Scalability Quantitative Measures
- 7. GRM is the ratio of real estate investment to its annual rental income BEFORE expenses. Sales Price / Gross Annual Rent = GRM Ex. 1: $400,000 / $24,000 = 16.7 Ex. 2: $500,000 / $33,600 = 14.9 Rent is $2,000 month Rent is $2,800 month Which house is a better investment? Gross Rent Multiplier
- 8. The Cap Rate is the ratio between the net operating income produced by an asset and its capital cost, or alternatively, its current market value. NOI / Sales Price = Cap Rate Ex. 1: $15,000 / $350,000 = 4.3% Ex. 2: $40,000 / $580,000 = 6.9% Which house is a better investment Capitalization Rate
- 9. If one is good, two is better. Ex.1: $500,000 home rents for $2,750/month Ex. 2: $1,000,000 home rents for $5,000/month Two $500,000 homes renting for $2,750 = $5,500 AND if one is vacant you still get $2,750/month. Scalability
- 10. Measuring Risk Risk vs. Reward Remember scalability… Qualitative Measures
- 11. Tenant likelihood of paying rent Tenant care of property Pets & Smokers Laws of local jurisdiction Job grown/economic stability School district Proximity to metro Measuring Risk
- 12. Tier 1 vs. Tier 2 markets Sales Appreciation Rent Appreciation Long term leases Risk vs. Reward
- 13. Length of ownership Number of tenants in five years? 7+ Years 3 is the dividing line Economic trigger years Cap Rate vs. Interest Rate Simple Measures for Success
- 14. 1st Priority: High Quality of Tenant 2nd Priority: Vacancy time/secure longer term tenancies 3rd Priority: Maximize monthly cash flows 4th Priority: Tax Benefits and Consequences 5th Priority: Protect your ASS(et) – Hire a Property Manager The Most Successful Landlords
- 15. Mortgage Decisions { Vince Coyle – Senior Loan Officer Coyle Mortgage Team • MVB Mortgage
- 16. Simply put, cash flow is the movement of money into and out of a business. A professional property manger can help ensure the money going in is maximized (rent). My job is to make sure the money going out is minimized (mortgage payment). Cash Flow
- 17. They are the same loan types and terms as primary residence or vacation homes. Selecting the right type and term can have a significant effect on your bottom line. Selecting the wrong type and term can turn a great investment into a poor one very quickly… Investment Property Mortgages
- 18. Fixed vs ARM (Adjusted Rate Mortgage) Fixed Rates have different terms Terms (30 years, 20 years, 15 years, 10 years) ARMS (Adjustable Rate Mortgages) ARMS are not EVIL Terms (3 Years, 5 Years, 7 Years, 10 Years) Mortgage Loan Types
- 19. If you are acquiring a property for the purpose of being an investment, the minimum down payment is 20%. TIP: Putting down 25% can reduce your interest rate by up to .25%. On a $400k investment property with a 30yr fixed: 20% down payment = 4.75% 25% down payment = 4.50 % Down Payment??
- 20. THE FBI INVESTIGATES MORTGAGE FRAUD
- 21. Down payment guidelines are more relaxed for primary residence and second home purchases. Rates and closing costs are also lower. As a result, some clients attempt to manipulate the system. Attempting to call this new purchase a “primary residence” when it is clearly an investment property. Attempting to call this new purchase a “second home” when it is clearly an investment property. Common Pitfalls
- 22. If you don’t have a two year history of being a landlord, you can’t use the future rent to qualify for a mortgage. (You will have to qualify carrying your primary and investment property) There are many investors who will not allow a client to carry more than 4 mortgages TOTAL on their credit profile. Common Pitfalls (cont.)
- 23. If you live in a home and wish to rent it out and acquire a new primary residence, you will have the benefit of a nice low rate and smaller down payment. Condos are commonly thought of as a smart investment. There are more restrictions on condos than ANY other property type. (LTV, Investor %, condo dues, defaults) If you work with the mortgage lender in front of you, you can have up to 8 mortgages in some cases. IT IS NEVER A BAD IDEA TO DO THE RIGHT THING. THE FBI INVESTIGATES MORTGAGE FRAUD. Mortgage Tips
- 24. Income Taxes & Your Investment Property { PRESENTED BY TOM TRASK NATIONAL CAPITAL CORPORATION
- 25. RENT RECEIVED OPERATING EXPENSES (Representative) Cleaning and maintenance Commissions Insurance Management fees Repairs Utilities TAX REPORTING
- 26. REAL ESTATE TAXES MORTGAGE INTEREST DEPRECIATION Residential 27.5 years Nonresidential 39 years TAX REPORTING
- 27. Usually reported on Form 1040 Sch. E Multiple owners probably partnership Single/multi member LLC Initial planning/setup important TAX REPORTING
- 28. PASSIVE ACTIVITY (In General) Gains and losses netted Net gain taxable Net loss deferred (Maybe) TAX REPORTING
- 29. DISPOSITION Realize prior year passive losses (maybe) Sale – capital gains with recapture Sec 1031 exchange THANK YOU – NATIONAL CAPITAL CORPORATION TAX REPORTING
- 30. Title & Escrow { Helen Krause, New World Title
- 31. Role of the Title Company Costs of Closing Putting Property into an LLC Basic Title Insurance vs. ALTA policy Title & Escrow
- 32. Rent out your primary residence and purchase a new primary residence. You’ll need to be well financed. Avoiding condos. Flipping is for pancakes. After tax annual cash flow. Knows the rules and laws you will be operating under. Tips to Buy the Right Investment Property
- 33. 1031 Tax Deferred Exchange Buying all cash vs. leveraging financing Buying foreclosures or short sales Amortization period ARM vs. Fixed Rate Mortgages Advanced Discussions
- 34. If it sounds too good to be true… Work with someone who is an expert. Use simple metrics to measure your goals and success. Know the likely demographic for the end user of the property. Rules of Thumb
- 35. Watch out for blanket statements or mass generalizations. “You should buy in Arlington, real estate will never go down there.” “This is a good investment, it’s near Route 7 and shopping.” “Buy near where the metro is coming.” Realtor telling you the property they have is a good investment. Red Flags
- 36. Re-evaluate every year. Buy low. 1031 Tax Deferred Exchange Understanding capital gains tax exclusions. ITS NOT A GOOD INVESTMENT UNTIL YOU HAVE A RETURN! Exit Strategy
- 37. I’ve got this great property. Now, what should I do with it? Should I hire a property manager? How do I operate it efficiently? Protecting your ASS(et)
- 38. Treat your investment property like a business. You are the business owner, the Tenant is your customer Presentation sets expectation Fair Housing Regulations Guilty Until Proven Innocent VRLTA vs Common Law? Don’t get in your own way! Landlord Perspective
- 39. Hiring Cousin Eddie to be your property manager Furnished Rentals Repair Deductibles Keeping rent low to keep a tenant Myths & Paradigms: Pets? Embassies? “Young professionals” Military tenants #LandlordFails
- 40. Property Management is not a commodity, it’s a service Good property manager will have: Team Depth Specialization Care Measureables Activity-Based Pricing Model 3 Reasons a property will not rent Good management = Good Procedures
- 41. Pre-Qualify with a Lender Discuss your intent with a Realtor you feel comfortable with Have Fun House Hunting! Next Steps
- 42. All attendees that RSVP’d to our event on Eventbrite will receive a link to their email with a digital version of the presentation to share with their teams, colleagues, and clients. Video Streaming and Slideshare made possible by: Social Media Maxima, Inc Andrea Howard andrea@socialmediamaxima.com Contact Andrea for a free Social Media consultation for your business today!