Buying Twin Cities Rental Real Estate

Buying a Rental Property Today John Mazzara NMLS #332556 7300 France Avenue S., Suite 410 Edina, MN 55435 Office (952) 929-2577 Direct (952) 887-1290 Fax (952) 884-3021 Mobile (612) 386-7027 john@johnmazzara.com www.MinneapolisStPaulHomes.com

When Buying a Property, it’s NOT about me, It’s About You

See What My Clients Have to Say… We have trusted John with all of our real estate transactions for the past 20 years. Not only has he helped us buy and sell 4 homes in addition to a recent commercial acquisition, but he has taken the extra step in alerting us of better financing options in between our buy/sell transactions that has saved us countless dollars. It is that extra step that he has taken for us over the years that encourages us to recommend his services to our friends and family without hesitation. We look forward to continue working with John on all of our future transactions as we know that he will continue to work hard and smart for us as if he was doing it for himself. Thank you John. - Steve and Vicki M John-You have recently sent us a "Thank You" card. This is no doubt good business, but absurd. We owe you the "Thank You"! You gave us good advice, you worked with us to get the job done, and provided a good time table assessment. You made the sale (trade) of our home a breeze. We think of you as a valued family friend and enjoy your company whether there is business to be gained or not. We hope you feel the same way! Stay as kind and congenial as you are. - Tony & Jeanne H I have hired John as a mortgage broker in 2003 and again since then. "John is a pleasure to work with. His wide breadth of expertise in different industries and depth of knowledge in all of these industries is unbelievable. I'd definitely recommend John for any of his services.“ - Tim L

See What My Clients Have to Say… I have known John for almost 30 years. During that time I have conducted real estate transactions (including using his company to acquire mortgages on homes and rental properties) with John and also consulted him on financial planning and business matters. I have always been completely satisfied with the service that he has provided. His extensive knowledge and hard work ethic, and positive "can do" attitude has contributed to many successes in my life. John is one of the most honest persons that I know and there has never been any doubt in my mind that he has my best interests at heart. I look forward to many more successful ventures with John in the future. - Mark M "John's professionalism and knowledge base for all aspects of real estate-selling, financing, and preparing to sell property-went above and beyond my expectations for a real estate agent and broker." Top Qualities-Personable, Expert, High Integrity - Mara P John-Thank you for your great advice through the years-you've been a guiding light on our financial road! - Carolyn & Chris B

Your looking for an agent who will work with your best interests in mind all the time, to get you the best deal possible, someone who has the depth of knowledge and experience to make your transaction flow smoothly. I am that agent Together with my team, we can make it happen

Making a Good Investment Decision The purpose of investing on a rental property is to make extra income and although it may be a daunting task for a first time investor, there are steps that we can take to make it as profitable as possible. Let’s discuss these steps , and together, you can make the right decisions .

Selection of Property In looking for a property to rent out, there are a lot of things to consider. You can either rent out a house or an apartment. For houses, these are the things you should consider: Single Family Condo/Townhouse Duplexes/Triplexes/Fourplexes “Residential” buyers vs. only investment property buyers

Selection of Property For apartments, these are the things you should consider: Economy of scale Bought and sold by the numbers Competition from new construction/code issues Amenities DSL/Satellite Work out rooms Pools Number of bedrooms Minimum square footage Age of building

Selection of Property Choosing from Distressed Properties will give you a great bargain on your investment, there are two types of distressed properties to choose from: A Foreclosure and a Short Sale

Selection of Property Foreclosure A Foreclosure is a legal process whereby a creditor repossesses collateral for a loan that’s in default. In most cases, that means the bank or mortgage lender repossesses a house so that they can resell it to satisfy the debt. Foreclosure properties are almost always sold via the MLS. Sometimes they will sell at an auction. In almost all cases, you are going to be able to buy a home at below market value. How much below market value? That depends on the property. Generally, I would say that you are able to get a discount of about 15-25% of what a home might sell for had it been a non distressed sale. There are often issues associated with these homes-such as light vandalism/neglect and a need for a good cleaning. Because they are normally sold "As Is", it is best to get the home thoroughly inspected. Most purchase agreements will give you 10 days from offer acceptance to complete your due diligence.

Selection of Property Short Sale A Short Sale is simply the sale of a property which the proceeds of the sale are less than what is still owing on the owner's mortgage with their Bank. The entire proceeds from the sale of the home are turned over to the Bank. In fact, even though the Seller initially approves your offer, it will be the Bank who makes the final decision. Although Short Sales can be a great opportunity to acquire a home at a discounted price, the entire process hinges on how much of a loss the Bank is willing to take in order to avoid the costly procedure of foreclosing and then reselling a home.

Selection of Property There are more things we need to consider in selecting a property to rent out other than which types to choose. There are geographic and demographic factors that we need to assess to make your rental property profitable. These are some things to keep in mind: Crime Website searches Sex offenders Police chief Police calls to the property Schools Performance record Access to freeways Amenities Lakes Parks Shopping Age of community housing stock Age of residents within community

After doing our some research and considerations, we now have to look at the financing options that you can avail. Financing Options

Financing Options Underwriting considerations Primarily with Income type properties such as apartment buildings and other multi tenant type buildings you will encounter various underwriting considerations. CAP rates-capitalization of NET income Debt service coverage-there must be cash flow after servicing the debt/mortgage Only a percentage of rent allowed – must factor vacancy-generally 75% of rental income

Financing Options Residential For 1-4 family homes, you will probably use residential financing with a Fannie Mae or Freddie Mac conventional loan. You can use FHA or VA financing only if you owner occupy the property. Fixed Rate mortgages amortized over a period of years-usually 30 Variable Rate (ARM)-payment will vary based on an index and margin added to the index Interest Only-paying just interest-nothing is paid on the principal

Financing Options Commercial For apartments with 5 units or more, or mixed use projects, you will use commercial mortgage financing. Commercial loans are generally shorter terms before they need to be renewed. 5-10 years is very common.

Financing Options Other ideas on where to find cash to be able to purchase property: Using your home and any unused or "dead" equity through either a refinance or a home equity line of credit. Using your IRA to buy a building-this can be done with an IRA or IRA LLC. Special custodians and rules apply. Reverse Mortgage—only requirements are to be age 62 and have enough equity to qualify. The loan must be originated against your primary residence.

Holding Period Considerations The Time You Own A Property Before You Sell Is A Holding Period Consideration Create a spread sheet or purchase an “APOD” (Annual Property Operating Data form)-this will allow you to input the data and then see how the property will work financially. Always verify the reported figures used in marketing the property against the actual leases and seller’s reported schedule E. A Schedule E is a sellers profit & loss that is attached to their tax return. You will always need to do an analysis of the numbers-i.e. Cash flow vs. Expenses

Holding Period Considerations Be Aware Of Market cycles Buy at the bottom, sell at the top-the goal is to get close to both. Appreciation of your property will largely be determined by the point you are at within the cycle. Always consider a vacancy factor. Rental property is NOT always full. Plan on a certain percentage of the rent to be lost due to vacancy-anywhere from 5-10%. How far do you want to drive to show, visit and maintain the property? What is an acceptable distance from your home (if you manage the property yourself)? My personal recommendation is no more than 30 minutes to or from your home. A commute longer than 30 minutes will make owning your property a chore.

Holding Period Considerations Always ask "What is my return on investment with an investment property?" Your return is calculated a number of ways. Which of these is most important: Tax benefits Appreciation Cash flow

Holding Period Considerations Expenses that you need to consider that are often overlooked when analyzing a property: Non-homestead taxes—there is a differential in the taxes-you pay more as a landlord City licenses—DON’T forget to license your property-this applies to houses and condos as well as the traditional multi-family rentals such as duplexes, triplexes, fourplexes and apartments. Fees-initial and annual licensing Inspections-often done annually or every few years.

Tax Benefits Tax benefits are available in the form of depreciation These can be phased out based on income Depreciation schedules vary depending on what you are depreciating 5 year for appliances 27.5 years for residential property-minus the land value 39 years for commercial property

Tax Benefits Capital gains Currently they are lower than ordinary income tax rates-this is likely to change in the future with additional legislation designed to raise tax revenue. Federal capital gains taxes are at 15% vs. ordinary income rates that are progressive Recapture of depreciation upon sale Ultimately you pay a portion (25%) of the amount taken in earlier years. It is still a great deal because you get the current benefit and pay back the taxes on the recaptured depreciation in the future.

Tax Benefits 1031 Exchange is the tax code that allows for exchanging equity from one property to another The tax-deferred (possibly free) accumulation of equity over time-building your empire one property at a time and moving the equity to another opportunity without losing a portion to taxes at that time. If you die with an exchanged property in your estate that has a low tax basis you will get a stepped up basis to the current market value at the time of your death. Acceptable exchange property only has to be considered investment property. In fact, an acceptable "like kind" exchange can be a triple net lease. With a triple net lease, you can own a lease or percentage of a lease and get the income from a property without any of the management and expense.

Lease Considerations Before leasing your property to a stranger, you need to consider their background, whether or not they’ll be a person you trust your property to. Use a rental screening service for criminals and credit backgrounds of your potential leaser. Do you rent to smokers or pets? These are some things you need to check on your potential tenant’s background: Approved leases Damaged deposits Evictions/unlawful detainers When you have your lease made, think about how long is the lease written. Do you have a 60 day notice provision?

Insurance Considerations As a landlord, you need to be insured for the property you lease. Carry an umbrella policy for you to have an excess liability coverage just in case something happens to your rental property. This insures you that even if your insurance company can only cover part of the damages done to your property, the umbrella policy would pay for the damages that the insurance company can’t. Your insurance policy coverage is also important. Should it cover vandalism damages? Major perils? Also consider having a Business Owner’s Policy which includes: property insurance, liability protection, crime insurance and liability insurance covering lawsuits arising from accidents.

Resources Real Estate/Mortgage/Financial Planning John Mazzara – 952-929-2577 http://www.JohnMazzara.com Minnesota Multi-Housing Association 952-854-8500 http://www.mmha.com Rental Research 952-935-5700 http://www.rentalresearch.com Pre-Paid Legal Ask John Mazzara, 952-929-2577 https://www.prepaidlegal.com/Multisite/Multisite?site=hub&assoc=mazzara IRS 800-829-1040 http://www.irs.gov Short Sale& Foreclosure Research http://www.ShortSaleSecrets.org Minnesota Non-Profit Distressed Homeowner Resource http://www.hocmn.org Minnesota Landlord Website http://www.MinnesotaLandlord.net

The Solution For Your Real Estate Needs John Mazzara NMLS #332556 7300 France Avenue S., Suite 410 Edina, MN 55435 Office (952) 929-2577 Fax (952) 884-3021 Mobile (612) 386-7027 john@johnmazzara.com www.MinneapolisStPaulHomes.com

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Buying Twin Cities Rental Real Estate

by John Mazzara on Jan 10, 2011

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Buying Twin Cities Rental Real Estate — Presentation Transcript