Learn the best practices of owning an Investment property. Learn how to help your client afford and invest in their future!

1. MASTERING THE SALE OF
INVESTMENT PROPERTY
November, 20151

2. AGENDA
 Why work with investors?
 Understanding the Benefits
 Establishing Value (Setting the Price)
 Listing Investment Property
 Working with Investment Buyers
 Financing Options
 Contracts and Forms
 Wrap-up
2

3. TYPES OF INVESTMENT PROPERTY
 Single Family Homes
 Condo’s
 2 Family
 3-4 Family Buildings
 5+ Family Buildings
 Other
 Commercial/Business Properties
 Mobile Home Parks
 Vacant Land
3

4. WHY WORK WITH INVESTORS?
 Investors Buy More Often = MORE SALES
 Financial Decisions, not emotional ones = LESS STRESS
 Investors need our services in BOTH up and down markets
= CONSISTENT SALES
 Investors eventually become SELLERS
 Investors who are building a portfolio will buy/sell larger and
larger properties.
 The market is prime for buying properties.
4

5. WHAT ARE THEIR GOALS?
 Owner/Occupant – Wants to get ahead by buying a
home, but doesn’t want a large house payment
 Family Need – College Savings Account for Child
 Occupation – Wants to quit job and manage property
 Recreation – Buy a Condo at the Lake for Rental
 Dreams/Retirement – Doesn’t have a retirement plan or
wants to supplement retirement income.
 Net Worth – Wants to build assets and net worth.
5

6. UNDERSTANDING THE BENEFITS
 Cashflow
 Taxable Profit/Loss
 Increasing Net Worth
 Return on Investment
6

7. CASH FLOW EXAMPLE $200K 4-FAMILY
Gross Rents $625 x 4units x 12mo $30,000
Less Vacancy 5-10% $ 1,500
Net Rents $28,500
Expenses
Fixed Expenses
Taxes $ 2,400
Insurance $ 1,200
Sewer/Roads/Trash/Water $ 2,800
Maintenance Expenses 10-20% $ 4,500
Total Expenses $ 10,900
Gross Income $ 17,600
Payment (P/I) 80% LTV, 5.0%, 30 year = $859/mo$ 10,307
Cash Flow $ 7,293
7

8. CASHFLOW VS. TAXABLE PROFIT/LOSS
8
Gross Rents $__________
Less Vacancy $__________
Net Rents $__________
Expenses
Taxes $__________
Insurance $__________
Swr/Roads/Trsh/Water $__________
Maintenance Expenses $__________
Total Expenses $__________
Gross Income $__________
Less Payment P/I $__________
Cashflow $__________
Gross Rents $__________
Less Vacancy $__________
Net Rents $__________
Expenses
Taxes $__________
Insurance $__________
Swr/Roads/Trsh/Water $__________
Maintenance Expenses $__________
Total Expenses $__________
Gross Income $__________
Less Mortgage Interest $__________
Less Depreciation $__________
Taxable Profit/Loss $__________

9. CASHFLOW VS. TAXABLE PROFIT/LOSS
9
Gross Rents $ 30,000
Less Vacancy $ 1,500
Net Rents $ 28,500
Expenses
Taxes $ 2,400
Insurance $ 1,200
Swr/Roads/Trsh/Water $ 2,800
Maintenance Expenses $ 4,500
Total Expenses $ 10,900
Gross Income $ 17,600
Less Payment P/I $ 10,307
Cashflow $ 7,293
Gross Rents $ 30,000
Less Vacancy $ 1,500
Net Rents $ 28,500
Expenses
Taxes $ 2,400
Insurance $ 1,200
Swr/Roads/Trsh/Water $ 2,800
Maintenance Expenses $ 4,500
Total Expenses $ 10,900
Gross Income $ 17,600
Less Mortgage Interest $ 7,946
Less Depreciation $ 6,545
Taxable Profit/Loss $ 3,109

10. DEPRECIATION
 Not Actual Cash Expense
 Tax Calculation Only
 Based on the fact that Land Appreciates and
Buildings Depreciate
 Count 80-90% of the Sale Price as the Building Value
and 10-20% Land Value
 Depreciation Expense = Building Value / 27.5 yrs
10

11. HOW REAL ESTATE IMPACTS NET WORTH
 Cashflow is not the game we’re playing …
 The ultimate game is Net Worth
 If you generate enough Net Worth, you can generate
Cashflow
 Balance Sheet
 Lists Assets and Liabilities
 Shows Net Worth
11

12. BALANCE SHEET SHOWS NET WORTH
12/31/2015
Assets
Cash $ 20,000
Home $250,000
Car $ 20,000
Total Assets $290,000
Liabilities
Home Loan $150,000
Car Loan $ 15,000
Credit Cards $ 10,000
Total Liabilities $175,000
Net Worth $115,000
12

13. NET WORTH IN 10 YEARS
12/31/2015 12/31/2025
Assets
Cash $ 20,000 $ 20,000
Home $250,000 $337,338
Car $ 20,000 $ 20,000
Total Assets $290,000 $377,338
Liabilities
Home Loan $150,000 $122,014
4 Family Loan
Car Loan $ 15,000 $ 15,000
Credit Cards $ 10,000 $ 10,000
Total Liabilities $175,000 $147,014
Net Worth$115,000 $230,324
13

14. IMPACT OF 4-FAMILY PURCHASE ON NET WORTH
 4 family @ $200,000
 New Loan $160,000
 Downpayment $40,000 from Home Equity Loan
 $5000 closing costs
14

15. BALANCE SHEET
WITH PURCHASE OF BUILDING ON 12/31/2015
12/31/2015 12/31/2015 after closing
Assets
Cash $ 20,000 $ 20,000
Home $250,000 $250,000
4 Family $200,000 purchase price $200,000
Car $ 20,000 $ 20,000
Total Assets $290,000 $490,000
Liabilities
Home Loan $150,000 $195,000 Home Eq Loan $45,000
4 Family Loan $160,000 New Loan Amount
Car Loan $ 15,000 $ 15,000
Credit Cards $ 10,000 $ 10,000
Total Liabilities $175,000 $380,000
Net Worth$115,000 $110,000
15

16. NET WORTH IN 10 YEARS
12/31/2015 12/31/2025 12/31/2015 12/31/2025
w/o 4fam w/o 4fam w/ 4fam w/ 4fam
Assets
Cash $ 20,000 $ 20,000 $ 20,000 $ 20,000
Home $250,000 $337,338 $250,000 $337,338
4 Family $200,000 $269,870
Car $ 20,000 $ 20,000 $ 20,000 $ 20,000
Total Assets $290,000 $377,338 $490,000 $647,208
Liabilities
Home Loan $150,000 $122,014 $195,000 $158,617
4 Family Loan $160,000 $130,148
Car Loan $ 15,000 $ 15,000 $ 15,000 $ 15,000
Credit Cards $ 10,000 $ 10,000 $ 10,000 $ 10,000
Total Liabilities $175,000 $147,014 $380,000 $313,765
Net Worth $115,000 $230,324 $110,000 $333,443
16

17. WHAT ARE THE FINANCIAL BENEFITS OF OWNING
RENTAL PROPERTY?
 Appreciation – Increase in Building Value over time
 Increase in Equity – Due to Loan Paydown
 Cash Flow
 Depreciation Tax Benefits
17

18. EXAMPLE OF RETURN ON INVESTMENT
 $200,000 Four Family w $40,000 down-payment.
 What is the Return on Investment?
18

19. RETURN ON $40,000 INVESTMENT
 Appreciation $200,000 x 3% = $ 6,000
 Loan Paydown 1st yr $ 2,360
 Cash Flow $ 7,293
 Total Benefits $15,653
 Return on Investment
 $15,653 / $40,000 = 39%
19

20. RETURN ON INVESTMENT VS. TAXES PAID
 Return on Investment = $15,653
 Appreciation
 Loan Paydown
 Cash Flow
 Taxes Paid on Actual Profit/Loss = $ 3,109
 Income – Expenses – Interest - Depreciation
20

21. HOW TO DETERMINE A BUILDING’S VALUE?
 Gross Rent Multiplier
 considers rent only
 Cap Rate
 considers rent and expenses
 Cost per Unit
 Cash on Cash
 Only considers cash flow
21

22. GROSS RENT MULTIPLIER
 Gross Rent Multiplier (GRM)
= Sale Price / Annual Rents
 One way to remember it … without any expenses,
how many years of rent would it take to equal the
cost of the building?
 Which is better … a high GRM or a low GRM?
22

23. GROSS RENT MULTIPLIER – 3546 MORGANFORD
Sale Price = $400,000
Annual Rents =
$425 x 12 units x 12 months = $ 61,200
Gross Rent Multiplier
$400,000 / $61,200 = 6.53 GRM
23

24. GROSS RENT MULTIPLIER – 3600 HEREFORD
 Sale Price = $450,000
 Annual Rents =
$395 x 10 units x 12 months = $47,400
$450 x 2 units x 12 months = $10,800
Annual Rents $58,200
 Gross Rent Multiplier
$450,000 / $58,200 = 7.73
24

25. GROSS RENT MULTIPLIER
Based only on the GRM, which of these buyers got
the best deal?
Sale Price GRM
 3546 Morganford $400,000 6.53
 3600 Hereford $450,000 7.73
25

26. GROSS RENT MULTIPLIER– GROUP EXERCISE
Based on the average GRM for 3546 Morganford and 3600
Hereford, what would you pay for 4205 Botanical with
Annual Rents of $61,200?
 GRM = Sale Price / Annual Rents
 Sale Price = GRM x Annual Rents 26

27. GROSS RENT MULTIPLIER– GROUP EXERCISE
 Sale Price = Gross Rent Multiplier x Annual Rents
 GRM for 3546 Morganford = 6.53
 GRM for 3600 Hereford = 7.35
 Average is (6.53 + 7.35) / 2 = 6.94 GRM
 Rents for 4205 Botanical = $61,200
 Estimated Value = 6.94 x $61,200 = $424,728 27

28. GROSS RENT MULTIPLIER
 What are the advantages and disadvantages of using the
GRM?
 Easy to compare similar properties
 Does not consider the impact of expenses
 Does not work with unlike properties
28

29. CAP RATE
29
Net Operating Income
(Income – Expenses)
(Price)

30. CAP RATE – SAMPLE 1
 Use the information provide by the listing agent to
determine the CAP Rate for 3546 Morganford
 Income $61,200
 Expenses $16,044
 Net Income $45,156
 Sale Price $400,000
 Cap Rate 11.29%
30

31. CAP RATE – SAMPLE 2
 Use the information provide by the listing agent to
determine the CAP Rate for 3600 Hereford
 Income $58,450
 Expenses $10,805
 Net Income $47,645
 Sale Price $450,000
 Cap Rate 10.59%
31

32. CAP RATE
 Based on just the CAP rate, which property was the
better buy?
Sale Price Cap Rate
3546 Morganford $400,000 10.59%
3600 Hereford $450,000 11.29%
32

33. CAP RATE – GROUP EXERCISE
Based on the Average Cap Rates for 3546 Morganford and
3600 Hereford, what would you pay for 4205 Botanical?
 Net Income / Sale Price = Cap Rate
and
 Net Income / Cap Rate = Value
33

34. CAP RATE – GROUP EXERCISE
Based on the Average Cap Rates for 3546 Morganford and
3600 Hereford, what would you pay for 4205 Botanical?
 Average CAP Rate =
(10.59% + 11.29%) / 2 = 10.94%
 Net Income / Cap Rate = Value
 $47,200 / 10.94% = $431,444
34

35. CAP RATE
 Considers both Income and Expenses
 Does not consider the effects of the loan
 May not consider maintenance of building
 Useful when comparing different types or ages of
buildings.
 What is the effect of Vacancies?
 What is the effect of Deferred Maintenance?
35

36. COST PER UNIT
 Cost per ‘DOOR’
 Used by Builders, Developers, and in “Product
Specific” situations
 For Builders, it’s always a comparison to how much
money it would take to build a comparable unit
 Developers don’t care about rents or condition,
because they are changing the use of the building.
They may look at Cost per Square Foot. 36

37. COST PER UNIT – EXAMPLE 1
 3546 Morganford
 12 Family Building sold for $400,000
 What is the Cost Per Unit?
 $400,000 / 12 = $33,333 per unit
37

38. COST PER UNIT – EXAMPLE 2
 5847 Sunshine
 8 Family Building sold for $480,000
 What is the Cost Per Unit?
 $480,000 / 8 = $60,000 per unit
38

39. COST PER UNIT
 Compare similar size units with similar features
 Compare similar age buildings
 Compare similar rents
 Compare similar condition
 Compute the Cost per Unit on Sold Properties
Use several comps and average the results
 Adjust for differences in your property 39

40. CASH ON CASH
$200,000 4-family, 80% LTV, $40,000 down
Income ($625 x 4 x 12 x 95%) $28,500
Less Expenses (incl maintenance) $10,900
Less Loan Payment $10,307
= Cash Flow $ 7,293
Divided by Investment ($40,000) 18.23%
40

41. CASH ON CASH
 Does not consider appreciation
 Will change based on the financing
 Used to compare real estate opportunities to non-
real estate opportunities
41

42. SUMMARY - COMPARING PROPERTIES
 Gross Rent Multiplier
 considers rent only
 Cap Rate
 considers rent and expenses
 Cost per Unit
 Cash on Cash
 Only considers cash flow
42

43. HOW TO LIST RENTAL PROPERTY
 Meet the owner at the building. Make sure they
notify the tenants and bring keys for all units.
 Make a list of maintenance items for the seller to
address.
43

44. HOW TO PREPARE A PROPERTY TO SELL
 View the exterior. Note all maintenance issues ...
clogged gutters, trash, muddy areas, broken
fencing, peeling windows …
 View the basements. Note all maintenance issues
… debris, past sewer backups, dangling/loose
wires, missing elec panel cover, dirty/missing
furnace filters …
 View the interior of all units. Suggest which unit
you think should be shown. Note all maintenance
issues …plaster/drywall repair, needs fresh paint,
water stains on ceiling, torn carpeting, ripped vinyl
floors, torn blinds. CLEAN any empty units.
44

45. TIPS FOR LISTING RENTAL PROPERTY
 While at the property, get all information needed to
complete the MLS profile form. Measure the rooms
for each floorplan.
 Get information about the major systems
 Roof age and type
 Furnace and A/C age and type; Are there flu liners?
 Electric upgrades? Is there any visible knob-n-tube
wiring?
 Type of Circuit Panel?
 Copper or Galvanized Piping
 Plumbing Stacks … PVC or Cast Iron 45

46. TIPS FOR LISTING RENTAL PROPERTY
 Run title commitment and verify who needs to sign
documents? Is it owned by a LLC?
 Have the owner complete the Rental Property
Verification Form. Update Rent Roll for closing.
 Get Seller docs, including applications, leases, rent rolls,
occupancy permits, capital improvements, etc.
 Verify date rents are due
 Verify who owns the appliances.
 Find out status of occupancy permits, especially for
vacant units.
 Discuss which seller disclosure form to use.
 Get tenant names and telephone numbers and arrange
for showings. 46

47. TIPS FOR LISTING RENTAL PROPERTY
 Bring comps with multiplier or cap rates. Use this
data to establish a suggested price for the subject
property. Adjust for deferred maintenance.
 Get the listing contract signed.
 What to emphasize in the MLS Remarks
 Things that make a property easy to rent
 Things that keep revenues high
 Things that make a property easy to maintain
 Things that keep expenses low
 Email the listing to your investor prospect list …
47

48. WORKING WITH BUYERS
 Focus on Buyer’s Capacity and Goals
 Condition – Is Buyer doing own maintenance?
 Location – Close to Buyer’s workplace or home?
 Goals – Cash Flow vs. Appreciation
 Time Required – High tenant turnover, Rent
Collections, etc.
 Cash Required – Deferred Maintenance and
Vacancies at time of purchase?
48

49. HOW TO FINANCE RENTAL PROPERTY
 Owner/Occupant
 SFR, FHA 96.5%, VA 100% Conventional 95% LTV
 2 family, FHA 96.5%, VA 100%, Conventional 85% LTV
 3-4 family FHA 96.5%, VA 100%, Conventional 75% LTV
 Non-Owner/Occupant
 Single Family, Conventional 75% LTV
 2-4 Family Building - Conventional 70% LTV
49

50. HOW TO FINANCE RENTAL PROPERTY
 Rates are Score-Driven
 75% of Rents are counted as Buyer Income
 PITI is counted as a Buyer’s Debts
 Appraisals are a little higher for non-owner/occupant
single family and $400-500 for Multifamily Properties
 Reserves – 2-6 months required unless only one
owner/occupied property.
50

51. WRITING A GOOD CONTRACT
 Residential vs. Special Sale Contract
 Utilities
 Occupancy Inspections
 Building Inspections
 How to Pick the Closing Date
 Occupancy Issues
 Owner Occupant
 Who Rents Vacant Units?
 Loan Requirements 51

52. WRITING A GOOD CONTRACT
 Rental Property Rider
1. Buyer contingency to receive and approve information
2. Delivery of lease documents and deposits at closing
3. Seller transfers leases and Buyer indemnifies Seller
for security deposits at closing
4. Seller shall not modify leases without written consent
of buyer between contract date and closing
5. Contingency to review remaining units (not viewed) 52

53. WHAT TO LOOK FOR IN A LEASE?
 Expenses paid by Owner
 Can a tenant create a lien on the property?
 Sewer and in some areas … water and trash
 Lead Hazard Notification for Tenants
 Term of Leases – Automatic Extensions?
 Late fees
 Who maintains the appliances?
 Who pays legal fees to enforce the lease?
53

54. MANAGING THE INSPECTIONS
 Building Inspections
 Consider knowledge and resources of Buyer
 Full Inspection vs. Systems only?
 Municipal Inspections
 Can these be skipped?
 Clarify in contract, if necessary
 FHA/VA Loans – Same general criteria as SFR
54

55. CLOSING ACTIVITIES
 Changing the Utilities – “leave on” agreements
 Notification of Tenants – SLAR form
 Original Leases, Keys to New Owner
 Transfer of Section 8 Leases
 Verification of Rents, including past due rents and
proration dates. Clarify with client that seller can
still collect past due rents. 55

56. 1031 EXCHANGE
 Lets owner sell investment real estate and purchase
investment real estate without paying taxes on the sale.
 Lets a seller buy a property more suited to their
needs/capabilities
 Lets a seller combine the equity from 2 or more properties
and buy a larger property …‘leverage up’
56

57. MASTERING THE SALE OF RENTAL PROPERTY
SUMMARY
1. Look for a need … what will rental prop provide?
2. Help identify the best type of property for your
client, based on time, skills, money, desire.
3. Look at properties, pick the best one
4. Set an offer price based on the comps
5. Get advice from professionals – inspectors and
accountants
6. Let client get their property ‘stable’ and then help
them buy another one.
7. Exchange as appropriate
57

58. THINGS I’VE LEARNED
4 family properties are often the best type of
investment for a first time buyer
 Better Cash Flow than SFR, 2fam or 3fam
 Overhead spread over more units
 30 year fixed financing is available
 Smaller % of building is vacant at one time 58

59. THINGS I’VE LEARNED
Lower Cost/Unit creates higher revenues
$ 30,000 $450/unit/month 5.55 GRM
$ 50,000 $625/unit/month 6.67 GRM
$100,000 $900/month 9.26 GRM
$200,000 $1500/month 11.11 GRM
$200,000 (4 x $50,000) invested in 4 family
4 x $625 x 12 $30,000/yr
$200,000 Single Family $1500 x 12 $18,000/yr 59

60. THINGS I’VE LEARNED
Lower Cost/Unit creates higher revenues
Lower Cost/Unit properties require more
management
Rent rates are directly impacted by Supply and
Demand
Seems to be independent of Geographic location
60

61. THINGS I’VE LEARNED
Condition and updates DO matter
 Tenants stay longer = LESS TURNOVER
 Units rent quicker = FEWER DAYS/VACANCY
 Tenants with better credit can rent anywhere, so they
are more particular. Tenants will bad credit or a bad
landlord reference will accept worse condition because
they are limited as to where they can live. FEWER
EVICTIONS AND COLLECTIONS
Put the improvements into living space as each unit
becomes vacant. Do not wait until you are ready to sell. 61

62. THINGS I’VE LEARNED
You can buy too many properties
You can leverage too much
Paying loans down or off reduces risk and provides for
better cash flow
1031 Exchanges are not complicated
Every year, sell your worst property and refinance your
worst loan 62

63. THINGS I’VE LEARNED
Rental Property is a long term strategy to grow Net Worth
Net Worth creates options and ultimately provides for Cash
Flow
If we rely solely on our jobs, we will have to continue working
to provide the cash we need.
63