TODD RUBINSTEIN - AAII. LOS ANGELES presentation... · TODD RUBINSTEIN SENIOR PARTNER Rubinstein Group at TOLD Partners 818-601-7200 [email protected] [email protected] AAII Los Angeles

TODD RUBINSTEIN S E N I O R P A R T N E R

R u b i n s t e i n G r o u p a t T O L D P a r t n e r s 8 1 8 - 6 0 1 - 7 2 0 0

T o d d R @ t o l d . c o m T o d d R @ r e a l t o r . c o m

AAII Los Angeles Chapter Saturday Meeting Investment Seminar at the Skirball Center, September 15, 2012

Goals for Real Estate Investment Seminar

 Diversify Your Portfolio

 Types of Real Estate

 Market Trends & Statistics

 Acquisition & Investment Analysis

 Pitfalls & Common Misperceptions

 Sourcing Properties & Opportunities

© 2012 Todd Rubinstein - Rubinstein Group

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Why invest in real estate?

  Portfolio diversification

  Most investment portfolios are made up of stocks and bond investments through pension, 401ks, and IRAs.

  15% - 25% of portfolio should be real estate

  Higher ROI

  Cash flow & equity build up o  Monthly or quarterly income


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Why Real Estate? Diversify

S&P 500 &

NASDAQ Composite

1994-2012

© 2012 Todd Rubinstein - Rubinstein Group 4

Types of Investment Properties & Assets

Commercial – Office, Retail, Industrial

Single Family (SFR) - 1 Unit

Residential Income - 2 – 4 Units

Multi-Family (MFD) 5+ Units / Apts

Notes – Mortgages & Trust Deeds


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How Much to Invest

TYPES OF HOUSING

PROPERTY

  SFR

  2 -4 units

  5+ units

  Notes – mortgages & trust deeds


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Advantages of the Multi-Family Investment

 Provides stable and growing income for retirement

 Economies of Scale

  Increase in property values not needed to realize a return   Rents cover expenses and mortgage so value of

property is of no immediate consequence   Tax advantages – Depreciation   Principal pay down increases equity   Price appreciation increases equity


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Advantages of Multi-Family Investment

  Favorable Tax Treatment

  Probate or Trust - “Stepped up basis”  Property acquired for $250k and is

worth $1,000,000 at time of death, no tax for heirs on $750k gain.

  IRS §1031 Deferred Exchange – defer taxes on gain from sale

  Always consult a tax professional


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Market Trends & Statistics

Los Angeles



Los Angeles



Los Angeles



Riverside



Riverside



Riverside



Comparison:

Newport Beach

& Fresno



Mortgage Rates

30Y Fixed &

10Y Treasury



Mortgage Rates

30Y & 15Y Rates

vs Fed Funds

Rate



Unit Completions

Net Absorption

Vacancy



Apartment Supply

& Vacancy Trends



Apartment Cap Rate

Trends


Market Trends & Analysis

Why invest NOW?

  Low interest rates

  Limited supply and increased demand

  Homeownership rate lower

  Baby Boomers retiring & Gen Y eschew homeownership

  Increasing rental rates

  Decreasing vacancy rates


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Acquisition & Investment Analysis

 Criteria for Acquisition  Location & Condition (Classes A, B, C)

 Investment Metrics (What is our ROI?)

 Initial Investment & Financing

 Completing the Investment Analysis


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  Location & Condition   Urban, Suburban, Ex-urban, Rural   Class A, B, C   Zoning   Employment Conditions   Crime Statistics

  Investment Metrics (ROI)   Keys to Determine Value   GRM - Gross Rent Multiplier   Price per Square Foot, Price per Unit   IRR – Internal Rate of Return   Cash on Cash Return (Pre-tax Return)   Cap Rate – Capitalization Rate


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CAP RATE

Cap Rate or Capitalization rate is one of the best real estate valuation approaches and is used as a primary measure for institutional sized properties in Multi-family sector as well as other Commercial sectors.

This is a direct income approach: value equals net operating income divided by cap rate. The Cap Rate is made up of 3 components. They are: NOI or Net Operating Income and Value.

Knowing any two will help you figure out the third. If you want to determine the cap rate of a property first look at the NOI. It does not include things like debt service, depreciation and capital expenditures; it simply reflects the buildings capacity to generate income.

Cap Rate = (NOI divided by market value) or the cap rate for a quadplex listed and priced at $750,000 with an NOI of $55,000 is 7.33 ( .0773 (7.33%) = ($65,000/$750,000)

If you do some research and find that for this type of property, in this location, at this time, the current market cap rate is 8.25% then you can determine what the value of the property is: ($55,000/.0825 = $667,000).


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Initial Investment & Financing

  Cash

  Equity   Direct acquisition – one or two partners   Portion of investment vehicle

  PP REITs / TICs / FDOs

  Syndication – group of investors

  Debt   1st deed trust   2nd deed trust   Hard money loans   Bridge or mezzanine financing


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Alternative Sources of Funds

  ERISA (Employment Income Retirement Security Act of 1974) – Federal law that sets minimum standards for pension plans in private industry. Set up option for self-direction in plans.

  Self-Directed Vehicles -   IRAs – Roth & Traditional   KEOGH   SEP IRA   401 (k)

  3rd Party Administration (Custodians)

  Disqualified Parties   Family   Spouse   Lineal Descendent   Fiduciaries

  Allowable: Investing in many forms of RE


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Cash Flow Analysis:

Los Angeles CA 90003

Property size: 2,100 sf

Number of units: 4

  Short Sale - Seller owned short payoff (Pending escrow)   Purchase Price: 245,000   Down Payment: 25%   Down Payment: $61,250   Closing Cost Estimate: $5,513   Total Cash investment: $66,763   Amount financed: New Loan $183,750   Interest Rate: 4.5%   Loan Term (yrs): 30 due in 10 years   Payment (P&I): $980.80 mo (fully amortized)   Tax & insurance: $345.00 mo   Price per Unit: $61,250   Price Per Square Ft: $116.67 (2,100 sf)   Scheduled Gross Inc (SGI): $34,800   Gross Rent Multiplier (GRM): 7.04   Net Operating Income (NOI): $21,924   Cap Rate: 8.95%   Return on Investment (ROI): $10,154   Cash on Cash Return aft Debt: 16.58%   LA Rent Control


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Cash Flow Analysis:

Palmdale CA 93550


Number of units: 11

  REO - Bank owned Acquisition (Closed)   Purchase Price: $390,000   Down Payment: 35%   Down Payment: $136,500   Closing Cost Estimate: $8,775   Total Cash investment: $145,275   Amount financed: New Loan $253,500   Interest Rate: 5.75%   Loan Term (yrs): 30 due in 10 years   Payment (P&I): $1,479.36 mo (fully amortized)   Tax & insurance: $615.00 mo   Price per Unit: $35,455   Price Per Square Ft: $53.19 (7,332 sf)   Scheduled Gross Inc (SGI): approx $82,800   Gross Rent Multiplier (GRM): 4.71   Net Operating Income (NOI): Actual $49,680   Capitalization Rate: 12.74%   Return on Investment (ROI): $31,928   Cash on Cash Return aft Debt: 21.98%   Non-Rent Control


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Cash Flow Analysis:

Sherman Oaks CA 91403


Number of units: 7

  Std Sale - Developer owned Active Sale   Purchase Price: $2,200,000   Down Payment: 25%   Down Payment: $550,000   Closing Cost Estimate: $27,500   Total Cash investment: $577,500   Amount financed: New Loan $1,650,000   Interest Rate: 4.5%   Loan Term (yrs): 30 due in 10 years   Payment (P&I): $8,360.31 mo (fully amortized)   Tax & insurance: $3,000.00 mo   Price per Unit: $314,286   Price Per Square Ft: $204.08 (10,780 sf)   Scheduled Gross Inc (SGI): approx $180,000   Gross Rent Multiplier (GRM): 12-13   Net Operating Income (NOI): Actual $102,960   Cap Rate: 5.15% (broker states 4.80%)   Return on Investment (ROI): $2,636.28   Cash on Cash Return aft Debt: 0.46% (1.21% if assumable loan)   Non-Rent Control*   Assumable non-recourse loan of $1,270,000 @ 5.95% locked for 7.5

yrs.


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Pitfalls & Common Misperceptions

o Poor Acquisition Strategy

o Faulty Investment Analysis

o Management Issues


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  Wrong location – investor tolerance

  Bad timing •  Chasing market up – feeling “left out” •  Chasing market down – can’t let go

  Lack of analysis •  Too much cash to acquire asset •  High entry and exit price

  Inappropriate financing Rate, fee, term, and covenants

  Risk vs Reward – poor understanding

  Incoherent strategy – no road map •  Short, mid or long term hold •  Breakeven is not acceptable

  No budget - for contingencies, rehab, or reposition

  Bad advice or incompetent team

Poor Acquisition Strategy

&

Faulty Investment Analysis


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  Property Management

o  Tenant screening

o  Quarterly or semi-annual property check

o  Leasing and resident retention

o  Proper eviction procedures

o  Accounting

o  3 Ts – Tenants, Toilets, & Trouble

o  Rent control

  Other Important Management Issues

o  Self managed – screening, leasing, bills, & books

o  On-site mgmt – on-site manager req for 16 or more units. CA state law - CCR Title 25 sec 42

o  Off-site - property management company

Management Issues


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Sourcing Properties & Opportunities

  Condition – distressed / fixer

  Location – less desirable

  Seller issues – financial / relo

  REOs – bank or lender owned

  Short Payoffs or Short Sales

  Bankruptcy sales

  Dissolution of marriage

  Dissolution of partnerships

  Value added

  Density plays – assemblage or upzone

•  MLS – RE agent relationship •  Online sources •  Auctions – general

•  Trustee Sale auctions •  Notice of Defaults (NOD) •  Notice of Trustee Sales (NTS) •  REO properties (bank inventory) •  Bank rolls, relationships, or tapes

•  Bankruptcy Court •  Letters to owners – off market •  Property Mgmt Companies •  Ads, marketing, email campaigns


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Questions


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Further Reading, Research & Links

  National Apartment Association - http://www.naahq.org/   Multi-Housing News Online – http://www.multihousingnews.com/   Multi-Family Executive Magazine - http://www.multifamilyexecutive.com/   Institute of Real Estate Management - http://www.irem.org/   Apartments for Sale - http://apartmentsforsale.com/   Freddie Mac - http://www.freddiemac.com/   Fannie Mae – http://www.fanniemae.com/   Dept of Housing & Urban Development - http://portal.hud.gov/hudportal/HUD   Investors Guide to Private Money Lending - http://www.privatemoneylendingguide.com/   Globerex - http://www.globerex.com/   Inman News - http://www.inman.com/   Globe St.com - http://www.globest.com/   CoStar Group – http://www.costar.com   Loopnet.com - http://www.loopnet.com/   Redfin – http://www.redfin.com/   Zillow - http://www.zillow.com/   Realtor.com - http://www.realtor.com/   Homes.com - http://www.homes.com/


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T O D D R U B I N S T E I N S ENIOR PARTNER

Rubinstein Group at TOLD Partners 818-601-7200

[email protected] [email protected]

If you want a copy of this presentation, a glossary of commercial real estate terms, and the Apartment Outlook reports for 2012, then send me an email.

Documents

TODD RUBINSTEIN - AAII. LOS ANGELES presentation... · TODD RUBINSTEIN SENIOR PARTNER Rubinstein Group at TOLD Partners 818-601-7200 [email protected] [email protected] AAII Los Angeles