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Building a Coordinated Real Estate Portfolio


... Accounting and Mortgage Solutions. Pretty house ... Mortgages and loans generally are expensive pains in the BUTT ... close to jumbo notes if ... – PowerPoint PPT presentation

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Title: Building a Coordinated Real Estate Portfolio

Building a Coordinated Real Estate Portfolio
Pretty house picture
R. Brook Hansen CLU,ChFC,AEP Creative Wealth
Strategies Integrated Accounting and Mortgage
Presentation Goals
Understanding the power of real estate as an
investment Discovering how to integrate RE into
your investment portfolio Learn different
acquisition tactics Developing a plan that fits
What is coordination?
Lifestyle Debt Income Estate and business
planning Taxes Liability
Leverage appreciation
Home valued at 330,000 grows at 5
16,500 Typical investment 66,000
GOI 25.00 Tax effect 280,000 _at_ 27.5 yrs
10,200 _at_30 3,050 Tax effect versus
investment 4.63 Cash flow 2K per year (very
conservative) 3.03 Total return _at_ 20
down 32.66 If highly rehabbed ?
Basic Debt Rules
Only ten conforming Freddie or Fannie
loans Cash out price breaks at 70,80,90 After
repaired or completion prefers seasoning Construct
ion to Perm, hassles, expenses, BENEFITS Subject
To Debt Lines of credit on unseasoned income
property are generally held at 75 ALL OF THIS
CAN BE MANIPULATED!!! Mortgages and loans
generally are expensive pains in the BUTT
Acquisition Options
Rehab-Sell Rehab-Keep New construction,
local Recreational Property New Construction,
national Multi tenant Commercial Foreclosures, et
After Repaired Acquisition
Purchase home to be upgraded 190,000 Substantial
upgrade 65,000 Total invested 255,000 Af
ter repaired value 330,000 Debt to
value 77.28 Monthly _at_ 30 years
(6) 1,528.00 Interest only 1,275.00
Properties within your target you choose not to
keep Price/debt is to high for comfortable
rental Profit is good but LTV is wrong Ultimate
loan is too small Location to you Low near term
growth potential beyond fix up Need cash or
income for debt support
Properties within your target you choose to
keep Price/debt is to right for comfortable
rental Profit is okay but LTV is great Ultimate
loan is large enough Location to you Cash
cow Need cash flow for debt support
New Construction-Local
Odd lots Modular homes Ten percent bump out of
the ground Benefits of phases one and last
phase Improving certain types of
property Commercial
Increase your lifestyle and your balance sheet
Recreational property, the ultimate black
holeBUT Build or do massive rehab to structure
debt (gt75 LTV) Develop equity line to handle
sideways amortization Use 5/1, 7/23, Interest
only or LIBOR financing Be prepared to sell in
five years
Sideways Amortization
Acquire 200K lake place. Invest 100K in fix
up Appraised value is 400,000 or better Debt
300K interest only, 6 18,000 per year Taxes
and insurance 6,000 per year Make
payments of 12,000 per year 300K _at_
3 400K _at_ 7 Which grows faster? Five year
equity 214,000
New Construction-National
RENA CENTEX YAHOO Research areas and
demos Locating and managing trends
Multiple Tennant Properties
Prices for multi tenant properties are coming
down some Watch for that continued trend Can
create after repaired value loans Slow growth,
need strong cash flows to work No sideways ams
or tight cash flow scenarios Reduce number of
properties required to create a portfolio of
X Good anchors to smaller groups of assets or
LLC notes
Commercial Properties
Triple net leases Require a lot of capital Can be
leveraged with relative ease Be prepared to bleed
occasionally Have the greatest preliminary growth
opportunity Good rehab candidates in some
circumstances 1031 exchange buyers Much more
risky than single family homes Require more skill
Foreclosures et al
Many groups to join Individual coaching
available If you have resources I would work
above this market Homevestors and others are a
source of opportunity for buyers Lots of less
than fun activities
Creating a Search Pattern
Select a few systems to locate property Become
familiar with areas in transition Locate wealthy
spots with homes on the periphery Mass offers on
homes within price range that have over X time on
the market, offering 15-20 off to see who
elevates Enlist a Finder Enlist a
Realtor Communicate your needs to those you
know Become known for being involved in RE
Checking your resources
Who do you know who? What are your ancillary
relationships How can you access certain
markets READ..the good stuff Develop debt
strategy Assemble team Loan officer, Realtor,
Finder, Property manager, accountant
Creating clusters
Building smaller portfolios within your larger
portfolio The idea here would be to maximize what
you can acquire Example Rehab two smaller
(value) homes and develop strong equity, keep the
two homes and create solid cash flow. Leverage
the equity of the two homes into one substantial
home that breaks even or goes slightly negative
(before tax). Allow this to season. (Build
another cluster, while this bakes) Consider 1031
or sale of one of the first rehabs to acquire
another substantial house (using equity to reduce
payments and create cash flow). Now you have two
high end and one medium to low end home in a
cluster (1MM?) and little invested.
Creating clusters
This little group of properties might take a year
or two to build but you should have twenty
percent or more in equity and a high average
price. If the smaller home was non-conforming
you could have created a million in assets using
only two conforming loans. When you have four
clusters plus your homes you are out of
conforming loans. If this take three to five
years you may decide to move this cluster to a
commercial loan, deal with the twenty years
amortization and create another conforming
Maximize your conforming Debt
Using personal residence/recreational
property Keep expensive homes (eventually) Use
smaller projects to create cash flow to support
the occasional larger acquisition (clustering)
and slowly upgrading through sale or 1031
exchange Build to ten close to jumbo notes if
reasonable Use non-conforming early to allow room
(via cash flow)
Tax Benefits
Depreciation is on the home, not the dirt.
Fortunately we can shift some of the value to the
building Example 200,000 total 150,000
building 27.5 year dep 5,455.00 (PV 85k
plus) If you purchased one home per year for ten
years, you will create in excess of 54,000 per
year in deductions against ordinary
income. Please quit with the 401(k) beyond the
Tax Benefits
Depreciation deductions (25K, lt100k) or RE
professional unlimited against ordinary
income Personal Residence Rules, 2 of 5, once
every 2 years 1031 exchanges (short and long
term) Capital Gains Tax treatment Potential for
tax free income Expenses for business related
activities (different discussion) MEGA tax
avoidance and leverage on deals of 3 million or
Income and Growth
Purchase fourteen homes,one per year like
this. Home one, year one 300K w/250K debt Home
one, year fifteen 600K w/185K debt We can access
80 LTV with relative ease 600,000 _at_ 80
480,000 Available for income, year fifteen
295,000 (tax free?) Home two year sixteen
310,000 and so on Home one, year 29?
How Property is owned
Property ownership determines the impact of taxes
on the estate. Changes in titling are usually
required to implement an estate plan. This is
more important than the type of document(s) you
have protecting those assets!
Contract or Will?
Joint property Contract Insurance
proceeds Contract IRA/401k Contract Annuiti
es Contract Individual accounts Will Fee
Simple property Will CD/ Bank
accounts Will Misc. personal property Will
Unified Credit Equivalent The Amount
allocated to each tax payer that is exempt from
transfer taxes
You Dont Have To Be Dead
To Use It!
Grantor Retained Annuity Trust
Split ownership interests. Retained interest
receives income for a period of years (example
15). Remainder interest receives the asset or
its benefits at the end of the term. Three
effects Value freezes Example
500,000 Creditor protection positive side
effect IRS assumes all assets owned this way earn
a certain rate, today it is 4 We earn and
withdraw 10 from the trust for fifteen years
Grantor Retained Annuity Trust
The effect The trust value for gift tax
purposes declines each year for fifteen years as
you supposedly spend down the asset. The IRSs
opinion of the value of the asset? 105,000 Actua
l value in fifteen years 1,200,000 Tax free
transfer 1,100,000 Taxes saved 500,000
Coordinate with Business
Use dividend rule to transfer RE to you. (Use
tenants in common to spread it out if need
be) Create lease and use GRAT or just shift
income or debt Use GRAT to facilitate buy-sell
agreements, buy insurance pre-tax (by creating a
roll out), Use outside real estate to create
outside investments via leverage Use outside real
estate as an additional and often less expensive
debt source Have corporate retreat
Other Creditor Protections
LLCs are very popular vehicles for holding
property for asset protection purposes. Buy
good liabilities and umbrellas first Dont end up
with ten of these things Use clusters within
LLCs based, to some degree on equity Tenants in
common interest Family Limited Partnerships
(FLP) Qualified Personal Residence Trusts
(QPRTS) Take care of your stuff, dont be found
negligent by good practices
Three Kinds Of People
Age Groups Age 50-55 Age 65 Age 80
Three Types Savers
Usually live beneath their means Usually
know what they spend and earn Often
underestimate the potential of their
assets Can create and follow wonderful income
plans Generally like things simple Often
cannot resist logic (like engineers) They are
teachable and accountable
Three Types Creators
More flexible in their options Have a make it
happen attitude Have only a vague idea of their
expenses (notable exceptions) Often live above
their means Often over estimate the potential
of their assets Are sometimes completely
unorganized CAVEAT Sometimes know their burn
rate and understand their goals Occasionally
have a real firm understanding of what they
want Are more prone to use their own home as an
investment Are more prone to purchase income
property Are by far the wealthiest groupwhen
they are organized
Three Types Floaters
Usually few or inherited assets Often have
no plan One or two asset households Home
is their biggest opportunity Least likely to
act on it Know exactly what their income and
expenses are Usually wait to long to act and
are very slow in acting even then Sometimes
are excellent earners that operate in Chaos
Creating a Planning Constitution
Clarity allows for success by decreasing stress
and other reasons Evaluate your investment,
involvement, and risk boundaries Dont start
what you will not finish, recognize your
limitations Involve family in constitution
Coordinate with estate planning
documents It is never to late Write focused
goals and action items
Creating a Planning Constitution
Create an income plan Evaluate potential
income streams Evaluate sought after
lifestyles Consider how to maximize
Determine what, if anything, we are willing
to give up Weigh inheritance goals against
lifestyle actions Write focused goals, if you
could only have one
Wealth Accumulation/ Retirement
What we have been taught limits our success. We
must stop working for Money. We need to mind our
Honorable Learned HandU.S. Appeals Court
  • There are two systems of taxation in this
  • one for the informed
  • and
  • one for the uninformed.

Creative Wealth Slide
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