Category: f23b4-bu325

Lesson 16: Using Real Estate to Build and Preserve Wealth in a Volatile World Economy

Review:

  • REITs
  • Final Project

Presentation:

  • Nature of wealth
  • Contracts
  • Physical Assets
  • Collateral
  • Inflation, deflation and volatility
  • Precious Metals
  • Bitcoin and other Cryto-currencies
    • Impact on existing monetary system
  • Future of the US Dollar as the World’s “Reserve Currency”
    • Fed, BoE, BoJ, ECB
    • ZIRP = Zero Interest Rate Policies
    • QE = Quantitative Easing (money printing)
    • BRICS = Brazil, Russia, India, China, South Africa
    • Currency wars
  • Advantages of Real Estate
    • Physical asset
    • Inflation hedge
    • Opportunity in an “inefficient” market
    • Enduring value
    • Relatively easy to insure
    • Relatively difficult to liquidate
  • Disadvantages of Real Estate
    • Vulnerable to local market deterioration
    • Vulnerable to deflation
    • Vulnerable to natural hazards

Assignment:

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Lesson 14: Profit Strategies

Review:

  • Negotiation
  • Final Project Submission Deadline
    • Due no later than Wed, Dec 20 at 12p

Presentation:

  • Strategies – ways to make money
    • Buy something broken
      • Cosmetic fixer
      • Major repairs
      • Problem should scare away amateurs
    • Buy at a discount … by paying cash
      • Pay cash
        • Cash offers are expected to be lower than conventional financing
        • Implicit discount to avoid bank financing headaches (e.g., inspection, appraisal, approval)
      • 3 “D” opportunities
        • Default – owner is facing foreclosure or bank-owned
        • Death – death in the family forces family to sell
        • Divorce – joint assets must be liquidated
    • Fix and flip
      • quick profits/cash
      • higher tax rates
    • Buy and hold rental
      • more headaches
      • long term income
      • lots of tax deductions
    • 2-year hold
      • hybrid approach
      • avoid short-term gains tax
      • relatively quick ROI
      • “Live and Flip” approach
      • House-Hacking
    • Seller financing
      • defer capital gains taxes
      • earn interest income
      • set price
    • Business with Real Estate
      • motivated sellers
      • buy together, sell separately
      • valuation is tricky – proceed with caution
      • liquor store deal
    • Short-term rental

Assignment:

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Lesson 13: Investment Proposal Presentation

Review:

  • ROI Analysis
  • Pitch Deck

Presentation:

Video instructions

  • Each student will create a video in one of two (2) formats
    • Zoom style screen recording (like my lectures), or
    • Homemade video (simply use your phone)
  • In your video you will
    • Present your Pitch Deck.
    • Explain your ROI Analysis
  • I want to see your face during the video. Don’t record audio only. This will help me better understand what you know and what you don’t know.
  • Don’t read from a script, make it conversational, like answering questions in a job interview. Use your own words.

Your video should be approximately 5 minutes in length.

  • Speak clearly! If I can’t follow your commentary it may negatively impact your grade.
  • Don’t rush through it. Take time to explain yourself.
  • Don’t make the video unnecessarily long but don’t worry if you go a little over.

Provide a YouTube link.

  • Post your video on YouTube (yes, only YouTube is acceptable, to keep grading manageable).
  • Email the link only! Please do not try to actually upload the video to Canvas or send a huge attachment via email.

Assignment:

  • Work on your Final Project – ROI, Pitch Deck and Video
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Lesson 12: Investment Proposal “Pitch Deck”

We’re meeting online today at 10a! Click the meeting link below to join!

https://meet.google.com/qhq-dwym-phq

Review:

  • ROI Analysis

Presentation:

  • Video Lecture (start at 01:52, stop at 21:45)
  • Funding your real estate investment
  • Think of it as a business startup … because that’s what it is.
  • Prepare a “pitch” for potential investors
  • Feel free to use materials found elsewhere

In-class Activity:

Create an Investment Proposal “Pitch Deck”

  1. If you haven’t already, complete your ROI analyses
  2. Use the apartment building with the most promising financial profile
  3. Calculate valuation metrics (should already be complete)
    1. Price per unit
    2. Gross Rent Multiplier
    3. Cap Rate
  4. Finalize your ROI Analysis
  5. Prepare a PowerPoint (or Google Slides) “pitch deck” for potential investors.
    1. Include the valuation estimate
    2. Include the ROI analysis
    3. What is “the ask”, i.e., how much money do you need?
    4. Include a slide about yourself
      1. Why you are the right person to lead the investment?
      2. How will you participate and how will you be compensated?
  6. Save your pitch deck in a format you’ll want to use for presentation.

Assignment:

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Lesson 11: Multifamily Investment Project Phase 1

Review:

  • Exam 2 results
  • Question 10
  • Score appeal process

Presentation:

Final Project Phase 1 (due in class today)

  1. Identify a target market (e.g., Milwaukee) and a backup – each student will be assigned a unique market
  2. Create a list of all multifamily investment opportunities in your target market
    • Apartment buildings with 10+ units
    • Create a spreadsheet with property address, number of units, asking price, price per unit, total annual rent (estimate), and Gross Rent Multiplier (GRM)
  3. Select 3 properties from your list for a deeper dive and ROI analysis.
    • Use the ROI Analysis worksheet
    • Create a separate worksheet for each property
    • Estimate annualized ROI for each of the 3 selected properties
  4. Verify completion of your ROI worksheets (allow me to review)
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Lesson 10: Multifamily Residential

Review:

  • Exam 2
  • Good news, bad news

Presentation:

  • Types of multi-family
    • Duplex, Triplex, Fourplex
    • 5-units and more require “commercial” financing
  • Advantages of multi-family
    • vs office, retail or other commercial
    • vs single-family
  • Search for Multifamily
  • Story of the Cree Terrace Apartments
    • Before:

    • After: Current Street View
    • 8-unit apartment building
    • Low-end rentals
    • Dealing with evictions
    • Adventures in bats, cockroaches, pets, guests and carpeting
    • Importance of “Santos and Bob”
    • Headache to revenue factor
    • Financials
      • Purchase Price: $182k
      • Beginning Monthly Rent: $495/month + electricity
      • Ending Monthly Rent: $650/month, all utilities included
      • Monthly revenue = ~$5k, cashflow = ~$2.5k
      • Selling Price: $256k
    • Lessons:
      • 1 bedroom apartment better than 2+ bedroom
      • Rent drives value and utilities are a hassle (including utilities was a good move)
      • Go big (10+ units) or stick w single-family
      • Beware of the “nickel and dime” buyer while under contract
      • I sold way too soon
      • I should have hired professional property management
  • Valuation Metrics for multifamily residential
    • Price per unit
    • Gross rent multiplier (GRM)
    • Net Operating Income (NOI)
    • Capitalization rate (aka “Cap Rate”)
  • Calculate Price per unit
    • Divide asking price by the total number of units
    • For example, if the asking price is $4,000,000 for a 50-unit apartment building
    • The price per unit is $4,000,000/50 = $80,000 per unit
  • Calculate the gross rent multiplier
    • First, calculate the gross annual rent
      • Rent per unit = $750 per month
      • Annual rent per unit = $750 x 12 = $9,000
      • Gross annual rent = Annual rent per unit x number of units = $9,000 x 50 = $450,000
    • Next, divide the asking price by the gross annual rent
      • Asking price = $4,000,000
      • Gross annual rent = $450,000
      • Gross rent multiplier = $4,000,000/$450,000 = ~8.9
  • Calculate Net Operating Income (NOI)
    • NOI = Gross annual rent – Vacancy Rate – Operating Expenses
    • Gross annual rent = $450,000
    • Vacancy Rate = 3%
    • Operating Expenses
      • Property tax = 38,000
      • Hazard insurance = 19,000
      • Utilities = 28,000
      • Repairs = 35,000
      • Maintenance = 17,000
      • Advertising = 3,000
      • Estimated Total = $140,000
    • NOI = $450,000 – (3% * $450,000) – $140,000 = $450,000 – $13,500 – $140,000 = $296,500
  • Calculate Cap Rate
    • Cap Rate = NOI/Asking Price
    • Cap Rate = $296,500/$4,000,000 = 0.074 = 7.4%
    • Alternatives
      • You don’t need to use Asking Price. You might instead use an offer price, like $3.6M.
        • Cap Rate = $296,500/$3,600,000 = 0.082 = 8.2%
      • You can also use the formula to determine an offer price, x, for a specific Cap Rate.
        • 9.5% = $296,500/x
        • x = $296,500/9.5% = $3,121,052.63 = ~$3.1M.

Assignment:

  • Select a market (e.g., Milwaukee)
  • Use LoopNet or a local MLS to identify potential multifamily properties (10+ units)
  • Calculate GRM for each property
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Lesson 9: Crime and (no) Punishment on Wall Street

Review:

  • Housing Market Collapse and Foreclosure Tsunami
  • Exam 2 on Mon Dec 11

Presentation:

  • The Untouchables
  • Mortgage Crisis Fraud
    • Wall Street Banks selling MBS and CDO securities
    • Subprime Loan Originators pushing ARMs and other non-traditional loans on low-income borrowers
      • Countrywide Financial
    • Rating Agencies issuing AAA ratings on low quality MBS and CDOs
      • Moody’s
      • Standard and Poor’s
    • Fannie and Freddie
      • Purchasing subprime loans in the secondary market
      • Providing liquidity for ongoing subprime lending
  • Why was no one punished?
    • Obama Administration DoJ did not aggressively pursue
    • Excessive greed everywhere but difficult to prove criminal fraud
    • No consequences = incentive to repeat
    • Too big to fail & Too rich to jail
  • Review for Exam 2

Assignment:

  • Study for Exam 2
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Lesson 8: Housing Market Collapse and Foreclosure Tsunami

Review:

  • Deregulation and the 2008 Housing Crisis

Presentation:

Assignment:

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Lesson 7: Deregulation and the 2008 Financial Crisis

Review:

  • Monetary Policy

Presentation:

  • The 2008 Crisis Explained
  • Deregulation of the Financial System
    • 2004 Securities and Exchange Commission (SEC)
      • In reply to global investment banks asking for more freedom
        • Agreed to loosen capital requirements
        • Allowed fewer reserves and more debt
        • Enabled voluntary regulation and self-reporting
      • Christopher Cox, Head of SEC under George W. Bush administration
        • Former Reagan staffer and US Rep from Southern California
        • Facilitated lack of oversight
      • Contributed to 2008 Crisis
    • Short History of Financial Deregulation in the US
    • Déjà vu all over again
      • Savings and Loan Deregulation in the 1980s > Savings and Loan Crisis
      • Energy Deregulation in the 1990s > Enron
      • “You can’t overestimate what happens when you encourage regulators to believe that the goal of regulation is not to regulate,” said Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University.
    • Recent deregulation during the Trump administration
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