Category: f25-econ325

Snow Day

Due to inclement weather class is cancelled today. I will post this week’s materials here later today or tomorrow. Stay tuned. And stay warm.

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Lesson 13: Profit Strategies

Review:

  • Multifamily Residential
  • ROI
  • Select your most promising apartment building (based on ROI Analysis)
  • Add the building address to the sign up sheet

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 younger generation 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
      • Airbnb

Assignment:

  • Have a good break!
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Lesson 12: ROI Analysis

Review:

  • Multifamily Residential

Presentation:

  • Pro Forma ROI Analysis
    • ROI worksheet
    • Begin with Asking Price (or your intended offer price)
    • Estimate rental income – what is fair market rent?
    • Estimate expenses
      • Property taxes
      • Insurance
      • Maintenance
      • Repairs
      • Management
      • Utilities
    • Use an amortization schedule
      • Calculate interest payments
      • Calculate principal payments
    • Estimate tax benefits
      • Depreciation
      • Tax shelter
      • Tax savings
    • Make assumptions
      • Appreciation of property value
      • Rent appreciation
      • Expense inflation
    • Estimate ROI
      • Total
      • Annualized

Activity:

  • Complete a “first draft” ROI worksheet for one of your selected multifamily properties

Assignment:

  • Complete a first draft for all 3 of your selected multifamily properties.
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Lesson 11: Multifamily Residential

Review:

  • 2008 Financial Crisis

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 (GRM)
    • 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:

  • Search LoopNet for multifamily properties (10+ units)
  • Identify 3 apartment buildings
  • Calculate GRM for each property
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Lesson 10: Crime and (no) Punishment on Wall Street

Review:

  • Housing Market Collapse and Foreclosure Tsunami
  • Crisis Players Video Presentations

Presentation:

  • 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
  • The Revolving Door between Wall Street and the Federal Government (1987-present)
    • Alan Greenspan
    • Robert E. Rubin
    • Larry Summers
    • Hank Paulson
    • Ben Bernanke
    • Timothy Geithner
    • Jack Lew
    • Steven Mnuchin
    • Jared Kushner
    • Eric Cantor and many others who moved to Wall Street/K Street immediately after serving in Congress.
  • Contrast with the prior generation when integrity mattered (pre-1987)
    • Marriner Eccles
    • William Martin
    • Arthur Burns
    • Paul Volcker
  • Inflection Point – the 1980s
    • Reaganomics – “Government is the problem.” (deregulation)
    • Wall Street – “Greed is good” (self interest over civic duty)
    • Finance has grown from 4.9% of GDP in 1980 ($140 Billion) to 7.3% in 2024 ($2 Trillion). That’s 14x growth!
    • Meanwhile Manufacturing fell from 20% to 11% and Construction fell from 5% to 4%.
    • Our core economic engine transitioned from production to asset inflation.

Assignment:

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Lesson 9: Housing Market Collapse and Foreclosure Tsunami

Review:

  • Deregulation and the 2008 Housing Crisis

Presentation:

Activity:

  • Signup for a particular organization (e.g., Lehman Brothers, Dept of Treasury, or Fannie Mae) that was caught up in the 2008 Crisis.

Assignment:

  • Research your organization and prepare the following 3 PowerPoint or Google Sheets slides:
    • Slide 1: Background on the organization, structure, business, key leaders
    • Slide 2: Role in the 2008 Crisis. What did they contribute to the mortgage meltdown?
    • Slide 3: What is their current status? Did they go bankrupt? Did they receive a bailout? Did they repay their bailout? Have they changed their business practices?
  • Presentation submission
    • Create a 2-3 minute video explaining your slides.
    • Email a link to the video.
  • Recommended (not required): watch Poverty Politics and Profit (PBS Frontline)
  • Recommended (not required): watch 99 Homes
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Lesson 8: Deregulation and the 2008 Financial Crisis

Review:

  • Comparable Sales Presentation scores posted in Bb
  • 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
      • Banking Deregulation in 1999 > 2008 Crisis
      • “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.
    • Current situation

Assignment:

Identify and research a company, government agency or other organization of interest that played a key role in the 2008 Crisis. Use AI to save time.

Answer the following about your chosen organization:

  • What was their role in the 2008 Crisis?
  • How did they suffer or benefit from rescue packages provided by TARP, the Federal Reserve or the US Treasury?
  • What is their current status? If they still exist, have they changed their business practices?
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Lesson 7: Monetary Policy and the 2008 Financial Crisis

Review:

Presentation:

  • Money for Nothing: Inside the Federal Reserve 
  • Federal Reserve
    • Central Bank for the US and, in some ways, the World
    • Alan Greenspan
      • Federal Reserve Chairman (1987-2006)
      • Free market champion appointed by President Reagan
    • Ben Bernanke
      • Federal Reserve Chairman (2006-2014)
      • Promised to continue Greenspan policies
      • At the eye of the storm in 2008
    • Kept interest rates too low for too long (2001-2004)
    • Contrast with Paul Volker (1979-1987)
  • Watch video (49:00-1:02:15)
  • Continue (1:17:45-)
  • Federal Funds Rate
    • Janet Yellen (2014-2018)
    • Jerome Powell (2018-present)
  • Discussion
    • Trickle Down philosophy
    • Promotion of financial markets
    • Quantitative Easing (QE)
    • Debt
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Lesson 6: Intro to the 2008 Financial Crisis

Review:

  • Property Valuation Presentations

Presentation:

  • Financial Crisis of 2008
    • Historical Context
      • Tech Stock Bubble (NASDAQ) bursts in Spring 2000
      • Tech job losses post-bubble weaken the economy
      • Bush II elected and takes office in Jan 2001
      • 9/11 and continued economic weakness
      • Wars in Afghanistan and Iraq
      • 2004 Election
      • Political pressure to stimulate economy

Assignment:

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