why invest in real estate presented by: tony a drost, mpm®, rmp®

Why Invest in Real EstateWhy Invest in Real EstatePresented by:Tony A Drost, MPM®, RMP®

What We’ll Learn

• Understand how and why investing in real estate can be beneficial

• How to SELL the benefits of a good professional property manager

• See that WE personally can get the greatest return of any investor– Don’t tell anyone – this is our secret

Too Good To Be True?

• Initial Investment $3,718.75• Yields $44,067

Who are our Clients

Definitions

CAPITALIZATION RATE:• Is the ratio between the purchase price and

the Net Operating Income (NOI)• Cap rates are market specific and can vary

from area to area as well as building type• The higher the cap rate the better the

performance

DefinitionsCASH-ON-CASH RETURN:• Compares the initial investment to the annual

cash flow. This does not take into account tax savings and increase in equity

• Simplified: If you put $10,000 in the bank, the cash-on-cash return is the interest rate you make

• Savvy investors use cash-on-cash return as it is a more conservative approach

DefinitionsINTERNAL RATE OF RETURN:• An estimation of the future stream of cash

flow including the net proceeds from the sale against your initial investment

• Sometimes referred as:– Yield– Return– Rate of Return– Return on Investment (ROI)

The Power of Leverage

SECURITIES INVESTMENT• Initial investment $14,875• Rate 8%• Net return (10 years) $19,893.71

– Before taxes

The Power of Leverage

REAL ESTATE INVESTMENT• Initial investment $14,875• Net return (10 years) $92,521

Cash Flow (year 1-10)+ Net sales proceeds

• Rate of return 24.73%– Before taxes

Why the Difference

• Securities investment– Return is based on initial cash investment

$14,875

• Real estate investment– Return is based on appreciation of the value of

the entire asset plus cash flow$125,000 plus cash flow

Leverage – See the DifferenceInitial Investment Return (Down Payment)

10% 24.73%

25 %

50%

75%

100%

16.64%

12.06%

10.5%

8.9%

Leverage = Risk• The greater the risk, the greater the return• Leverage improves CASH PERFORMANCE• Hedge your investments with CASH RESERVES

Accidental Landlord – Upside Down

Please turn to back of handout to find the Case Study Assumption Page

Case Study Assumptions

Accidental Landlord And How We Can Help

• Rent covers mortgage payment• Places a caretaker• Assuming a 10-year holding period

– Owner had $17,500 in tax savings– Owner now has equity

• Principle reduced by $25,000• Value improved by $43,000

Accidental Landlord.xls

True Investor - And How We Make Their Investment Perform

Investor Analysis.xls

Why We Make the Best Investors

Assumes 25% owner• Commission on Purchase $3,750

– $125,000 X 3%• Contribution (25%) $<3,125>• 25% Cash Flow – 10 years $6,385• Commission on Sale $5,040

– $168,000 X 3%• Proceeds of Sale – 25% $13,382• PM Fees – 10 years $18,635

Net Proceeds $44,067

Why Partnerships Can Be Good

• Perfect client – because I am in control• Upon Sale, partners tend to exchange into

replacement properties individually• Allows you to participate in an investment

opportunity with little to NO money• Builds upon your own portfolio

Summary

• Financial analysis is technical• Templates are available• Merging your own data and spreadsheets is

the best way to fully understand the performance measures