2015 02-04 - understanding appreciation - a guide to building wealth in real estate
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Transcript of 2015 02-04 - understanding appreciation - a guide to building wealth in real estate
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Understanding Appreciation:A Guide To Building Wealth In
Real EstateJames Orr
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Upcoming Classes• Property Management: Leases – Brian Williams• Wednesday February 11th, 2015 6 PM to 8 PM
• Contract To Buy and Sell Real Estate – James Orr• Wednesday February 18th, 2015 6 PM to 8 PM
• Property Management Mastery – Brian Williams• Wednesday February 25th, 2015 6 PM to 8 PM
• House Selling Strategies – James Orr• Wednesday March 4th, 2015 6 PM to 8 PM
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Upcoming ClassesPlease RSVP early since seating is limited:
• http://NCREIG.com• http://Facebook.com/ncreig
IMPORTANT NOTE: If you’re not going to attend, please remove your RSVP so someone else can attend.
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Introductions• How long will it take a $250,000 property to be worth
$1,000,000 in our local market?• BONUS QUESTION: If you put 20% down ($50,000)
what is your average return on investment per year once it gets to $1,000,000
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Wealth• This presentation is called “A Guide To Building Wealth”• What is wealth?
• an abundance of valuable possessions or money.• the state of being rich; material prosperity.• plentiful supplies of a particular resource.• Rich Dad’s definition of Wealth:
• The definition of wealth is the number of days you can survive without physically working (or anyone in your household physically working) and still maintain your standard of living.
• For example, if your monthly expenses are $5,000 and you have $20,000 in savings, your wealth is approximately four months or 120 days.
• Wealth is measured in time, not dollars.
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Wealth• So, using Rich Dad’s definition there are two ways to
build wealth:• Cash Flow and/or• Appreciation
• To “use” appreciation, you need to:• Refinance and pull cash out, or• Sell the property
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What do you call it when you buy something hoping that it goes up in value?
Speculation
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So… isn’t that what appreciation is?
Yes
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Which ones of these are speculative?
Appreciation Cash Flow
Debt Pay Down Tax BenefitsROI
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Buying Conventional 20% Down
Appreciation ≈ 15% Cash Flow ≈ 5%
Debt Pay Down ≈ 5.5%
Tax Benefits ≈ 14.55%
ROI ≈ 40%
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Assumptions
Mean3.500%2.000%2.000%2.000%2.000%2.000%2.000%2.000%2.000%
Monte Carlo
RTO Rent Appreciation Rate:Rent Appreciation Rate:
Utilities Inflation Rate:HOA Inflation Rate:
Property Taxes Infl Rate:
Repair Inflation Rate:
Yearly Appreciation Rate:RTO Purchase Price Increase Rate:
Hazard Insurance Inflation Rate:
250,000$ 250,000$
20.0%50,000$
200,000$ 5.000%(1,073.64)$
1,600$ -$
1,500$ 1,200$
-$ -$ -$ -$
2,000$ 4,000$
56,000$ 256,000$
33.00%0.00%12.00%2.00%
5,000$ 2.00%
2,000$ 7.00%
Tenant Buyer Turnover Cost:
Seller Concessions:
Subsequent TB Down Payment %:
Maintenance Reserve:Property Management:
Vacancy Percentage:Years Between Tenant Buyers:
Initial Tenant Buyer Down Payment $:
Suggest Initial Maintenance Account:
Yearly Property Taxes:
First Mortgage Rate:
Yearly Hazard Insurance:Yearly HOA:
First Mortgage PI Payment:
Extra Monthly Option Fee:
Total Investment Buying ALL CASH:
Initial Tenant Buyer Down Payment %:
ARV:Purchase Price:
Down Payment %:Down Payment $:
First Mortgage:
Traditional Sell With Agent Cost:
Traditional Loan Closing Costs:Total Initial Investment:
First Make Ready:
Monthly Owner Utilities:
Fund Initial Reserve Account:
Fair Market Rent:
Basic Assumptions
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What is “Normal” Appreciation?
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Source: National Association of Realtors
http://www.realestateabc.com/graphs/natlmedian.htm
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National Data Summarized• From 1968 through 2004
• My Fort Collins, Loveland and Windsor data is 1996 to present• See reference slide at end to see my data
• From data on previous slide:• Average = 6.41• Median = 5.85• Standard Deviation = 3.30
• Case-Schiller claims 3.4% annually from 1987 to 2009• Another website claiming National Association of Realtors
as source claims 5.4% annually from 1968 to 2009
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Median Sales Price/Total Sq Ft 2014
$125+7.31%
$112+9.91%
$109+11.52%
Fort Collins Loveland Windsor
http://jamesorr.com/appreciation-rates/
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
$320,000
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Fort Collins Appreciation RatesSo
ld P
rice
in T
hous
ands
Perc
ent C
hang
e Ye
ar O
ver Y
ear
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
$320,000
$60
$70
$80
$90
$100
$110
$120
$130
$140
$150
Fort Collins Appreciation Rates
Average $ Median $ Average $/Sq Ft Median $/Sq Ft
Sold
Pric
e
Sold
Pric
e/To
tal S
q Ft
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New Assumptions
Mean Standard Deviation Low 25th %ile Average Median 75th %ile High3.500% 2.000% -3.18% 2.19% 3.54% 3.55% 4.92% 10.47%2.000%2.000% 2.000% -6.50% 0.70% 2.02% 2.06% 3.39% 8.57%2.000%3.000% 2.000% -3.58% 1.68% 3.00% 3.02% 4.33% 10.45%3.000% 2.000% -5.07% 1.63% 2.99% 2.99% 4.32% 10.77%3.000% 2.000% -3.84% 1.67% 3.04% 3.03% 4.42% 10.73%3.000% 2.000% -3.33% 1.70% 3.04% 3.05% 4.37% 9.99%3.000% 2.000% -5.06% 1.65% 2.99% 3.01% 4.33% 9.97%
Monte Carlo
Coming Soon
Coming SoonRTO Rent Appreciation Rate:Rent Appreciation Rate:
Utilities Inflation Rate:HOA Inflation Rate:
Property Taxes Infl Rate:
Repair Inflation Rate:
Yearly Appreciation Rate:RTO Purchase Price Increase Rate:
Hazard Insurance Inflation Rate:
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From “The Intelligent Investor” by Benjamin Graham
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References• http://jamesorr.com/appreciation/• By City:• http://jamesorr.com/fort-collins-appreciation-rate/• http://jamesorr.com/loveland-appreciation-rate/• http://jamesorr.com/windsor-appreciation-rate/