Investment Property Study Sun Valley
KASEY ATKINSON 208.721.1744
HAVE YOU EVER THOUGHT OF BECOMING AN INVESTMENT PROPERTY OWNER? In an article dated June 19, 2019, The Wall Street Journal reported that the share of homes purchased by investors in the United States reached 11.3%, the highest on record. In 2019 of the 13,852 total residential properties in Blaine County, there were 5,935 registered homeowner’s exemptions properties. This means 43% of residential properties are primary residences. We can assume that the remaining 57% of residential homes in Blaine County are second homes/investor properties. In the Sun Valley resort core, a majority share of homes are purchased by second homeowners and investors. With the housing market recovered and healthy second home buyers and investors are active players in the resort market. Second home buyers look at the upside of an appreciating asset. These buyers are generally astute about getting out whole if they need to sell quickly or consider renting to help cover expenses. The last several years have yielded more buyers looking at property to fix up and flip, which would also be an investor. If you are looking to invest in Sun Valley real estate as investment rental property, it is important to understand cash flow and pertinent planning strategies. Here are some insights for becoming a rental investment owner.
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SUN VALLEY RENTAL PROPERTY SUMMARY Blaine County, like many other resort areas, is challenged by the limited inventory for affordable housing. Currently, the long-term rental market is exceptionally strong. There is an increasing demand for rental properties both for high-end and working-wage budgets. High-end renters include those in the process of building or renovating, new families moving to the valley, and part-time seasonal recreationists. Full-time renters include our vital workforce such as firefighters, teachers, nurses, and service employees. Many young adults start in the rental pool before finding a home to purchase. With such strong demand, investing in rental properties has proven to provide steady cash-flow for investors. Second-home owners may consider leasing their property via a property management company to generate income or cover expenses. Other investors monitor the market and purchase property in order to rent for cash flow while their asset appreciates.
Rental Property Investment A large percentage of buyers in the Sun Valley area purchase a vacation home for family use, to rent out, for equity gain, or to use as a primary residence during retirement. In the multifamily market, low rental vacancy rates continue to push rents up. REALTORS® reported strong sales and leasing activity for multifamily properties according to the 2019 Q3 Commercial Real Estate Trends & Outlook Report. The multifamily market had the lowest median going-in cap rate, at 5.9% (low cap rate = high price). •
Rental property investment refers to real estate investment that involves real estate and its purchase, followed by the holding, leasing, and selling of it. Depending on the type of rental property, investors need a certain level of expertise and knowledge to profit from their ventures.
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Rental property investments are generally capital-intensive and cash flow dependent with low levels of liquidity. However, compared with equity markets, rental property investments are normally more stable, have tax benefits, and are more likely to hedge against inflation. Given proper financial analysis, they can be profitable and worthwhile investments.
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There are several ways in which rental property investments earn income. • Investors earn regular cash flow, usually on a monthly basis, in the form of rental payment from tenants. • Rental properties give the investor the possibility of earning profit from the appreciation, or increase in value over time, of the property. A sale provides one large, single return. • In some cases you can do a tax free 1031 investment exchange into other rental investments. This gives the next investment even more leverage towards building a real estate investment portfolio and increase your internal rate of return.
Property Management Rental property investing is not passive income. It requires time and work. The investor or owner takes on the role of the landlord and all the job responsibilities associated with it. General responsibilities of owning a rental property include: • • •
Tenant Management—finding tenants, performing background screenings for potential tenants, creating legal lease contracts, collecting rent, and so forth. Property Maintenance—repairs, upkeep, renovations, etc. Administrative—filing paperwork, setting rent, handling taxes, paying employees, budgeting, etc.
It is common for rental property owners to hire property management companies at a fixed or percentage fee to handle all the responsibilities. Investors who have limited time, who don't live near their rental property, who aren't interested in hands-on management, or who can afford the cost can benefit from hiring a property management company. This is roughly estimated to cost about 10% of rental property income. With such a high percentage of rental properties in the Wood River Valley, we have wonderful services and property management companies at our disposal.
I have access to data concerning long and short-term rental rates throughout the valley, including the resort core. I also have lease contracts and other necessary paperwork, so you don’t have to worry about creating your own forms. Contact me if you would like a local referral or to discuss your property management needs.
Table of Contents
IMPORTANT TOPICS TO INVESTOR PURCHASES • Measuring Housing Inventory in terms of Months of Inventory • Insight : The inventory of homes and condos/townhomes was down in 2019 (vacant land inventory was up). Buyer demand is strong, but there are simply not enough listings coming on to satisfy this demand. • Measuring Profit • Income Cash/Flow Method • Solving for Capitalization Rate (CAP Rate), Property Value, Monthly Rent, Net Operating Income (NOI) • Appreciation in Value Method: Internal Rate of Return (IRR) • Leverage • In Terms of Purchasing • In Terms of Mortgage Rate
Sun Valley Real Estate Activity HISTORICAL LOOK AT THE SUN VALLEY MARKET
Sun Valley has rebounded nicely from the Recession. Our slow and steady growth has been good for buyers, sellers, and for Sun Valley in general. Places like Jackson Hole, Aspen, and Park City are all experiencing some upand-down fluctuations. Our market is showing a strong pattern of sustainable growth, in sales, volume, and home values. We have learned that stable, slower-growth year over year is the best thing for buyers and sellers.
ABOUT THIS REPORT • • • •
Always remember to consult with your CPA and financial advisor These figures are assumed to be correct, but Buyers and Sellers are encouraged to Perform their Own Due Diligence. Information is Not Guaranteed to be Correct. For more information regarding Real Estate in Sun Valley, please contact me! Information is deemed to be reliable, but is not guaranteed.
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Housing Inventory To determine housing inventory in terms of “Months of Inventory”, take the total number of homes listed for sale during the last month and divide that number by the total number of homes sold in that month. This determines the number of months of inventory remaining. Housing Inventory Example If there were 400 homes listed for sale in June, and 100 of these listings sold in June, then 400 divided by 100 equals 4 months of inventory. • • •
6 months of inventory equals a Balanced Market. More than 6 months of inventory equals a Buyer’s Market. Less than 6 months of inventory equals a Seller’s Market.
Housing Inventory Market Trends Since January 2018 the months of residential inventory has been decreasing, steadily trending towards a Sellers Market.
Measuring Profit There are two methods to profit with real estate: •
Income / Cash Flow
• Appreciation in Value A rental property calculator or Income/Cash Flow spreadsheet are great tools to calculating Cash Flow. See page 16-18 for examples.
Income / Cash Flow Applicable Terms: •
Gross Annual Rental Income
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Annual Expenses
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Net Operating Income (NOI)
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Annual Mortgage Payments
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Capitalization Rate (CAP Rate)
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Property Value (Purchase Price)
Gross Annual Rental Income minus Annual Expenses equals Net Operating Income (NOI) $40,200 = Gross Annual Rental Income – $7,262 = Annual Expenses $32,938 = Net Operating Income (NOI)
Net Operating Income (NOI) minus Annual Mortgage Payments equals Positive Cash Flow $32,938 = NOI -$24,912 = Annual Mortgage Payments $8,026 = Annual Positive Cash Flow
Measuring Profit Solving for Capitalization (CAP) Rate Assume a List Price of $567,500. Net Operating Income (NOI) divided by Property Value (Purchase Price) = CAP Rate NOI divided by Purchase Price = CAP Rate $32,937 รท $567,500 = 5.804 % (Cap Rate) Solving for Property Value One of your goals with this potential purchase is a 6% CAP Rate; normal for this neighborhood. NOI divided by CAP Rate = Purchase Price (In Order to Achieve CAP Rate Goal) $32,937 (NOI) รท 6% (Target CAP Rate) = $548,956 (Purchase Price to Achieve 6% Cap Rate) Solving for Monthly Rent One of your goals is to determine the amount of rent necessary to achieve $32,937/ month NOI. Annual NOI Divided by 12 = Monthly NOI $32,937 รท 12 = $2,745 (Monthly NOI) Annual Expenses Divided by 12 = Monthly Expenses $7,262 รท 12 = $605 Monthly Expenses Monthly NOI plus Monthly Expenses = Gross Monthly Rent $2,745 + $605 = $3,350 (Gross Monthly Rent for $32,937 Annual NOI and 6% CAP Rate) Solving for NOI Method to determine NOI. Property Value X 6% CAP Rate = NOI $548,956 X 6% CAP Rate = $32,937
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Appreciation in Value Sun Valley is a resort market with over 50% of homeowners as part time residents. With the housing market recovered and healthy second home buyers and investors are active players in the resort market. Second home buyers look at the upside of an appreciating asset. The last several years have yielded more buyers looking at property to fix up and flip, which would also be an investor. As with the ownership of any equity, rental properties give the investor the possibility of earning profit from the property’s appreciation. Unlike rental income, a sale provides one large, single return. Not all second homeowners are looking for investment properties. However, most likely all second homeowners aim for property appreciation as an investment strategy.
Internal Rate of Return Internal rate of return (IRR) or annualized total return is an annual rate earned on each dollar invested for the period it is invested. It is generally used by most if not all investors as a way to compare different investments. The higher the IRR, the more desirable the investment. IRR is one of the most important measures of the profitability of a rental property; capitalization rate is too basic, and Cash Flow Return on Investment (CFROI) does not account for the time value of money. A Rental Property Calculator can help run the numbers. Internal Rate of Return (IRR). Using an Internal Rate of Return Calculator, The Rate of Return over time may be calculated.
Leverage Leveraging is a powerful tool. Here is an example of leverage in terms of purchasing. In this example, we have a purchase price of $548,956. There is a down-payment of $137,239. We’ve borrowed $412,717 in the form of a mortgage at 4% over 30 years. So in essence we have the opportunity to leverage a significant Internal Rate of Return with 75% of the purchase being with someone else’s money! There Is Also The Potential To Leverage The Cost Of The Mortgage Interest! In our example we are looking at a Rate of Appreciation of 4%, a CAP Rate of 6%, and Mortgage Interest Rate of 4%. CAP Rate Plus Appreciation Rate Lower Than Mortgage Rate = Negative Leverage CAP Rate Plus Appreciation Rate Higher Than Mortgage Rate = Positive Leverage 6% CAP Rate + 4% Appreciation Rate = 10% Total 10% Total - 4% Mortgage Rate = 6% Positive Leverage 1031 Tax Free Investment Exchange is a great way to leverage your investments. Consult your tax advisor or CPA for guidance.
EX. 1: Rental Property Calculator
EX. 2: Rental Property Calculator
EX. 3: Income / Cash Flow Spreadsheet A spreadsheet can be helpful computing the feasibility of a particular property. Here is an example:
Further Reading: NAR: Rising Rents: a Boon to Commercial Investors but a Bane for Renters 2019 US Vacation Home Counties Report October 2019 National Association of REALTORSŽ Research Group NAR identified a county as a vacation home county if the vacant housing for seasonal, recreational, or occasional use made up 20 percent or more of the county’s total housing stock.
According to NAR : 6.6% of 3,141 counties are vacation home counties.
The median sales price in vacation home counties rose 36% during 2013 to 2018 compared to 31% for all existing and new homes sold during the same period. The build-up in financial wealth, although concentrated, has helped boost the demand for vacation homes. Among second home buyers who obtained a mortgage, low mortgage rate made a purchase more affordable. www.bhhssunvalley.com
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KASEY ATKINSON 208.721.1744 www.kaseyatkinson.bhhssvunalley.com kaseyatkinsonsv@gmail.com 411 5th St E, Ketchum, ID
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