Secure Your Future: Invest in Real Estate
Presented By: Mark Rusnak
Copyright © 2012 Charfen Institute, LLC
Copyright © 2012 Distressed Property Institute, LLC
What Will We Cover?
1. How real estate compares to other assets for growth potential
2. The benefits of investing in real estate
3. How you can use retirement funds to invest in real estate
This presentation is designed to inform you of your options regarding residential real estate
investments. In it, you’ll learn:
Copyright © 2012 Distressed Property Institute, LLC
Tenets: My Promise to You
1. I always do what is best for you, and will never let you close on a bad deal.
2. Real estate should be purchased for cash flow only; appreciation is a bonus.
3. Real estate investing is a non-emotional event; I always do the math.
4. You, as an investor, play a vital role in the real estate market and deserve to be treated accordingly.
I am committed to providing the highest quality service to you through focus, honesty, and integrity.
As a CIAS, I adhere to the following tenets:
Copyright © 2012 Distressed Property Institute, LLC
Copyright © 2012 Charfen Institute, LLC
Real Estate vs.
Other Assets
Copyright © 2012 Charfen Institute, LLC
Bonds and Certificates of Deposit
Bonds and CDs typically have low rates of return
Copyright © 2012 Charfen Institute, LLC
Mutual Funds
•Often underperform the market
•Average 3.66% 10-year return (2000-2010)*
•Managed by someone else
•Dividends reinvested, not paid to investor
*Source: http://screen.morningstar.com/FundSearch/FundRank.html
Copyright © 2012 Charfen Institute, LLC
4 Total Years of Negative AppreciationMax. -13%
Real Estate
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11 Total Years of Negative AppreciationMax. -38%
S&P 500
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Stocks
Stocks in S&P 500 averaged a 1.82% dividend yield from 2000-2011
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Real Estate
Real estate values increased in thelast decade despite the market cycle
Copyright © 2012 Charfen Institute, LLC
Real Estate vs. Stocks
$100,000 invested in real estate in 2000 would have generated $77,755 of cash flow by 2010
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The Benefits of Real Estate
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Cash Flow Can Be a Steady &Significant Stream of Income
• Most stocks don’t provide cash flow• Cash flow increases over the years• Cash flow is liquid and can be invested
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Appreciation
•Appreciation should always be considered a bonus
•Yearly home appreciation averaged more than 5% over past 40 years
•You can help property appreciate (improvements)
•Home appreciation less volatile than the stock market
Copyright © 2012 Charfen Institute, LLC
Appreciation
Source: HUD Historical Data: www.census.gov/indicator/www.newsreconst.pdf
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Leverage
Most investments don’t offerleveraged buying power
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Leverage
• Earn returns with other people’s money• Leverage is a key way to increase your
returns• Leverage is largely unique to real estate
Copyright © 2012 Charfen Institute, LLC
Tax Benefits
•Depreciation allows yearly deductions on improvements to the property
•1031 Exchanges defer capital gains taxes
•Other benefits
*Source: http://screen.morningstar.com/FundSearch/FundRank.html
Copyright © 2012 Charfen Institute, LLC
Investors Can Deduct the Following Items Related to Rental Property:
•Advertising
•Cleaning & Maintenance
•Commissions
•Depreciation
•Employees, Contractors, Non-Employed Staff
•Insurance
•Interest
*Source: http://screen.morningstar.com/FundSearch/FundRank.html
• Legal Fees
• Local Transportation Expenses
• Long Distance Travel
• Losses
• Professional Services
• Repairs
• Utilities
Copyright © 2012 Charfen Institute, LLC
Investors Can Depreciate Property as Tax Deferred
Copyright © 2012 Charfen Institute, LLC
How Depreciation Works
1. Purchase a property worth $100,000. $85,000 worth is attributed to the improvement (house).
2. The basis for depreciation is $85,000.
3. Calculate the first year’s depreciation based on the month of purchase.
4. Every year afterwards (until 27.5 years), deduct 3.636% from the basis.
5.Every year, deduct $3,090.60 in taxes.
Copyright © 2012 Charfen Institute, LLC
Using a Self-Directed IRA to
Invest in Real Estate
Copyright © 2012 Charfen Institute, LLC
Traditional IRAsIndividual Retirement Account (IRA):
•Held in trust by bank, credit union, savings and loan, or other IRS-approved institution‣Custodian distributes, receives, and holds funds for the investor
•Shelters retirement savings from certain taxes and lawsuits
•Typically invested in stocks, bonds, and mutual funds
Copyright © 2012 Charfen Institute, LLC
Self-Directed IRAs
• Same rules and restrictions as traditional IRAs except...
• The investor directly chooses how the IRA invests his or her funds
‣ Can invest in real estate
‣ Generally, any retirement funds can be rolled over into an SD IRA
Copyright © 2012 Charfen Institute, LLC
Retirement Savings in the US
• 44% of retirement savings in mutual funds‣ 3.43 trillion dollars in mutual funds
‣ 90.2 million individual investors
• 52% of retirement plans in other investments‣ 4.05 trillion dollars in other investments (stock market)
‣ 86.2 million individual investors
• 4% of retirement plans in SD IRAs‣ 0.27 trillion dollars, or 312 billion dollars (other investments)
‣ 3.6 million individual investors
Copyright © 2012 Charfen Institute, LLC
SD IRA Permitted Investments
• Residential Real Estate• Single Family Homes
• Multi-Family Homes
• Apartments
• Commercial Real Estate• Undeveloped or Raw Land• Real Estate Notes (mortgages & deeds of trusts)• Promissory Notes• Private Limited Partnerships, LLCs & C-Corps• Tax Lien Certificates
Copyright © 2012 Charfen Institute, LLC
Borrowing Money with an SD IRAIRS requires a non-recourse loan
•Non-recourse loan restrictions‣Loan-to-Value Ratio (max):
- 70% for Single-Family Residence- 50-65% for Multi-Family & Condo
‣Debt service Ratio: varies- Typically 1.25, depending on property
‣Interest rate: typically 1-1.5% higher
‣Reserves: 10-20% of loan (depending on property)
Copyright © 2012 Charfen Institute, LLC
Two Scenarios:
Investor A and Investor B both contribute $5,000 annually to an IRA
Investor A: Traditional IRA‣Invested in mutual fund earning 5% annually
Investor B: SD IRA‣Purchased a property for cash flow in addition to 5% annual appreciation
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SD IRA Invested in Mutual Fund
$100,000 invested in a 5% mutual fund
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How an SD IRA Invested in Real Estate Can Perform Better
In addition to 5% annual appreciation:
‣Rent: $1,200/month
‣Expenses: $325/month (including SD IRA fees)
‣NOI: $874/month ($10,500/annual)
Copyright © 2012 Charfen Institute, LLC
SD IRA Invested in Real Estate
For a $100,000 property appreciating at 5% annually
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SD IRA vs Traditional IRA
SD IRATraditional
IRAContributions:
Interest:
$25,000$30,256
Contributions:
Appreciation:Cash Flow:
$25,000$27,628$52,500
Total: $55,256 Total:$105,128
SD IRA earns $49,872 more after
5 years90% more
Copyright © 2012 Charfen Institute, LLC
Thank You!
Mark A Rusnak
RE/MAX Allegiance @ Loehmann’s Plaza
4000 Virginia Beach Blvd # 164Virginia Beach VA, 23452
Phone: [email protected]
www.MarkSold.com
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