Buying, rehabbing and renting is a great way to build a real estate portfolio. We are finding that even with the unusual and tired hurdles that it takes to purchase these potential rental properties from the banks’ foreclosure inventory, or worse yet, HUD owned homes, (or perhaps because of) you can really set yourself up in a sweet equity + cash flow position.
REAL LIFE EXAMPLE
On May 25 of this year we closed on a 3 bedroom, 2 bath ranch foreclosure property. Our first contractor fell thru and we had our other contractors on other houses so we didn’t even get started on this house until nearly 2 1/2 weeks later! Yet, it’s a great buy. It sure didn’t look like it when we first walked in. It needed everything. The carpet smelled and the kitchen was a greasy wreck. Broken bathroom tiles and leaky water pipes and gutters falling and on and on and on.
Purchase Price (including all closing costs and my buyer’s fee)
Rehab Price (including all mentioned, my oversight fee and more)
Total invested is $46,672.32
We had a tenant move in on July 27 for $875/mo after having put the house on the market on July 14.
This was a cash sale. So let’s figure and investment return.
Expenses wise, we’ll add in $60/mo for property management, a lease-out fee of $437.50 (they get a discount because of the dozens of properties we work with them on), property taxes of $1,290/yr and insurance of $800/yr, $1,000 for future repairs and $200 for misc and we’ll come up with a year’s worth of expenses at about $4,450.
Income on this property for the next year will be $875/mo with no vacancy since we’re starting this clock on the day it’s leased and our previous vacancy time was built in to the rehab.
So, Gross Operating Income is $10,500
Total Operating Expenses is $4,450
Do a little math and you find that your Net Operating Income is $6,050.
There is no debt service (cash buy) so the Cash Flow Before Tax is $6,050.
There is no Principal Reduction
Tax benes help. $6,050 – depreciation of approx $2,150
You can learn more about the 4 Benefits of Real Estate Investing here.
Cash on Cash return is 13%
Two important items to note;
- This is an all cash sale and rehab for this income property. No leverage was used. Therefore I didn’t calculate other ways of measuring return as Cash on Cash is the primary focus here.
- We haven’t spoken about “mine-able equity” down the road. Within the previous 12 months two homes have sold that have pretty much the same floor plan and are in pretty much the same condition as the house we have (post rehab, of course). One sold for $70,000 back in July and one sold for $82,500 back in May. That means there is, at minimum, an additional $23,300 equity gain on the money!!! No, you can’t get it out immediately or easily. But it is there and it is real.
Want to talk about what we can do for your real estate portfolio here in Kansas City whether it be for buying, rehabbing or property management? Feel free to give us a call. We’d love to talk about it.