Originally Posted by
Gunfighter
Here is a non "hot stock tip" case study for the Side Hustle crowd. My college age daughter wanted to invest in RE like mom and dad, so I figured the best way to teach her was the hands on approach. I hadn't bought an investment house since new hire days, so this was kind of fun for me too.
We found a 3/2/2 single family house built in 2003 that had foundation problems. It was only suitable for investors as there was NO WAY this house would pass inspection. The After Repair Value (ARV) based on neighborhood comps was $210,000. We purchased the house from a wholesaler for $152,500 using a private money loan. The lender agreed to 75% of ARV for a max loan amount of $157,500 at 8% interest only. We had to be prequalified for a post rehab conventional refi to get the private money loan.
152,500 Purchase
+5,344 Private money closing cost (points, title ins, survey, appraisal, etc.)
+25,000 Repairs (8,000 foundation, 4,500 plumbing, 4,000 flooring, 4,500 paint and drywall, 500 roof repair, 1,000 lighting, 2,500 misc)
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=182,844 invested
-157,500 private money loan
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=25,344 Private money cash to close
+5,825 holding cost (interest, taxes & insurance during rehab)
-5,980 cash back after traditional refi (80% LTV @ 4% for 30 yrs)
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=25,189 total cash out of pocket
210,000 Appraised Value
-168,000 traditional 30 yr loan
-25,189 cash out of pocket
=16,811 equity capture on the rehab
After a 4 months to rehab, rent and refinance the ROI for cash out of pocket was 67% (16,811 gain / 25,189 cash invested)
Here is the ongoing investment:
$1,525 Monthly Rent
-1,214 PITIH (Principal, Interest, Taxes, Insurance & HOA)
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= $311 monthly cash flow
Annual cash flow is $3,732 or 15.8% of the amount invested.
-with 1 month vacancy cash flow is $2,207 or 8.7% (neighborhood average is closer to 1/2 month)
-we escrow $1,100 per year in reserves for roof, HVAC and maintenance which eats up 1/3 to 1/2 of the cash flow
Additional aspects to consider:
-Principal reduction on the loan is $3,000 per year, which is an additional 11.9% (3,000 / 25,189) ROI
-Appreciation is expected to be 3% annually ($6,000) in the neighborhood. This is an additional 23.8% return on the cash invested.
Our year 5 target value is $240,000. We have the following three options.
1) Sell for 240,000 - $20,000 closing costs - $152,000 loan payoff = $68,000 (plus a few thousand from cash flow - expenses) That is a 170% gain over 5 years.
2) Refinance with a new loan at 75% LTV = $25,000 cash out PLUS keep the house with $400 monthly cash flow (Rent increases, but so does the loan payment, taxes and insurance)
3) Do nothing and keep the higher cash flow. Assuming rents have increased with inflation, we are now collecting $225 more per month. $1,750 vs $1,525