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Should I Buy Real Estate Now or Wait?
Guys, I am BEYOND stoked this week, because I am KILLING it in real estate! Now this isn't an episode for me to just brag (even though I AM and WILL), but to show you EXACTLY how amazing real estate investing is for your life and your pocketbook!
In December of 2014, Jill and I purchased a fourplex using a VA loan. Not only did we NOT have to put money down, but we WALKED AWAY from the negotiations with money in our pockets thanks to our fantastic team of lenders and title companies.
Back then we “paid” (actually this was all my tenants) $220,000 for the fourplex. I learned from my mentors that if you purchase cash-flowing assets and put money towards renovating them and increasing their value, THAT is how you escape the Rat Race. Our first cash-flowing property made us enough money that we were able to leave the Rat Race on that first deal!
Over the years we've improved the units, raised the rents, and found new and innovative ways of creating cash flow from the property without waiting for longer-term tenants. We decided recently to refinance because interest rates have dropped again and wanted to use that cash to go buy MORE properties. Here's a breakdown of that process:
The appraiser came out and after complimenting us on how nice our units are, appraised our fourplex for $425,000.
Remember, we originally “purchased” the property for $220,000! That means we've built $205,000 in equity in just a little over 2 years! Now based on comparable sales in the area, the appraisal evened out to $385,000.
To refinance, lenders use 2 methods:
- Using comparable sales in the area, and
- The “income method”, based on how much money the property is bringing in each month.
This information brings me to my big takeaway today: if you already own property, go out and BUY ONE MORE. We're going to use this equity to purchase MORE cash-flowing properties, rinse, and repeat. It is genuinely not rocket science folks, and it's not a pipe dream only for the elite!
Let me show you another example:
Recently we had a client looking at a single-family property, a 3 bedroom, 2 bath in a good neighborhood in St. Petersburg, Florida. They wanted to know if they purchased this property what the best exit strategy would be: rent or flip?
Here is a quick analysis of this entire deal:
(To obtain a copy of this analysis and sign up for my FREE email mini video course, go to
CashFlowGuys.com/MailboxMoney)
The purchase price will be $90,000 (this is HIGHER than previous years).
The rehab cost will be $21,500 (this is HIGHER than previous years).
Market rent for this area is $1,325.
We are buying with a standard conventional mortgage:
70% loan-to-value (provided by the bank);
30% down (provided by the buyers);
fully amortized for 30 years at 5% interest.
Debt coverage ratio is 2.05. This means there was twice as much money coming in than was going out to pay the mortgage.
Out of pocket expenses (including rehab, down payment, and closing costs) will be $50,300.
Assumptions:
A 5% appreciation rate;
a 10% vacancy rate;
and a 15% property management rate.
The total operating expense ratio is 42%. This means that 42% of the income is going towards property management, vacancy loss, maintenance, taxes, and upkeep for your tenants.
After paying the mortgage and putting money aside for all the operating expenses, that leaves us with a net profit of $356. That's $356 EVERY MONTH.
The metrics of returns:
Year 1 cash-on-cash return = 8.5%;
Year 5 =10.6%;
Year 10 = 13.6%, ONLY on the income.
IF you sold in five years, you could have a 45% return; in ten years a 178% return!!! That’s $89,755 PROFIT plus your $50,300.
Notice I didn't include a CAP rate? Because it's nonsense. I work (and I suggest you do as well) strictly in NET profits after all the expenses are paid. This way there are rarely any surprises if you've already budgeted for them.
Now if you're VERY lucky like we are, you might be able to get EVEN MORE from your investment, primarily from recouping the money you set aside for vacancy loss.
Remember: Get your own copy of this analysis and sign up for my FREE email mini video course, go to CashFlowGuys.com/MailboxMoney. We're going to go EVEN FURTHER in depth through this deal for you so you can see every step I took to determine this was a good deal.