$39K Discount, $332.37 Positive Cash Flow Plano Deal
Wednesday, March 26th, 2008We have analyzed this deal to see how this particular house in Plano would be as a rental property.
Where is this property?
It is located in Plano, TX. The property address is kept private to preserve the deals for our members. To work with our preferred investor friendly real estate agent/broker for this deal, contact us about Deal #603 and they can give you the full details about this property and help you in purchasing it.
How did we find this property?
We found this property from one of our real estate investor friendly agents/brokers or one of the real estate investor wholesalers we know in the Plano area.
Learn to find motivated sellers using marketing in The 10 Cures for Finding Deals in Hot Markets. This CD is included as part of the 68 CD Ultimate Real Estate Investor Package that you get when you purchase any house we promote on the website through our recommended real estate agent or broker. To work with our preferred investor friendly real estate agent/broker for this deal, contact us about real estate Deal #603 and they can give you the full details about this property and help you in purchasing it.
The Story
Before we get into our full analysis, here is some of the interesting story for this particular deal: Repairs are all cosmetic which include: paint, floors, kitchen and both bath updates. The foundation has already been fixed. The 3 bedroom, 2 bath, 2 car garage home is located in Plano near an elementary and middle school so you should not have trouble selling this one. After $12K in repairs the house should appraise for $133K
Property Details
- Bedrooms: 3
- Baths: 2.00
- Square Footage: 1,601 (see square footage estimates for info)
- All information is deemed reliable, but is pulled from tax records, real estate agent, zillow or the seller.
Income
- Gross Rent: $695/month (see Rent Estimates for more info)
- 4.00% Vacancy Adjustment: $28/month (see Vacancy Estimates for more info)
- Net Rent: $667/month
- NOTE: These numbers are for traditional rental income and NOT a rent-to-own. Rent-to-own analysis follows below.
Expenses
- Management: Self Managed (we have assumed you will manage the property yourself for this analysis)
- Maintenance: $27/month (see maintenance estimates for info)
- Utilities: $0/month (tenant pays)
- Taxes: $240/month based on $2,875 per year
- Insurance: $67/month (based on an estimate of $800 per year)
- Other Expenses: $0/month
Net Operating Income: $334.26/month
Repairs Needed
The estimated repairs are unknown for:
- Paint (cost unknown)
- Floors (cost unknown)
- Kitchen (cost unknown)
- Both bath (cost unknown)
All repairs are merely speculative estimates based on what the seller (or agent) has told us at this point. Before buying this house you should have it inspected and get quotes for actual repairs found.
Most We Can Pay For This House Based On NOI
- Investor Interest Rate: about 6.500% (see Interest Rate Estimates)
- 30 Year Amortization Fixed Interest Rate
- Principal and Interest Payment = NOI = $334.26
- Max loan for 100% financing with that payment: $52,884 minus closing costs and any repairs
Estimating Value
- Seller claims the value of the property is $133,000.
- Zillow claims the value of the property is $137,500. See Zillow Estimates for more information on why this can be misleadingly high or low.
- Seller is asking $94,400.
- You should analyze the property to determine your offer, but we will use the full asking price for our analysis.
Purchasing The House
Based on getting our full price offer accepted, that would be our purchase price. We will use that in our calculations below.
Nothing Down
- 100% Financing
- 100% financing for investment property is very difficult in our current credit market. There are ways to purchase property with no money down, but you will want to discuss these more creative methods with your lender and the real estate professional we can refer you to when you request information about this deal.
- Hard Money Then Rate and Term Refinance
- We can sometimes buy a house with a hard money loan and then immediately do a rate and term refinance to eliminate the really ugly 20% second mortgage that we describe above on the 100% financing analysis.
- To do this, we need to buy the property well below 80% loan to value.
- It would be close, but it might work for this house. If we really can buy the house for $94,400 and it does appraise for more than $133,000, then we are at 70.98% of value. I prefer to be well under 75% when trying to do these and the lower the better.
10% Down
- If we purchase it for $94,400, then a 10% down payment would be $9,440.
- Likely, we would then be financing 80% (that’s $75,520) on a first mortgage and then 10% (that’s $9,440) with a second mortgage with a higher interest rate.
- Principal and interest payments on a $75,520 30 year fixed rate loan at 6.500% are: $477 per month
- Principal and interest payments on a $9,440 30 year fixed rate loan at 9.000% are: $76 per month
- That would leave us with a negative cash flow of -$219/month when we subtract it from our Net Operating Income calculation which takes into account a reserve for maintenance and a 4.00% vacancy rate.
- Return on Investment Estimates
- IMPORTANT NOTE: These can change if any assumptions change.
- For putting up $9,440 as a down payment you’d see the following returns from the following benefits:
- Cash Flow
- -$219/month times 12 months = -$2,628 per year
- -$2,628 per year/$9,440 invested = -28% return on investment from estimated Cash Flow
- Depreciation
- $94,400 purchase price with 10% estimated land value leaves $84,960 for the value of the structures that we can depreciate
- $84,960/27.5 years = $3,089 per year
- Assuming a tax rate of about 33%, then a third is the benefit from depreciation
- $1,030 per year/$9,440 invested = 10.91% return on investment from Depreciation
- Principal Paydown
- $75,520 loan pays down about $680 in the first year
- $9,440 loan pays down about $85 in the first year
- ($680 per year + $85)/$9,440 invested = 8.10% return on investment from Principal Paydown
- Appreciation
- Assuming a 5% appreciation rate. How did we come with that number? See Appreciation Rate Estimates for more info.
- Assuming the property is worth exactly what we paid for it $94,400. If the appraisal comes in lower then we will be forced to go back to the seller since it will affect our ability to get a loan on the property. If it is higher than our numbers will likely be much better.
- $4,720 per year/$9,440 invested = 50.00% return on investment from Appreciation
- Total from Cash Flow, Depreciation, Principal Paydown (first and second mortgages) and Appreciation
- (-$2,628 + $1,030 + $680 + $85 + $4,720)/$9,440 = 41.17% return on investment
- Cash Flow
20% Down
- If we purchase it for $94,400, then a 20% down payment would be $18,880.
- We would then be financing the balance of $75,520
- Principal and interest payments on a $75,520 30 year fixed rate loan at 6.500% are: $477 per month
- That would leave us with a negative cash flow of -$143 when we subtract it from our Net Operating Income calculation which takes into account a reserve for maintenance and a 4.00% vacancy rate.
- Return on Investment Estimates
- IMPORTANT NOTE: These can change if any assumptions change.
- For putting up $18,880 as a down payment you’d see the following returns from the following benefits:
- Cash Flow
- -$143/month times 12 months = -$1,717 per year
- -$1,717 per year/$18,880 invested = -9.09% return on investment from estimated Cash Flow
- Depreciation
- $94,400 purchase price with 10% estimated land value leaves $84,960 for the value of the structures that we can depreciate
- $84,960/27.5 years = $3,089 per year
- Assuming a tax rate of about 33%, then a third is the benefit from depreciation
- $1,030 per year/$18,880 invested = 5.45% return on investment from Depreciation
- Principal Paydown
- $75,520 loan pays down about $680 in the first year
- $680 per year/$18,880 invested = 3.60% return on investment from Principal Paydown
- Appreciation
- Assuming a 5% appreciation rate. How did we come with that number? See Appreciation Rate Estimates for more info.
- Assuming the property is worth exactly what we paid for it $94,400. If the appraisal comes in lower then we will be forced to go back to the seller since it will affect our ability to get a loan on the property. If it is higher than our numbers would be much better.
- $4,720 per year/$18,880 invested = 25.00% return on investment from Appreciation
- Total from Cash Flow, Depreciation, Principal Paydown and Appreciation
- (-$1,717 + $1,030 + $680 + $4,720)/$18,880 = 24.96% return on investment
- Cash Flow
Rent-To-Own Analysis
- If you purchase the property and instead of renting it, offer the property for sale on a rent-to-own basis, you can further improve your returns.
- Offering flexible financing like a rent-to-own program is an amazing way to eliminate negative cash flow especially when rents are low compared to actual property values like it is in this analysis.
- Here’s an overview of how you might structure this property:
- Purchase the property for $94,400 (what the seller is asking) at the investor interest rate of 6.500%
- Sell the property for full market price, $133,000 on a rent-to-own.
- Ask the seller to make payments that would resemble what they would pay on a mortgage for their purchase price with an interest rate that would be accurate for their credit situation and not the lower rent amount of $695.
- For example, if the interest rate for an investor with good credit is 6.500%, then their interest rate might be 7.490%.
- Your payments, if you could finance 100% of $94,400 (the seller’s asking price) at 6.500%, would be: $596.67/month
- Their payments, if they could finance 100% of $133,000 (what it’s worth) at 7.490%, would be: $929.04/month
- Since they will be buying the house, they would be expected to cover taxes, insurance and maintenance as well, so you have a positive cash flow of:
- (Their Payment To You) - (Your Loan Payment) = Cash Flow
- ($929.04) - ($596.67) = $332.37/month
- By structuring your exit strategy in this way, you can essentially eliminate negative cash flow and find a buyer for your properties that will be closing in the next year, two or three.
- You’d be collecting $332.37 per month in cash flow and $38,600 when you actually sell it by utilizing this strategy.
- Important Note: The Zillow.com value for this property, of $137,500, is higher than the seller’s estimated value of $133,000 we are using. While Zillow’s values can be off, it is something to note and would boost profits by $4,500.
- For more details on how I personally structure these when I do them, I can send you an audio download once you’ve gone out and seen this house. Contact me about Deal #603 to get more information and to schedule a showing and I will put you in touch with a local real estate professional who can assist you with your investing purchase.
For more information on this particular deal, please contact us about real estate Deal #603.
Until my next post…
James
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