Deal of the Day - Single Family Home Investing
Thursday, December 22, 2011 at 7:23PM At The Capitalist Manifesto, I am always spitting out bash sessions on real estate brokers and investors around the country who we don’t believe look for the right deals in the real estate market. So to show that we aren’t just all talk, I am starting a recurring blog post that I hope to add to once a month or so called “Deal of the Day.” This won’t always be the deal that makes us money. To be fair, we want to show our winners and our losers, or the deals that didn’t do as well as we had hoped. It’s always easy to brag about deals that make money, but I want people to see that we are conservative because we have screwed up as well.
When I threw this idea out to those I know very well (business partners and investors of mine), they were hesitant saying that it would give away too much about what we do, but I figured out a few easy ways around it. 1.) I won’t give exact addresses of the properties I am looking at. 2.) I won’t give the dollar amounts for our own good so people don’t know how much money we have made on our deals. So all data below is a proportional number to the actual deal we have done.
The first deal I wanted to talk about is VERY important due to the fact that it is the reason we are in this whole financial mess to begin with…single family homes. Back in 2009, we partnered with a few people to start buying bulk single family homes. We purchased a total of 70 homes and rehabbed them fully. When I say fully, I mean new kitchens, bathrooms, carpet, drywall, HVAC, roofs, driveways, garages, electrical, plumbing…everything. We are VERY proud of these homes and we have taken investors on tours of these homes and the reaction has always been very positive with many saying “wow, I would live in this type of home.” Now, granted, the areas aren’t the best, so I don’t know if they would live in those areas, but that’s not what they are saying. They are saying they are shocked, given the area, that we did such a great job, so that’s nice to hear.
Of the 70 homes, 55 of them are average everyday homes in the $70K to $85K value range, in today’s market, so I will concentrate on those. The other 15 are high-end homes that we have flipped or used for other reasons and aren’t part of our rental package. We will discuss the flips as well on this recurring blog post because we have done quite well with them.
We are into these 55 homes for an average of $44K per house, so let’s put a total investment of $2.42MM (using investor $$$ and money from a credit line). Now, let’s look at our cash flow, over the past three years, by year. (Keep in mind…the profit I am listing is BEFORE debt. I did use a credit line for part of the purchases, so I do have low interest debt until I refinance with permanent financing, which I am doing right now).
2009: We spent this entire year basically buying homes and starting the rehab. We only had $6200 in total REVENUE for the year and showed a net operating profit of $995.
2010: We were still purchasing and rehabbing and trying to lease, so the large part of the year we were vacant…our revenues were: $342,522 and in this year, we only paid a little under half of our property taxes (we paid $46,750 of $106,520) because we were appealing them since we had purchased many of the homes for 20% of the property tax values. Our net profit at the end of the year was: $40,653. So if you took out the taxes we should have paid, it would have been a net LOSS of $19,159.50.
2011: We spent this year only acquiring 5 properties and rehabbing them but we also had bad occupancy! We did a poor job of screening our tenants. We were so eager to get the houses filled that we put some bad tenants in. In 2011, we had 68% financial occupancy! It was terrible. Even with that, our revenues were $467,696 with profit of $72848. So, in a year where we paid $65,000 more in property taxes than was billed because we had to pay the taxes of the properties we lost on appeal AND had 68% financial occupancy, we still managed to make a return.
So looking at 2012, we expect to run in the 80% financial occupancy range and pay less in taxes, obviously. If that occurs, we expect to have revenues of $530,000 and expenses of $298,188 for a total profit of $231,818 or a total return of around 9.6%. Again, this is based ONLY on 80% financial occupancy and the same expenses as last year. Remember ,since we had so many evictions, many of our houses needed a lot of work done to turn them back around.
And the kicker…we are into these houses for $44,000 each. They currently appraise, in this bad market, for $70K to $85K per house. In 5-7 years, when they have stabilized, we expect the average to be close to the $85K range, we will be able to sell and make $40K per house for a total additional equity of $2.2MM plus the net income of $200K to $250K per year along the way. If we are able to operate at 90%, that NOI jumps up $60K extra per year.
So…again, it goes back to my previous blog posts…an investment isnt’ bad just because everyone thinks it is. In fact, it’s usually the opposite.
Reader Comments (2)
These results compared to stock market alternatives are still impressive.
Carl, thanks. Yes they are. Granted the stock market has had a bad 3 year stretch but we also like the consistency of the investment as well.