67 East Bend
Bought my latest property, which closed this past February.
As I’ve shared in previous posts, I have been partnering with other people to acquire more rental properties.
I believe this is a win-win for both parties, as my partner has a full-time career and doesn’t have the time nor expertise in real estate to invest fully on their own and for me it allows me to continue to expand my real estate portfolio with less of my own funds.
The exciting part about this latest deal is we paid $0 to acquire it…yeah baby!!
Ok so how did we do this? Good question…
Here is the whole story:
Back in November I had seen a listing for a small 2-bedroom freehold townhome on the same street as our awesome flip project. The property didn’t show very well and apparently the current tenants were giving agents a hard time showing the place to their clients.
So, what did I do? I made an offer, sight unseen with only contingencies of a property inspection and a vacant place. I also made a low-ball offer expecting the seller to negotiate.
I guess the seller was pretty fed-up with the place as he accepted our offer without any changes….score!!
As we were doing our flip project on the same street, I was already very familiar with the area and projected rent for this place. We did our home inspection and surprising the place didn’t have any major issues.
The only thing remaining was the property to be vacated, sounds easy, but it wasn’t. The tenants gave the seller a tough time and it took until February for them to leave and for us to close the deal.
So how did we get this place for $0? Oh yes thanks for reminding me…
Well my partner and I on this deal, also owned another rental property we had bought about 17 months before this. I knew we had bought that place for a great price and the market had continued to increase significantly so we refinanced that first property and were able to get enough funds to close on the latest deal and renovate the entire place and still have reserves left in the account.
SO here are the numbers:
Purchase Price: $106,000
Closing Costs: $2,500
The seller had listed the property for $130,000 and we knew comps for similar properties were around $150,000 so I really feel we hit a home run here!
As I mentioned we refinanced our first property and took out about $50,000 which we used for the down payment and renovations.
What’s the Cap Rate?
First let’s find the capitalization rate, more commonly known as the cap rate.
The cap rate measures the property’s cash return if it’s held free-and-clear. This formula measures how strong of a cash return you’ll receive, compared with the total price you paid for the property. In other words, it measures the strength or weakness of the deal itself, without conflating the financing into the analysis.
Why calculate this? The cap rate helps you examine the underlying deal. Every property will look terrible at a 99% interest rate, and many properties will look beautiful if they’re bought in cash. But that doesn’t mean those properties create strong returns.
First, you need to figure out whether or not the property is worth buying — and one way you do this is by measuring the cap rate. If it’s a good investment, then you can start looking at financing.
To calculate the cap rate, you’ll first calculate “net operating income.” This is the net income that you collect from a property after paying its operating costs.
Let’s take a look at this property.
Potential Gross Income: $14,400 per year (at full occupancy)
Less Vacancy: $432 (with a 3% vacancy rate)
Effective Gross Income: $13,968
This is how much money we can expect to collect. What about the operating expenses?
Management: $1,152/year (8% of Gross Income)
Property Taxes: $1,100/year
Repair/Maintenance/CapEx: $1060/year (one percent of purchase price)
Utilities: Paid by tenant
Operating Expenses: $4,464 per year
Net Operating Income: $9,504 per year. Yeah baby!
Right off the bat, I can see that this is a sweet deal. We are netting close to $10k a year for a $106,000 house. That’s a 10 percent cap rate.
You can compare this to getting a consistent 10 percent dividend payout from a stable, blue-chip stock. (If you’re not familiar with the world of stock investing, that’s practically unheard-of.)
How much passive income are we collecting?
We were able to qualify for a standard loan with 20% down.
Net Income: $9,504
Loan payments: $4,824
Passive Cash Flow: $4,680
We’re getting $4,680 in passive income from this house! That’s one huge step closer to financial freedom.
How much money did we pay out-of-pocket for this investment?
Zero. Zip. Zilch. Nada.
Without spending a dime of our own money, we set up a deal in which we receive $4,680 in passive income per year. That’s the money we pocket after paying a property manager (in this case ourselves as we self-manage) plus setting aside a “rainy day” fund for long-term capital expenses, maintenance and repairs. This doesn’t even include the built-in equity I was able to secure for us, by buying it at such a great price!