My real estate investment company recently liquidated a home it had held for several years. I thought it would be a useful exercise to do a post-mortem on investment and see how we turned out.
The home was purchased in November 2004 as a short sale. The previous owner had built the home to suit his budget. The home boasted contractor grade carpet and no automatic garage door. You could tell the owners skimped on flooring to make the home affordable to them. When the guy lost his job, he risked loosing the home to the bank. So, we stepped in to purchase it.
The 3 bed 2 bath 2600 SQFT home was purchased for $120,000 using hard money. Unfortunately, the owners wouldn't leave the home after we closed and following two weeks of wrangling with them, we finally paid them $200 to find a hotel. After $5K in out of pocket repairs (new flooring, paint, some plumbing fixes, and a garage opener), $5k in hard money fees, and $5K in loan closing costs, we refinanced the home for $130,000. The home appraised at the time for $155,000.
The home was purchased as a cashflow investment with an eye toward equity banking. The total obligation (1st mortgage, 2nd mortgage, HOA, and water) each month for the home was $868.
We immediately began marketing it for rent and found our first tenants. They agreed to a lease option and payments of $950/mo. They initially agreed to pay $2500 as an option payment but absconded on our plan and instead paid a fee of $1500. Ironically, the fee was paid just a couple months before they decided they didn't want the home and moved on. They stayed 18 months.
The next tenants were strictly renters with an $700 deposit. They agreed to pay $1050/mo. They stayed 24 months and thrashed the carpets and floors by the time they left. See what kind of mess they left. The repairs costs us $2500. We decided to upgrade the linolium floors to tile and that cost us an additional $2500.
Finally, our third set of tenants moved in. The new tenants were related to someone we were personally indebted to; so, as a good faith gesture, we leased the home for a very low rent of $925/mo. They stayed 9 months.
Here is a breakdown of the revenues generated over the 4 Years and 10 months we owned the home:
In this example, initial fix up expenses when purchasing the home are kept on our resale ledger instead of our cashflow ledger.
So what is the bottomline on cashflow? For the 58 months we held the property, we earned $66/mo. Not super exciting but much better than a poke in the eye. Also, not bad considering the home was almost zero maintenance for 5 years (except for the one-time carpet issue).
Now for the exciting part...lets take a look at our resale ledger:
Here is a copy of the check (turned into a shameless marketing piece) from the title company:
Now this is exciting! The net cash proceeds from the sale are the direct result of two things:
1. Purchasing the home right (wholesale) relative to the market at the time in 2004.
2. Riding the appreciation wave up through the sellers market of 2006-2007.
Interestingly enough, the home would appraise for $210K but the market in North Ogden is so saturated with inventory that it took a steep price discount to $180K to get it sold. Ironically, the buyer of the home is another investor looking to cashflow. The home was priced at such a good bargain in today's market that the next owner will likely experience the same cashflow and resale benefits that we experienced. Hopefully, he will fare even better by screening his tenants carefully and avoiding an expensive remodel.
If you are wanting to invest in real estate, let me show you how it's done.
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