Last week, I released episode 2 of The Real Estate Investor Web Series, a reality-style show that follows my business partner Shauwn and I as we acquire rental real estate.
We caught up with our contractor, Vernon, as he worked on Glendora; walked through Blue Lake, our latest acquisition; and made a decision on another property that we had under contract.
Blue Lake House Specs
Blue Lake is a 3 Bedroom, 2 bath rental property in San Antonio, TX. It was a HUD property that we located through one of our realtors.
This is my favorite house yet because it’s in a great neighborhood and the numbers are sweet.
It was in good enough shape that we could have rented it out “as-is”; but we stuck to our business model of “fix everything” to make sure that we had the best product at the best price.
Acquisition Costs
We bought this property for $47,400, which is about half the after repair value (ARV) of $92,300. I used to doubt my mentors when they claimed that you could buy real estate at 50 cents on the dollar; but we’re doing it all day long!
The rehab cost us $12,300 to complete; and the house is already rented.
Closing costs included lender fees, title fees, etc.
$47,400 – Purchase Price
+$12,300 – Rehab
+$ 3,200 – Closing Costs
=$62,900 – All In
Equity
One of the reasons I really love this house is the big equity capture. We are sitting on almost $30,000 in equity from day 1.
I can’t stress this concept enough to people. The day you buy a piece of real estate (correctly), it instantly increases your net worth. Shauwn and I increased our net worth by $15,000 each the day we bought this property.
A year from now, we will sell the house to capture the equity and roll it into the next deal. We expect to pay about 7% in realtor and title fees, so that will bring the profit to around $23k.
Equity Capture
$92,300 – After Repair Value
-$62,900 – All In
=$29,400 – Equity Capture
-$6,461 – Realtor & Title
=22,939 – Projected Profit
Cash Flow
Cashflow is the #1 reason we invest in real estate. It’s the passive income that I talk about on this site. By adding $320 a month to the $338 we are already making from Glendora, we are already clearing $600 a month in passive income.
My half of the cashflow is $300 a month, which is going to easily cover my internet, electricity, Netflix, and web hosting bills.
Monthly Cash Flow
$850 – Rent
$530 – Expenses
$320/mo. – Cash Flow
Don’t hesitate to leave comments or ask questions!
{ 15 comments… read them below or add one }
That is exciting. So both properties are already rented out?
Also what do you include in those monthly expenses?
Best Regards,
BB
Yes, we had a ton of applications before we were even finished with the rehab. Both tenants are now in the houses and paid up to date.
Monthly expenses is just our mortgage note. We also hold aside a $50/mo maintenance reserve (which we never really use because we fix everything before hand).
I laughed when the screen went black for the “before.” Well done!
Thanks again Brian for breaking down the numbers. Fascinating stuff.
I’m curious. What is the rationale for selling the property in 1 year? Can’t you capture the equity income immediately and then do it again at a much more rapid pace if you don’t wait? If you stay in it to get the cash flow, then why stop at 1 year?
Also, how do you deal with tenants at 1 year when you sell?
It’s great what your doing. I also just finished reading “Rich Dad, Poor Dad” which you recommend. Thanks!!!! I wanted to know with these properties are you purchasing them straight-up or are you taking out a loan? I see how you gain the equity, I just need advice to see what is better because I been looking to get into real estate eventually.
We keep them for a year because of the tax advantage. If you are flipping houses and holding them for less than a year, you pay significantly more in taxes.
Our lease with the tenants is for 1 year, so we will be able to put a for sale sign in the yard at that point.
We are using loans which amplifies your return on investment. I would suggest using loans unless you have so much capital that you don’t know what to do with it. If that is the case, you should probably be buying apartment complexes anyway.
Great deal! You said that you used hard money financing on most of your deals. Do the high interest rates cause any problems for you guys? I would love to hear some details on how you structure your financing terms. That seems to be the number one problem for me as I am trying to break into the real estate and passive income world. FYI, I just bought 10 bulk candy vending machines and am trying to get those babies placed – any tips on placement? Thanks a lot brotha!!!
Awesome on the candy machines! My best tip for placement is to hit up clothing stores with a lot of college-aged employees. They are usually happy to let you place a machine in their break room.
Hard money is just for the purchase and rehab. Most people refinance out of hard money after 2 or 3 months. We have a few hard money lenders that we do business with and they each have their own programs.
Hey Brian,
Are you just lucky to be living in an area with low housing prices or do you travel around looking for these deals?
I haven’t been interested in real estate as an investment vehicle but your blog helps explain the benefits of it. Unfortunately, a house like that would be 10x the price in my city, no joke. House prices are driven up well beyond the average income level because it is a desirable place to live in my country.
How is it possible to look into real estate investing when you are living in an area with housing prices so out of whack?
Yeah, we don’t buy unless it cashflows and has equity. That’s difficult to do on either coast, but you might have more luck getting away from the cities. Also, prices have come down quite a bit to where they might start making sense.
You might try to find a local investor group and ask around to find out where they are buying. There might be some places that you haven’t though of yet.
How stinkin awesome. Okay, I’ve been reading the Rich Dad Poor Dad Investing book and that led to searching on the net for random things and here I am. You’re site is great! I like the very specific…REAL…examples you post. SO, I do have some questions…
We’re preparing to buy a duplex in a year and a half. We haven’t found one yet, it’s just the PLAN. I see these houses you are buying with loans and I’m wondering how one doesn’t lose money? —Stick with me here. So, you buy a house that’s 40K with a loan and by the end of the typical 30 years, you owe almost double (or at least a lot more) RIGHT? So, are you paying these off faster? Or, what are you doing?
The thought of WAY overpaying for a house just makes me squirm…but then again so does going into lots of debt for real estate (which I’m working on getting over)…but…what do you do about paying off these mortgages and all that jazz?
Thanks!
Hey Ashley. Thanks for the question.
We don’t lose money because we buy them so cheap that even after the rehab, we still have $20-$30k in equity. The loans get paid off by our tenants, plus some for us to take home each month.
Never over-pay! There’s an easy way to make sure you don’t and that is to run comps, or comparable sales on your house to make sure you are never into it for more than 70% of the after-repair value.
Ashley,
A couple of points:
You mention about how after 30 years, you ended up paying double for the property. That may be true but who is really paying for it: me or my tenants? Additionally, I think it would be silly to pay off the loan anyway since your return would plummet.
Looking at Brian’s numbers, he is making a 24% return on his out of pocket (commonly called ‘cash-on-cash return’).
$320 per month x 12 months = $3840 per year.
3840 / 15,500 out of pocket = 24% return
If he paid off his mortgage, he would have 62900 in the deal and would probably only be making $400 more a month. I’m guessing on this number but some of his expenses are insurance and taxes so he wouldn’t get to keep the whole $850 in rent. If you run the numbers again you get this:
720 per month x 12 months = 8640 per year.
8640 / 62900 = 13.7% return
So he is actually making MORE for his money by having the loan payment. That’s the power of leverage which is one of the many reasons why investing in real estate is so powerful!
Thanks Nate!