Analyzing a Real Life “Rent & Flip” Deal
I picked up a new house last week…I call it “The Haggle House” due to the extensive negotiation it took to convince the bank to sell me this REO…
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In this post, I want to walk through the analysis I did to determine whether this property would be a good candidate as a mid-term rental and flip, and the resulting financial metrics I came up with. My specific plan for this property is to rent it for 3-5 years, and then sell it; given the property’s location (near a freak flooding last year), I expect decent appreciation over the next 3-5 years as memories of the flood recede (forgive the pun).
First, here are the important numbers associated with the purchase and financing:
- Purchase Price: $43,500
- Closing Costs: $2,500 (only incurred at time of refinance)
- Rehab Costs: $6,500
- Financing: 65% LTV, 7.0% Interest, 15 Year Amortization, 3 Year Balloon
Overall, between the purchase and the rehab, I plan to put about $50,000 into the property of my own cash. My local bank is willing to do a cash-out refinance once the property is rented, which I anticipate should happen by the beginning of Month 2. Given their refinance terms above, I expect to be able to pull out $32,500, with $17,500 of my own cash remaining invested into the property. Add the $2500 in closing costs at the time of the refi, and my total out-of-pocket investment will be roughly $20,000.
My monthly income and expenses should break down as follows:
- Income / Rental Rate: $900/month
- Vacancy: 8.3% (1 month per year)
- Property Taxes: $1400/year ($116/month)
- Insurance: $400/year ($33/month)
- Maintenance: $900/year ($75/month)
- Property Management: $1200/year ($100/month)
- Mortgage Payments: $292/month
Some additional notes:
- The income is estimated, with actual rental rates between $850-950, and potentially going as high as $1050 with Section 8 tenants.
- Maintenance is on the low side, but given that the property is only 6 years old and has been rehabbed, I don’t expect many maintenance costs.
- I’ll be paying an employee $100/month to do all the property management, which should also keep my maintenance costs down, as he is my project manager for the rehabs as well.
- I haven’t included any capital expenses, as I only expect to keep the property for 3-5 years, and there shouldn’t be any capital costs in that time frame.
- The total expenses — including vacancy — are about 44% of income, which given that our capital expenditures should be low, given it’s a relatively new property and given that we’re doing our own property management, seems about right.
Given all that, our rental analysis breaks down as follows:
Ultimately, we’ll see cash flow of about $200/month, our cash-on-cash return will be somewhere around 12.5% and our total return will be about 19%.
While not a spectacular return, it’s enough to keep this property cash-flowing until my real exit strategy kicks in about 3-5 years from now. At that point, with a bit more rehab, I believe I should be able to resell the property for about $120K (these were 2008-2009 numbers in this area pre-flood).
Let’s assume that I hold this property for 3 years, with the purchase, refi and rental data determined above. After 3 years, let’s assume that I put another $15,000 into rehab (a good cosmetic overhaul on this property), and resell for a net of $110,000 (assuming $120,000 minus $10,000 in commissions/costs).
Based on that assumption, here is my expected compounded rate of return over those 3 years:
So, given these assumptions, it appears my 3-year compounded return on my investment would be over 50%!
I’ll let you know how it goes…