112% Cash on Cash Return…. 1 Minute Real Estate Analysis… And a Pep Talk to Find Your “Yes!”
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I mean it. If you are reading this you might want to do one of the following (or perhaps more than one, in combination with one) …
1. put on a construction helmet while being backed up by Guns and Roses as you imagine entering the flip you just handed the keys over to the homeowner, doubling your money in one transaction (foreshadowing anyone?) … or,
2. dust off tool belt in the garage “keep for forever but never use pile” and place largest tool in tool box into tool belt while standing in front of your spouse humming Battle Hymn of the Republic (if you don’t hum, then mouth trumpet is second choice) … #winning … or,
3. have your favorite contractor and realtor, wholesaler, and banker, all on conference call … and tell them they need to drop what they are doing RIGHT NOW because you are about to go buy 100 units. Maybe 200.
And You, Their Favorite Client, Needs Their Assistance. Now. #obviously
Sometimes there are things in life that just get me so fired up I feel like my energy or enthusiasm could melt stuff … like metal, or buildings or something.
You know, feeling like a super hero, with one of those sweet outfits. Let’s be honest, Bruce Wayne had a sweet car, sweet wardrobe, and a sweet super hero outfit. Anyway … I am fired up.
And specifically, I met with my realtor and GC over several potential deals… and had a lender that contacted me about some pretty awesome funding options** (wait until you read the last paragraph) **yes … met said lender on #biggerpockets … (yes Joshua and Brandon … your welcome for that shameless plug and whatever google does with it when they search with their fancy interweb robots **… ) … sorry for tangent. Back to 112% baby… First, let’s take a moment.
Definition: Cash on Cash Return … in Simple Math, Income/Cash Invested.
In other words, you made $20k on your flip you invested 80k on (this would be assuming you paid all cash, the cash that YOU have in the deal), that would be a .25, or 25% cash on cash return. In this same example, if you used $20k to control the deal, and you made $20k, then you made 100% cash on cash.
Yes, I Really Did Make 112%. Yes, You Really Can Too.
First, I want us to just think about the kind of properties we are looking at.
If you are new to investing, you better think about your market, and understand it. Walk it. Drive it. Read it. Study it. Love it. Sleep with it under your pillow. Believe in it. Have your mentor double check it. We all get excited, and we all want to buy.
Doesn’t Mean You Should… DO YOUR HOMEWORK!
The area of town I bought this particular house is was a lower middle class kind of neighborhood where you can buy a house anywhere from $25k to $40k as a REO, bank owned, etc. Here are my steps for this kind of neighborhood:
First, Regarding the Property/Neighborhood:
1. Can I drive here and feel safe (answer no … deal is dead)
2. Can I drive here with my kids and wife in the car (answer no … deal killer)
3. Can I purchase this property and make additional upside on value by improving it, and also improving the neighborhood (not deal killer, but very important to me … )
4. Can I get a quality tenant here (conversation with other investors, neighboring property tenants/owners, and management company question)
5. What will it rent for? What can I flip it and resell for?
6. Does this deal, overall, looking at the house, the street, and all things I know, make sense?
If I get past 1, 2, and 3, and then litmus test flies on 4-6, I can move on:
Second, Does it Past My Gut Test?
As in, do I feel good about it.
The more deals you do, I believe anyhow, the more comfortable we get understanding there is real money, real gain, real loss, and real life involved here.
It’s not a decision to take lightly, even on house in the tens of thousands. If I generally feel good about a specific property, I will put the numbers to “paper” (and a lot of times I will generally do this in my head before hand, and if it is grossly out, I don’t bother to look at it) and make a clearer observation of the deal.
I built my own spreadsheet, and I always start with I am willing to pay (takes out emotion), then minus what I need to put into it for make ready for a tenant, holding costs for utilities or financing, and then general rent for the property/area, taxes, insurance, and mortgage if that asset is leveraged. I also put a picture right on that ONE PAGE spreadsheet so I can remember what the property was. This spreadsheet is also very helpful when speaking with a funder, lender, banker, whatever … it’s simple, it’s clear, and it tells you what you need to know. Does this thing make money? Does it make sense?
Third, Assess Specific Property:
1. Price (is it a normal price for the area, is it priced so I can make that number or close to it work)
2. Days on market (less days, less wiggle room, more days, more wiggle room)
3. Pictures (look at overall condition, does this meet my model, does the scope of work generally look like what you do, does the house have curb appeal, would a tenant/or buyer like it?)
4. Does this house conform to my business strategy? It might be an awesome buy, but not what you are looking for (hello, pick up phone, send email, get under contract … wholesale/assign … ). For me, that is defined such as location in city, on one side of a hwy or street or another.
5. I look at Zillow’s rent zestimate. At least in my market, I think its pretty good. It’s not 100%, but it will at least be a ballpark to test if you should keep working. Their “zestimate” … not so much. Do your homework on the comps.
6. Everything good so far … I pull up the google map which is linked right there on the Zillow listing page, is the property close to parks, or an industrial area, or a creek, or a huge nasty apartment … whatever. Then hit up street view and look at the surrounding properties.
Is this one better, worse, or the same? Is there crap everywhere in peoples yards? Are the properties surrounding generally maintained, and does this house look similar, or fit in with it neighbors? Can I make this house as good or BETTER than my competition within budget? If so, then move on. Here is an example of a house I just bought a few months ago: (I normally call my houses by their street name, but for this one, we will call her … Cute Cottage)
Purchase: $26k Make Ready: $3,500 – $4k (paint, gut bath, clean up, yard work, a few windows, clean carpets, few plumbing issues) Market Rent: $795 (rented in 3 weeks) ARV: $45k-50k conservatively # for all you 1% or 2% people …
well, : $795/$30k = 2.65%, closer to the 3% rule … This one is well on it’s way to being over a 100% cash on cash if I decided to sell as well.
For The 112% Actual Deal Now:
Here’s what I did do.
I bought the house for about $34k, putting about $10-12k down … put a few thousand dollars into it to get ready for tenants, and a renter into the house for a year at $900 a month. Yeah, I know … I was pretty stoked about that rental amount too 🙂
So, then after a year of them paying rent, I also have now owned it for 12 months so I don’t pay short term capital gains on the sale, I put a few more thousand dollars into the property, and then listed it with a realtor. Prior to listing we painted throughout the inside, touched up outside, redid hardwood floors, and re-carpeted the upstairs.
In this area the average days on market at the time were 120+ … we listed and sold our house just below $60k, in less than 3 weeks under contract and 3 more weeks to close to a conventional buyer. All in all, with my cash in the deal, the rental income, closing costs, realtor fees, etc … we made 112% on our money in 14-15 months.
So, to recap … bought house, netted $400+ passive income monthly for a year, wrote off and depreciated property, wrote off all expenses to make ready and then renovate to sell, and made an awesome return on investment. Oh yeah. I would do that deal any day of the week.
The Wrap Up:
Sometimes we can’t see how the deal makes sense even while it is looking us IN THE FACE.
That’s because we haven’t trained ourselves yet to see them. To take them in, to quickly process through how we could make the deal work, AND, then know how to quickly decide and execute. I could have held that property for a long time for cash flow, but instead I sold it, and turned around and bought Cute Cottage as referred to above. And I still have more cash to go out and buy something else. And remember, in one deal, I more than doubled my money. Now, on to …
Real estate is about understanding the deal, and how to make it a win win.
If it’s not a win win for everyone, don’t do it. If it is, and it makes financial sense, and you understand the deal, then do it. Stop being afraid. Stop saying next time. Stop with the excuses. Stop the negative feelings. Stop the self doubt. Get out there, and do it.
If you don’t have funds to buy yet, then mock write up deals. Study. Get Thrifty. Save. Talk to others about their deals. Partner up with someone who does know what they are doing and learn. But, don’t do nothing.
Sometime in a future blog post I will share further about this, but several years ago my wife and I … after losing all the properties we owned, after law suits, after foreclosures and short sales, and attorneys, and sheer horror, got back up, and I started asking everyone I could find to lend us money and get back into real estate … I asked 27 times. 27. That’s 26 no’s people. But it only takes 1 to say yes. Go find your yes.