@William S. The traditional buy and hold model or flip model may have too thin of margins to make it worth your time, however, the lease option model (which is in between a flip and a rental) may work better for you.
Here are the numbers and how it might work for you.
Purchase price = $87,500
Rehab = $42,500 (somewhere in the middle of the projected rehab)
Closing = $2,000
Holding Costs (Hard money and utilities, etc.) = 6,000
All in 138k
ARV is around 160k
Get a refi on 75% of 160k if you can find a bank that will do that for you, some only do 75% of what you have into it (138k).
Rent = $1,550/m (you get the 100 premium because someone is paying more for the ability to get into a house they can call their own but are not qualified by a bank to get a bank loan at this time).
Mortgage = $775.47 (120k at 4.75% for 5 year adjustable rate amortized over 20 years).
Taxes = $300
Insurance = $50
Net Cash Flow = $424.53
Option fee is 5k which comes back to you.
Out of pocket cost = $138k-5k-120k = 13k
You don't need to budget for Vacancy, Maintenance, or CapEx, or Property Management.
The reason you don't need to budget for vacancy is because you are not looking for a renter, you are looking for an end buyer and you are selling it on a 5-year lease option. The person is giving you 5k to buy the house in the next 5 years or so they are pretty committed to buying the house. If they do leave early, you can just get another buyer in there for another 5k.
You don't need to budget for maintenance because in the lease agreement you state that the tenant is responsible to take care of anything with the property which is why you are discounting the rate from $1650 to $1550 a month and if they want you to take care of the month-to-month fixes then the rent goest to the agreed upon amount of $1650.
You don't need to budget for CapEx because you have already rehabbed the property and you will be selling it to them within the next 5 years and everything should last at least that long if you have rehabbed it.
You don't need to budget for property management because once the property is leased out, it is pretty easy to manage because the tenant does most of the managing of the property because they are living in the home they are looking to buy.
Here is the benefit of this model. Lets say that the tenant exercises the option to buy the property at the end of the 5 years. Here is your profit
Monthly cash flow is 424.53 x 60 months = 25471.80
The option price is 169k (a 9k premium because of likely appreciation)
The closing costs are around 2k (they are minimal because no realtors are involved).
The mortgage after 5 years would be 99,696.13 because of the principle pay down over the 5 years.
Total profit upon sale is 169k - 2k -99,696.13 = 67,303.87 plus monthly cash flow over 5 years of 25, 471.80.
Total profit = 92,775.67
Yearly profit = 18,555.13
ROI = 143% yearly.
Will it go exactly like this, no. They may not exercise the option. Many investors say that they won't. However, if you work with them and connect then with a credit repair company they are will more likely exercise the option.
We started this model with 16 properties that we acquired last year. 14 of the 16 are lease optioned out (1 is still on the market, and the other is still being rehabbed) and they have been working out really well for us. The management has been really low once the property gets rented out.
After posting this, it is likely that people will criticize this model or say it is illegal. Just so you know, there is a very legal way of doing it. It is just very important that the docs are done correctly.
