$0 money in = $4680 in passive cashflow...another HomeRun! w/PICS

124 Replies

Hey guys, I wanted to share another great story on a property we closed earlier this year.

As I’ve shared in previous posts, I have been partnering with other people to acquire more rental properties in Canada.

I believe this is a win-win for both parties, as my partner has a full-time career and doesn’t have the time nor expertise in real estate to invest fully on their own and for me it allows me to continue to expand my real estate portfolio with less of my own funds.

The exciting part about this latest deal is we paid $0 to acquire it…yeah baby!!

Ok so how did we do this? Good question...

Here is the whole story:

Back in November I had seen a listing for a small 2-bedroom freehold townhome on the same street as our awesome flip project. The property didn’t show very well and apparently the current tenants were giving agents a hard time showing the place to their clients.

So, what did I do? I made an offer, sight unseen with only contingencies of a property inspection and a vacant place. I also made a low-ball offer expecting the seller to negotiate.

I guess the seller was pretty fed-up with the place as he accepted our offer without any changes….score!!

As we were doing our flip project on the same street, I was already very familiar with the area and projected rent for this place. We did our home inspection and surprising the place didn’t have any major issues.

The only thing remaining was the property to be vacated, sounds easy, but it wasn’t. The tenants gave the seller a tough time and it took about four months for them to leave and for us to close the deal.

So how did we get this place for $0? Oh yes thanks for reminding me…

Well my partner and I on this deal, also owned another rental property we had bought about 17 months before this. I knew we had bought that place for a great price and the market had continued to increase significantly so we refinanced that first property and were able to get enough funds to close on the latest deal and renovate the entire place and still have reserves left in the account.

SO here are the numbers:

Purchase Price: $106,000

Closing Costs: $2,500

Repairs: $18,000

Total: $126,500

The seller had listed the property for $130,000 and we knew comps for similar properties were around $150,000 so I really feel we hit a home run here!

As I mentioned we refinanced our first property and took out about $50,000 which we used for the down payment, renovations and capex.

--

Let’s take a closer look at this property.

Potential Gross Income: $14,400 per year (at full occupancy)
Less Vacancy: $432 (with a 3% vacancy rate)
Effective Gross Income: $13,968

This is how much money we can expect to collect. What about the operating expenses?

Expenses:
Management: $1,152/year (8% of Gross Income)
Property Taxes: $1,100/year
Repair/Maintenance/CapEx: $1060/year (one percent of purchase price)
Utilities: Paid by tenant
Insurance: $1,152

Operating Expenses: $4,464 per year

Net Operating Income: $9,504 per year. Yeah baby!

Right off the bat, I can see that this is a sweet deal. We are netting close to $10k a year for a $106,000 house. That’s a 10 percent cap rate.

You can compare this to getting a consistent 10 percent dividend payout from a stable, blue-chip stock. (If you’re not familiar with the world of stock investing, that’s practically unheard-of.)

How much passive income are we collecting?

We were able to qualify for a standard loan with 20% down.

Net Income: $9,504

Loan payments: $4,824

Passive Cash Flow: $4,680

We’re getting $4,680 in passive income from this house! That’s one huge step closer to financial freedom.

How much money did we pay out-of-pocket for this investment?

Zero. Zip. Zilch. Nada.

Without spending a dime of our own money, we set up a deal in which we receive $4,680 in passive income per year. That’s the money we pocket after paying a property manager (in this case ourselves as we self-manage) plus setting aside a “rainy day” fund for long-term capital expenses, maintenance and repairs. This doesn't even include the built in equity I was able to secure for us, by buying it at such a great price!

Another HOME-RUN!!!

Can you go a little more in depth? I'm a little confused by a couple of things:

1. You say you saw this in November, but the seller took 4 months to get the tenants out. Was this November 2016 that you made the offer? When did you close?

2. Is it currently rented? How much is it rented for? How long has it been rented? 

3. Shouldn't you be counting your loan costs on the other property refinance against the profit of this property?

4. If it is actually rented and there's some track record, how have your projected numbers compared to actuals?

Originally posted by @JD Martin :

Can you go a little more in depth? I'm a little confused by a couple of things:

1. You say you saw this in November, but the seller took 4 months to get the tenants out. Was this November 2016 that you made the offer? When did you close?

2. Is it currently rented? How much is it rented for? How long has it been rented? 

3. Shouldn't you be counting your loan costs on the other property refinance against the profit of this property?

4. If it is actually rented and there's some track record, how have your projected numbers compared to actuals?

Hi JD, 

Yes this was November 2016, closed February.

Rents for $1200/mth (I mentioned $14,000/yr in the article), rented right after renos were completed.

I guess I could calculate the loan costs for the refi, whatever it would be is easily offset by the equity we earned at purchase of the new place. Also there was an increase in the monthly mortgage payments for the other property which I didn't add here, however the cashflow on that property easily covers the increase.

It is rented and projected numbers are on track.

Tks for reading.

"Without spending a dime of our own money"  False. I see so many of these clickbait stories nowadays. They are purposefully misleading to make someone think they can literally go in broke and have a successful rental flip. You took $50K of equity out of another property and turned it into cash. Which is technically $50,000 of "your own money".

Good point.  50K is not exactly zero down.

Originally posted by @Justin Robinette :

"Without spending a dime of our own money"  False. I see so many of these clickbait stories nowadays. They are purposefully misleading to make someone think they can literally go in broke and have a successful rental flip. You took $50K of equity out of another property and turned it into cash. Which is technically $50,000 of "your own money".

Hi Justin, true I titled the post so people would click and yes I did take $50k out of another property but in reality I didn’t use any of my own “actual” funds from my own bank account. The $50k is really the bank lending me more money.  

Originally posted by @Greg Parker :

Good point.  50K is not exactly zero down.

 Hi Greg please see my response to Justin. 

@Thomas Lorini another good point.  OPM is the best!! 

Did the seller counter at all?  Seems like a decent offer you made for the condition of the property.  I might have started at 98K.

I think the main point is how much closer you are to financial freedom. whether it is technically "0 money down" or not I think is irrelevant in this case. The numbers are great. good work

Wouldn't your cap rate include your "all in" Investment, like rehab and closing costs?  So 7.5%  That still may be a good cap rate depending on your market.  I personally look for closer to 15% and am willing to go out of town to get it.

Nice job!!! Very inspiring.

Less Vacancy: $432 (with a 3% vacancy rate)

Three percent seems low.  When one borrows from a bank, they use 25% vacancy factor.

Who paid the $18,000 for repairs?  That wouldn't exactly be "no money" in the deal, would it?

how much did the $50k add to your other mortgage payment and impact your cash flow?  Also what about the equity ratios on the first property?  

Personally I’m getting concerned that folks are focusing on $2300 cash flow (like in your example) and consistently refi’ing and soon you have small margins  not allowing for proper reserves and the slightest downtick in housing creates another bubble.  And let’s be real some areas like mine aren’t in.  I do want to I say kudos for setting up proper reserves on your deal though, a lot of folks don’t establish that up front.

Originally posted by @Greg Parker :

@Thomas Lorini another good point.  OPM is the best!! 

Did the seller counter at all?  Seems like a decent offer you made for the condition of the property.  I might have started at 98K.

Seller did not counter at all which was surprising. The market i invest in is extremely hot with multi bids being the norm. So starting where i did was based on previous experience. I think it was only because of the tenant issues the seller wanted to move in a hurry. 

Originally posted by @Catherine Coy :

Less Vacancy: $432 (with a 3% vacancy rate)

Three percent seems low.  When one borrows from a bank, they use 25% vacancy factor.

Who paid the $18,000 for repairs?  That wouldn't exactly be "no money" in the deal, would it?

Hi Catherine again as I mentioned earlier the 18k was part of the 50k from the refi. So no “out of pocket cash” in this deal.  

Cheers. 

Originally posted by @Scott Royer :

how much did the $50k add to your other mortgage payment and impact your cash flow?  Also what about the equity ratios on the first property?  

Personally I’m getting concerned that folks are focusing on $2300 cash flow (like in your example) and consistently refi’ing and soon you have small margins  not allowing for proper reserves and the slightest downtick in housing creates another bubble.  And let’s be real some areas like mine aren’t in.  I do want to I say kudos for setting up proper reserves on your deal though, a lot of folks don’t establish that up front.

Yes I’ll dig up those numbers soon. $50k over 30 years isn’t gonna add that much to monthly payments. And yes the other place still cashflows great. 

I do appreciate your concern about people getting carried away with refi’’ng their properties, but I new the opportunity at hand and my market very well which helps in determining when to pull this type of trigger.  

Just an FYI the unit to the right in my picture (attached to ours) sold this past August for $210k. Exact same property.  So buying in at 106k using all the banks money for a cash flowing property which has comps almost double makes it not just a homer but I’d say a 2-run Homer! 

Originally posted by @Alex Shaughnessy :

I think the main point is how much closer you are to financial freedom. whether it is technically "0 money down" or not I think is irrelevant in this case. The numbers are great. good work

Exactly Alex! I was just trying to have a bit of fun in sharing my example. There are so many posts here on BP and sharing numbers can sometimes be a bit of a boring read. But you hit the nail on the head: the main point was that this deal is taking me one step closer to financial freedom!!....few more of these and I’ll be there ;)

Congrats! Like how you added the pictures to your post for a visual. 

@Thomas Lorini , congrats on the deal.  Just wondering, do you live in Canada full time now?  Or in California? You mentioned doing a flip project nearby. 

Just wondering how that works for you , are you flying back and forth a lot (if still in California) ?

Originally posted by @Tommy Spijkers :

Congrats! Like how you added the pictures to your post for a visual. 

 Thanks Tommy! Visuals def add to any story 

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