Unit #25 under contract
Last week we signed the purchase agreement for what will be our 25th unit over 4 1/2 years. It's nothing glamorous, but with a bit of work should exceed what we could achieve in most other investments, and hopefully will put us that much closer to the goal of a comfortable retirement. I share the details here to show what a series of small low-risk transactions can do over the medium and long term to build passive income for retirement.
The PA is for a 1 BR condominium unit in a 150 unit complex where we already have 22 units, bought in 3 earlier transactions. The complex has a mix of 1, 2, and 3 BR condos, and the 1 BR units are in the sweet spot for us, in that their price is too low for conventional financing, leaving cash sales and owner financing as the primary options for incumbent owners of single units looking to dispose of their apartments. The 1 BR apartments also have a good 'rent to rehab' ratio, a term I use that means they cost relatively little to update relative to the amount of rent they collect. A 2 BR or 3 BR townhouse condo in the same complex easily costs 3x - 5x as much to rehab if it has been neglected since the 1960s, while only drawing 1.5 - 1.8 the rent.
The purchase price for the latest unit is $18,000, and closing costs including reimbursement of pre-paid property taxes will bring the total to $18,700. While we've used owner financing in previous transactions, in this case we have a relative who wants to provide the financing. We will be putting $3,700 down, and borrowing $15,000 over 4 years at 5%, which is 4x the interest rate our relatives make on their savings in a bank CD, making both them and us very happy with the terms of the transaction.
After closing, we anticipate ~$4000 in rehab costs to bring this very tired unit up to date, which will include refinishing the hardwood floors, complete repainting, new kitchen flooring, new counter top, new appliances, new lights, blinds, fans, toilet, etc. Our total out-of-pocket costs will therefore be around $7,700 ($3,700 down + $4000 rehab).
The numbers look like this:
| Rent | $650 | |
| Loan payment | $345 | 4 years @ 5% |
| HOA | $130 | |
| Insurance | $13 | |
| Property taxes | $67 | |
| Maintenance + CapEx | $80 | For new windows and HVAC |
| Cash flow | $15 | During land contract |
| Cash flow | $361 | After land contract |
| Cash on Cash | 56% | After land contract |
| ROI | 48% | During land contract |
As the numbers show, there is virtually no cash flow during the 4 years the loan is being paid off, but the return on investment from principal pay down is almost 50% PER YEAR. After the loan is paid off we should be achieving over 50% cash on initial cash. If we want to look at return on capital, the rate is much lower, because at the end of 4 years we'll have an asset worth ~$35,000 (if sold in a package to an investor) returning ~$4300 annually, but that is still a 12% return on capital. A risk with this transaction is lower than anticipated rent ($650 is higher than any of our other units, but is being achieved by many other recently-listed units owned by others), but even at $600/mo cash flow is only slightly negative during the loan period and ROI and CoC are still 40% and 48%, respectively. Another risk is lost rent, but we have run at 100% occupancy for the past 3 years and achieve over 100% of theoretical rent due to late fees, so we view this risk as minimal.
Assuming we close as planned in the next few weeks, I'll post pictures as the work progresses.