I'm writing this post for a few investor clients of mine, and wanted to see what the average cash-flow per door other investors in the Phoenix metro area (Scottsdale, Tempe, Gilbert, Glendale, Chandler, Mesa, Peoria, Surprise, etc.) were getting on their rental properties.
Of course, the more details you share about the property the better, so here's a generic outline to make sure we get all the necessary info to evaluate what to expect:
- Property Type: (Condo, Single Family House, Multifamily Property)
- Total Doors:
- Purchase Price:
- Year Bought: (Buying at bottom of market obviously makes for more cashflow today)
- Financing: (Cash purchase, financed with percentage down, lease option, etc.)
- How You Found Property: (MLS, Off-market, Wholesaler, Foreclosure, REO, etc.)
- Property & Neighborhood Rating: (A-F, 1 to 10, neighborhood quality and condition of property)
- Net Cashflow Per Door:
- Cap Rate, CoC, Appreciation, Etc.: (Any other metrics or ROI figures you think are important to the deal)
You can either answer in this format or write a paragraph or two including all the details. Figured this would help some beginners know what to expect and see what returns other investors are currently getting in the Phoenix market.
Let's see who has the highest net cashflow!
Originally posted by Account Closed:
Originally posted by @Account Closed:Originally posted by @Bill F.:
@Account Closed that looks like an interesting deal. I'm curious about some of the mechanics?
Is the Seller carry back a zero coupon note or interest free?
Do you specify redemption periods or set times for the buyer to refi or leave it open ended?
What type of conversion rates do you see in your area sub-to deals and how much do you reserve for each deal?
How do you qualify your buyers?
The carry back is interest free to be paid when my Tenant Buyer refinances. (Sometime in the future.)
The Tenant Buyer is on a 3 year Lease Option unless he wants some other period of time. I don't particularly care about the length of time because:
a. I get the cash flow for as long as he is in the Lease Option
b. I get the principal paydown
c. I get the tax write offs
d. Potentially I get the appreciation (look at h. below)
e. A yearly rent increase is written into the Lease Option so the amount I get increases each year
f. The Tenant Buyer takes care of all Rehab, Maintenance & Repairs.
g. If the Tenant Buyer refinances I get the "Back End Equity"
h. If the Tenant Buyer walks away from the deal I get to keep his Option payment since it is non-refundable and I sell to another Tenant Buyer and get another Option Payment usually about $20k to $25k.
I encourage people to get qualified for financing and to plan their lifestyle to be able to get a loan to exercise the Option. Some do, some don't. I offer to help them through the process but few take me up on it. As I tell then, "I will help you but I'm not your daddy". I have the information and I will work with them, but if they choose to "do it on their own", that's fine. (It just never gets done that way.)
About 1/3 of the deals fall through at their end because people "have stuff happen" in their lives like Job Loss, Lose Momentum getting credit cleaned up, Medical Issues, Divorce, "Changed their mind", Don't REALLY want to be home owners, etc. As long as they can keep paying the rent, I keep them in the premises if they want but when the Option expires the Option goes away. Not hard and fast, just rule of thumb.
I qualify my Tenant Buyers by Down Payment and Income and Job Security. If they have the Down Payment I am looking for, if they have provable income at least 3x rent, 12 months of paying rent on time, if they have been employed two or more years in the same line of work, that is what I am looking for. They can have a foreclosure, bankruptcy, repossession, defaulted credit cards etc but I don't really care.
They can't currently be in bankruptcy, they have to bring any child support current if they have child support and they have to have student loans current or in abeyance. I prefer self employed Tenant Buyers because they show drive and most self employed simply take all of the tax write-offs available to them which reduces their bottom line income. That makes it hard to get a mortgage (since they aren't showing enough income). I am their pressure relief valve, I provide a home where before they didn't qualify. I once upon a time was a Loan Officer so I understand a little bit about underwriting a loan and I just keep to "good common sense".
I had never thought about directly targeting self employed individuals, but it makes sense. Is that who you find is your most common buyer?
I'm assuming in the situation described in h. that you will have some turnover/rehab costs or do you just sell it as-is again?
You must have some sales skills to convince the seller to give you an interest free loan for 3-5 yrs.
Do you reserve a fixed number or percentage of purchase price to cover the deals that go south, since you still have to pay the original note.
I've done this for so long it's second nature.
Most people get hung up on Fix & Flip which is the riskiest highest taxed, or Buy & Hold and hope for $100 a month cash per door. I think that's a mistake, but to each his own.
I average $20K that I get as a Down, and $500 per door cash flow on a $50k investment. There is no bank qualifying I need to do or worry about 25% down or debt ratios or any of that stuff.
I keep $5k per house in reserves so that I can always make the underlying payment and cover emergencies. In the event of a turnover, I simply see to it that it is habitable and safe. Other than that, any rehab, maintenance, upgrades are entirely up to the Tenant Buyer or the the new Tenant Buyer.
I never offer interest on the carryback. Interest rarely comes up and I simply write up the agreement.
I find that I have a mix of self employed and W2 but my preference is self employed. Self employed tend to think like I think and they are more resilient to changes in the economy.
Do you have any experience doing this in CA?
Edited: Nevermind.. I saw your post about this being difficult in CA. Im interested in doing a possible JV if you have anything so I can learn the mechanics of this strategy.