170% Cash on Cash Return! THAT JUST HAPPENED!

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170% Cash on Cash Return! THAT JUST HAPPENED!

Justin B.
Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes

So before people get on me about bragging, please notice I did put this into the real estate success stories forum :). We are buying our 10th property (a milestone by itself), but the real story here is the numbers. I'm constantly surprised with what's out there. Where did we find this one? The REO list from our bank. I'm also posting this because I want to show people that fantastic deals are out there.

The numbers are really insane. Below is what we're looking at.:
-- Area: OK. Not great, but not bad either, but OK areas is where we typically invest.
-- Purchase Price: $37,000
-- Down Payment: 5%
-- Property Management: 10% fee monthly
-- Rent: $750/month (You are reading that correctly).
-- Taxes: $900/year
-- Insurance: $300/year
-- Vacancy Rate: 0% (It's already rented upon purchase)
-- Money put into it: $0 (Upon inspection there is nothing for us to do).

Here are the results from my analysis spreadsheet:
Cash on Cash Return: 170.15%
Debt Coverage Ratio: 2.378
Vacancy Breakeven: 44.43%
Operating Expense Ratio: 23.33%
BreakEven Ratio: 55.57%

Capitalization Rate: 18.65%
Gross Rent Multiplier: 4.111
Net Income Multiplier: 5.362
LTV Ratio: 95.00%
Monthly Rent to Value %: 2.03%

Cash Flow: $331.20/month - The amazing thing about this number is it's WITH a property manager taking 10%.
5-year IRR (using 2% appreciation): 175%
10-year IRR (using 2% appreciation): 172%
Present Value: $11,678
Net Present Value: $9,328
Profitability Index: 4.97

Before anyone starts to say how a price this low isn't somewhere they want to be, listen to this. It's a 1,200 sq/ft 3 bedroom, 1 bath house. It's a typical SFR. I happen to invest in MS where prices are lower than most other places in the country. The house is in great shape, already rented, and we have to put $0 into it. Anyway, just felt like tooting my own horn for 5 minutes :)

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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
11y
Originally posted by @Justin B.:
Originally posted by @John Thedford:

I see a problem with the numbers as well. Until you calculate vacancies, maintenance, CapEx, etc you don't have a true picture of your returns. Also, as other mentioned, what about closing costs?

There is no problem with the numbers. This is an SFR, so when it goes vacant, it's 100% vacant. Again, I could put an estimate of vacancy but I chose not to because it's currently rented and not vacant. When I first evaluate properties (what I call my 5 minute analysis), I use 10% as a vacancy rate, $50/month per $1,000/month rent (Over the years I've found that to be very accurate). All the other expenses I have (Taxes, Insurance, PM) are pretty easy to get accurate up front. Even at that, the numbers still blow me away.

I think John's point was that you're leaving several expenses out of your cash flow equation. When you are inaccurate with your cash flow, your cash on cash return is going to be inaccurate as well. Your true cash flow, and resulting cash on cash return, will be lower once you factor in things like vacancy, maintenance, Capex, etc.

Not factoring in longer term expenses into your cash flow and CoC is like claiming that your meal is free because the waiter hasn't brought you the bill yet.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Gautam Venkatesan:

    What kind of investor loan did you get for only 5% downpayment?

    It's a commercial loan in the LLC's name. We do have to personally guarantee the loan. Our bank is a smaller bank that only operates in Mississippi and they are just willing to do it based on our history.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Justin B.

      by MS do you mean Mississippi ?  or is it by were you live in Maryland .. did the bank that owned it finance it for you with these special terms ?

    Yes, Mississippi.  a $37k house here in Maryland would definitely something I have 0 interest in :)

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Sharad M.:

    @Justin B.

    Congrats on your deal!

    You cash on cash return that you have is your best case scenario. You aren't factoring for any repairs and maintenance or any vacancies. You don't have any vacancy or any repairs right now, but it's only a matter of time that you will have those expenses and it's better to factor for those expenses.

    It's great that you are able to get a loan with no closing cost and 5% down payment.

    I agree.  It is best case scenario, but the house is already rented and has been by the same woman for 5 years.  Unfortunately her credit keeps her from qualifying for a loan to buy the house herself.  So yea, she pays $750/month in rent but the bank won't approve her for a loan that would be ~$400/month with insurance and property taxes all in.  It's messed up but that's the world we live in.  Again, once you get your money back, the Cash on Cash Return doesn't really have much value.  I just think it's interesting than in ~7 months, we'll have all our cash back.  That's the point I'm trying to make.  I'm sure over time their will be maintenance fees.  Also, keep in mind, these numbers are about 3x what our "goal" is.  so even adding 10 or 20% vacancy and $50-$100/month in maintenance (which is high), the numbers are still pretty awesome.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Justin B.

      cool are you buying in Jackson ?  or someplace else.   those are very favorable terms however I am going to go out on a limb and say that PG is what is carrying the transaction.

    But for someone who does not live in MS to get a local bank to finance you that is very rare.  The local MS banks will finance locals though in these asset class's.

    And if you ran into me 2 years ago I would have sold you some of my MS OREO with same down and ZERO percent financing :)  but I am all out of them now... !!

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Stephen Moore:

    howd u get an REO with only putting down only 5% unless I'm reading it wrong? All REOs are cash only no financing

    Some other people may have covered this too, but the statement "all REO's are cash only" is just not true. I've bought 3 REO's now and actually paid 0% down (100% financing) on the first 2).

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Rhondalette W.:

    Sounds great! Share with the newbies how to access the bank REOs and how you make the offer. 

    Just call the bank and ask for their REO list. You might get bounced around until you hit the right person, but they e-mail it to us monthly without us even having to ask anymore.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Justin B.

      that was me who made that statement and it is generally true of lenders shedding OREO's .. there are of course special cases like it appears you have gotten with a local commercial bank that will take your PG.

    and of course I sold off many of my OREO on contract but I am a private lender.. I was talking about the big boys...

    Are you buying in Jackson ?  Jackson has some of the best rent to purchase price ratios for a state capital in the country...

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  • Justin B.
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    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Matt Devincenzo

      not sure we are all on the same page.. the majority of distressed asset sell for cash.

    at least in my circles

    This is not what I'd call a distressed asset. However there are plenty of homes on the REO list that are in horrible condition, priced extremely low that I'm sure the bank wouldn't finance. There are probably 100 SFR's on the REO list each time we get it (a lot of it is the same from month to month) but we've found 3 in the past 6 months that were not only in great shape, but were already rented out and we just took it over.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Andraise Scott:

    @Justin B., way to go man!  Not only for this incredible deal but for the nine others as wel! I too am VERY interested in the 5% down though.  All I keep hearing from lenders Is 20% down for investment properties.  If you or anyone else has a lead on 5%, 10% or even 15% money I would love to hear it!  Please do share if you would.

    I truly believe it's the relationship with the bank.  Not only did we have previous personal relationships with this bank (personal loans like car/house over the years), but we now have 5 years of paying every time on time, every month (through automatic withdrawal).  Last year we went about 9 months without buying a property and the bank was actually calling us wanting to know when we were going to buy again.  We also send out balance sheet and P&L to the bank each year so they can see for themselves that we are buying profitable properties.  We didn't start out at 5% down.  We had to earn it.  We started out just like you're seeing.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Tariq B.:

    Good job! But I'll do you one better. ;-)  Purchase price 29,000 put 4,000 into it. So $33,000 all together.

    Monthly rent: $1200 

    You are correct.  that is better.  As good as mine is, I realize there are even better ones out there and that's what we're on the hunt to find.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Rhondalette W.

     Many banks will have OREO's even posted on their websites ... you can check there first then call a banker and ask who handle s the OREO then talk to that person and get the list. It used to be harder but now a days the banks will sell to anyone if they are portfolio like this bank and actually own the asset.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @John Thedford:

    I see a problem with the numbers as well. Until you calculate vacancies, maintenance, CapEx, etc you don't have a true picture of your returns. Also, as other mentioned, what about closing costs?

    There is no problem with the numbers. This is an SFR, so when it goes vacant, it's 100% vacant. Again, I could put an estimate of vacancy but I chose not to because it's currently rented and not vacant. When I first evaluate properties (what I call my 5 minute analysis), I use 10% as a vacancy rate, $50/month per $1,000/month rent (Over the years I've found that to be very accurate). All the other expenses I have (Taxes, Insurance, PM) are pretty easy to get accurate up front. Even at that, the numbers still blow me away.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Jeff S.:

    Personally don't place value on cash on cash because you can play games to get big numbers @Justin B.That is ok though because there are plenty of big players that do.

    What is important IMO is the return on the entire investment because you can go negative equity in a heart beat.

    Understood.  That's why I put about 20 different numbers in my post.  Different people look at different things.  Cash on Cash is not my #1 number.  Cash Flow per month is my main number that I care about.  I don't even care about equity.  As long as I can rent it and meet my goal of cash flow per month, that's all I care about.  Once cash flow reaches a certain point, that's when I can retire and do this full time.  I'm on a mission! :)

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Justin B.

      cool are you buying in Jackson ?  or someplace else.   those are very favorable terms however I am going to go out on a limb and say that PG is what is carrying the transaction.

    But for someone who does not live in MS to get a local bank to finance you that is very rare.  The local MS banks will finance locals though in these asset class's.

    And if you ran into me 2 years ago I would have sold you some of my MS OREO with same down and ZERO percent financing :)  but I am all out of them now... !!

     We actually own in Jackson, Brandon, and Hattiesburg.  This particular house is in Jackson.  And I'll be clear.  If you read my blog or my profile here, you'll see that I grew up in Jackson, MS (first 23 years of my life), then moved to Maryland after that.  My Dad still lives in the Jackson area and my brother now lives in Memphis, TN (he was in Jackson when we started this business), which is where we own a few properties as well.  So I don't want to put a false illusion that I just up and started purchasing property in MS and found a bank who was willing to give a guy who lives 1,000 miles away 5% down on properties.  another reason may be that all 3 of us personally guarantee these loans as well.  I'm guessing the bank feel pretty well covered in that respect and I'm sure that contributes to the favorable terms we get, but I'll take it :)

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Justin B.

    Are you buying in Jackson ?  Jackson has some of the best rent to purchase price ratios for a state capital in the country...

     You are right on.  Jackson, MS and Memphis, TN are some of the best markets in the country right now for buy and hold properties.  There are others as well but we're interested in buying where we have a presence.  When we're all full time doing this, I'm sure we will venture out.  We're buying sub $100k properties and cash flowing hundred of dollars a month even with low % down payments.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Justin B.

       now that your actually describing your TRUE relationship with this bank,,, your characterizations that investors can find 5% down bank financed deals is a tad misleading :).. .. So you have a long track record you lived in the community and you obviously have financial strength and you add that up and put your PG in there and yes you will get deals. I am sure many locals get the same..

    from your first posts it looked like you live in Maryland and just happened to stumble in the the great state of MS and found this increbible leveraged bank deal.. that's why every one wanted to know how you did it.... Good job though take the deals that you have earned. its all about track record and performance

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Justin B.

      our post jumped over each other.. your description of the deal makes total sense now.

    Many community banks are precluded from lending to anyone who does not live within 100 miles of the asset.. so your Dad living there checks that box. And with MS dual action deficiency statues the PG's in that state are very strong.. and since there is no equity in the deal the deal was made almost like a unsecured LOC they just happen to tie an OERO to it and they can do that with some latitude.. I had a very large line of credit back in the Day with Community bank based out of Hattiesburg.. they have branch's in Jackson.. But at the time I was the largest HML in Jackson and had a very large presence there even though I did not live there.. Plus the financial strength ... Too bad we did not meet a few years ago I would have sold you 50 of my Jackson OREO's all with no money down and Zero interest !!

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
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    Originally posted by @Jay Hinrichs:

    @Justin B.

       now that your actually describing your TRUE relationship with this bank,,, your characterizations that investors can find 5% down bank financed deals is a tad misleading :).. .. So you have a long track record you lived in the community and you obviously have financial strength and you add that up and put your PG in there and yes you will get deals. I am sure many locals get the same..

    from your first posts it looked like you live in Maryland and just happened to stumble in the the great state of MS and found this increbible leveraged bank deal.. that's why every one wanted to know how you did it.... Good job though take the deals that you have earned. its all about track record and performance

    I wouldn't classify anything I said as misleading.  I was just stating what I got.  The post was all about the deal, never "how" I got my terms.  It looks like people focused in on the 5% down so I elaborated and answered questions.  How I got started and they way I do things I've never hidden.  I unfortunately don't have time to lay out my life story every time I post.  That's why I have the blog :)

    I will say this though.  My relationship with our bank is nothing that every single person out there can't eventually get.  My "personal" history with the bank is that I have financed a couple of cars through them.  I never even had a mortgage with them and when I moved to Maryland 12 years ago, I ended my personal banking relationship with them all together (closed my account and went with BoA up here).  My brother and father do still use them as their personal bank.  If you have a bank you hold a car loan and mortgage with, then you have the exact same relationship I had with our bank in 2010 when we went to them for our first loan.  In fact, they didn't even want to finance our first property because we had no business history with them so we had to do owner financing to start.  All they knew us for was personal items.  They did finance it 6 months later in a re-finance type scenario.

    So the personal relationship (again, nothing more than anyone else has with their current bank), several years of payment history, and several properties later, we have a great relationship and we get great terms, but we earned it.   I do think relationships like this can only happen with smaller banks.  If you currently bank with BoA, Wells Fargo, Regions, etc, then I doubt very seriously you'd be able to garnish a relationship that would get you the terms we have.  You may be stuck at "normal" terms forever unless you're a big dog financing buildings in major cities.

    Also, we did find one property out of state that we considered purchasing at one point.  When we went to the bank, they said they would require 40% down because they don't do a lot of business out of state.  So even our relationship has it's limits.  If we wanted to buy up here in Maryland, I'd be in the same spot as many of you.  I'd be lucky to get 20%from a local bank here.

    On the topic of 3 of us, yes, we have 3 people that can personally guarantee loans but again, that's 3 people.  3 people that have to split everything we get.  So it takes a lot longer to get to a goal with 3 people than it does with 1.  The good definitely outweighs the bad in my opinion.  We've got 3 people looking towards this income to retire on instead of 1.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Justin B.

      I also learned all about Yazoo clay in Jackson ... !! 

    And bought a bunch of new construction for go zone bene's .. I am now selling them all off they are in Madison,  Patrick farms, Brandon.  I am in Jackson 4 times a year

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
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    Originally posted by @Jay Hinrichs:

    @Justin B.

      our post jumped over each other.. your description of the deal makes total sense now.

    Many community banks are precluded from lending to anyone who does not live within 100 miles of the asset.. so your Dad living there checks that box. And with MS dual action deficiency statues the PG's in that state are very strong.. and since there is no equity in the deal the deal was made almost like a unsecured LOC they just happen to tie an OERO to it and they can do that with some latitude.. I had a very large line of credit back in the Day with Community bank based out of Hattiesburg.. they have branch's in Jackson.. But at the time I was the largest HML in Jackson and had a very large presence there even though I did not live there.. Plus the financial strength ... Too bad we did not meet a few years ago I would have sold you 50 of my Jackson OREO's all with no money down and Zero interest !!

    The person who we work with the most actually used to work at Community Bank back in the day. My first car loan when I was 16 was done by that bank. I don't even know if they still exist anymore. Eventually we want to be out of SFR's and into MFR's but in MS and TN, the pickings are just too good right now for SFR's. It's hard to turn them down especially since we've been looking for MFR's for quite a while and just aren't finding deals that are any good.

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  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
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    Originally posted by @Jay Hinrichs:

    @Justin B.

      I also learned all about Yazoo clay in Jackson ... !! 

    And bought a bunch of new construction for go zone bene's .. I am now selling them all off they are in Madison,  Patrick farms, Brandon.  I am in Jackson 4 times a year

     Yea, that's pretty much why basements don't really exist in MS.  The effort and cost to put one in is prohibitive among other things.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Justin B.

      yes Jackson is under the radar city... you really don't have any turn key guys working it anymore like you do in Memphis and they are stiff competition on the buy side.

    I funded 60 homes for one of my Jackson clients last year and will do the same this year. They are buy and hold like you...

    If I told you in 2001 I would end up doing what amounts to over 1000  deals in Jackson MS from Portland Oregon I would have said your nuts.. But like all things you go were the deals are made.. Plus I love to travel and I REALLY like the people in the South especially the children with there southern manners .. we just don't have that out this way. 

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    11y
    Originally posted by @Justin B.:
    Originally posted by @John Thedford:

    I see a problem with the numbers as well. Until you calculate vacancies, maintenance, CapEx, etc you don't have a true picture of your returns. Also, as other mentioned, what about closing costs?

    There is no problem with the numbers. This is an SFR, so when it goes vacant, it's 100% vacant. Again, I could put an estimate of vacancy but I chose not to because it's currently rented and not vacant. When I first evaluate properties (what I call my 5 minute analysis), I use 10% as a vacancy rate, $50/month per $1,000/month rent (Over the years I've found that to be very accurate). All the other expenses I have (Taxes, Insurance, PM) are pretty easy to get accurate up front. Even at that, the numbers still blow me away.

    I think John's point was that you're leaving several expenses out of your cash flow equation. When you are inaccurate with your cash flow, your cash on cash return is going to be inaccurate as well. Your true cash flow, and resulting cash on cash return, will be lower once you factor in things like vacancy, maintenance, Capex, etc.

    Not factoring in longer term expenses into your cash flow and CoC is like claiming that your meal is free because the waiter hasn't brought you the bill yet.

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  • Ramon Jenkins
    Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
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    Congrats

    5% down : sweet

    $300 property insurance : very nice

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    Over the years on here I have heard many posts about buying houses cheap in OK areas.

    What I hear very little to almost zero posts about is future update posts how they have owned a bunch of those houses for five years and they are still throwing off tons of cash flow with no issues.

    I will never be sold on low income tenants and ok areas but that is just me. I want to buy the crappiest property in the best area. If a shift happens in an OK area to bad you could lose the whole investment.  

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