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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  • Stephen Seaberry
    Woodbridge, VA · Member since 2015 · 44 posts · 7 votes
    11y

    A good bit of motivation to end my week. Congrats

    0Reply
  • Thomas Oliver
    Summit, MS · Member since 2014 · 63 posts · 40 votes
    11y
    Justin congrats. I don't totally agree with your numbers. I am also a investor in Ms. I'm farther south. I live in Summit. We are in a state of its own. What most people don't realize is you have to buy in my area at around 30-40K to get Cash flow with a 15 yr AMR. The advantage we have is our little local finace in the LLC name. Not show it on our personal credit. I would like to know who your insurance is through. I'm paying 1000-1500 a yr for ins.
    0Reply
  • Rob Beland
    Investor · Leominster, MA · Member since 2011 · 1k+ posts · 589 votes
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    The problem @Thomas Oliver is that you legally must disclose all debt that you own. It may not be reported to the credit bureaus but you still own it personally even if it is in the name of a SMLLC and anytime you apply for a loan it must be listed. I hope you dont think if its not on your credit report you dont have to disclose it. 

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  • Account Closed
    Laurel, MD · Member since 2015 · 101 posts · 30 votes
    11y

    I have 3 SFH 3 bed rentals in Baltimore City under a group policy, each one costs between 550 and 600 to insure so please tell me how you insure yours for 300. Is that what they insure for in Mississipi?

    0Reply
  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y

    To answer the question on insurance a few people have had, I use NREIG.  And yes, all my properties are insured for $300-$500/year depending on the size.  I guess that's just how it is in MS and TN.  I don't invest anywhere else so I haven't done in research in to what other areas insure for on a normal basis.

    0Reply
  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @A.J. Chesney:
    Originally posted by @Justin B.:
    Originally posted by @Jay Hinrichs:

    @Justin B.

      can you give the street name.. I am curious ... I would like to see what your risk tolerance is and how well you bought ... or I guess I could just ask is it So Jack  or north jack?

    North.  Right off 51.  Just west of 55.

     How did you find the deal if you don't mind me asking?  I've been watching like a hawk all over jackson and the surrounding areas for the past month or two and I'm seeing some ok deals here and there but no knockouts.  Did you buy in fondren or a little farther north?

    Off the banks REO list.

    0Reply
  • Martin Mace
    Real Estate Investor · Forest Park, GA · Member since 2015 · 7 posts · 1 vote
    11y

    Great job in working in an affordable area and sourcing your deal to minimize capital outlay in order to maximize cash on cash returns.

    0Reply
  • Elle Scott
    Real Estate Investor · San Diego, CA · Member since 2013 · 18 posts · 2 votes
    11y

    Nicely done and thank you for the post on this @Justin B. As someone starting out, it's extremely helpful to hear all about the success and methods you used. I don't really see it as bragging but helping :) Keep up the great work and congrats!

    0Reply
  • Bart H.
    Currently work as a Computer Security Officer · Savannah, GA · Member since 2015 · 14 posts · 5 votes
    11y

    I would love to know what bank accepts 5% down and no closing costs. Please share with us.  We would love to do business with them.

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    11y
    Originally posted by @Justin B.:

    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 :)

     It looks like a very good purchase, but going forward for your cap rate and cash flow, you'll need to put in at least a 10% vacancy rate and something for maintenance/turnover. Still, it looks like a very good deal. Well done!

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

    @Bart H.

      This was a local portfolio lender. one of Justins members of their company lives in Jackson, so they are local.. And with MS dual action foreclosure laws if you can get PG's from credit worthy buyers its mitigates the loss scenario.. if it were not for those factors a bank would not sell under those terms... And remember these are low value assets so not much is at risk.. if it tanked the bank would have judgements against the borrowers and collect from them.. they would look at the asset as just a piece of the collection effort.

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  • Mike Moles
    Investor · Bethel, CT · Member since 2014 · 55 posts · 12 votes
    11y

    Thanks for the post @Justin B., it sounds like you are doing well in REI! And thanks for the replies all, always more to learn about on BP.

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    11y

    I bought a 3/1 central HVAC brick ranch house in a decent neighborhood from a wholesaler that is active in my Real Estate Club for a total of $19,500 plus closing costs with cash from my Roth IRA. It needed no repairs. Tenant was already in place. I had just flipped a house a few months prior and had cash in my account to invest.

    It is a section 8 house getting $675/month that the government took over 100% of the rent shortly after my Roth purchased it. I should be able to get $775/mo after I raise the rent. I have another 3/1 section 8 house getting $775 so I know this is feasible.

    I have 4 houses in my Roth now and if I can find another motivated seller to sell another 3/1 house for 20K that needs little to no repairs then I can buy a new house for cash about every 12 months. In a few years I'll be able to buy another property every 6 months and so on.

    John Underwood

    Greenville, SC

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

      nice strategy  do you self manage ?

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  • Katie Rye
    Plano, TX · Member since 2015 · 30 posts · 6 votes
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    great find!! 

    0Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    11y

    I invest in Mississippi properties as well I can attest that these figures are about right. However, I have never paid as much as 37K for a 3 bdrm 1 ba house. The houses I pick up for 30-35K are 3 bdrm, 2 ba. I rent them for 800-850 a month. Generally I expect to put in about 5K into the houses I buy because I buy them vacant and I'm picky about how I want a house to look before I rent it. I figure if I rent a nice house to my tenants they are more likely to keep it nice. I might add I live in the same neighborhood as where I rent my property. I bought my own house for 30K. 

    If you want to buy a 30K pig, Mississippi is the place to do it! 

    1Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    11y
    Originally posted by @Jay Hinrichs:

    @John Underwood

      nice strategy  do you self manage ?

    Tenants or government (section 8) deposit rent directly into my Roth IRA, so not much to manage.

    As a general rule, the Internal Revenue Code provides that a fiduciary is prohibited from furnishing services to the plan or its assets. IRC § 4975(c)(1)(C). However, there is a statutory exemption for services necessary for the . . . operation of the plan . IRC § 4975(d)(2).

    If a fiduciary provides services to a plan without the receipt of compensation or other consideration . . . , the provision of such services does not, in and of itself constitute an act described in section 4975(c)(1)(E) or (F).

    John

    0Reply
  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
    11y
    Originally posted by @Susan Maneck:

    I invest in Mississippi properties as well I can attest that these figures are about right. However, I have never paid as much as 37K for a 3 bdrm 1 ba house. The houses I pick up for 30-35K are 3 bdrm, 2 ba. I rent them for 800-850 a month. Generally I expect to put in about 5K into the houses I buy because I buy them vacant and I'm picky about how I want a house to look before I rent it. I figure if I rent a nice house to my tenants they are more likely to keep it nice. I might add I live in the same neighborhood as where I rent my property. I bought my own house for 30K. 

    If you want to buy a 30K pig, Mississippi is the place to do it! 

    Couldn't have said it better myself :)

    0Reply
  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
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    @Justin B. congrats on the deal. 

    0Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    11y
    Originally posted by @Justin B.:

    To answer the question on insurance a few people have had, I use NREIG.  And yes, all my properties are insured for $300-$500/year depending on the size.  I guess that's just how it is in MS and TN.  I don't invest anywhere else so I haven't done in research in to what other areas insure for on a normal basis.

     okay, you are doing much better than me when it comes to insurance. All my houses are in MS and my insurance costs between 500-700 a year. I need to talk to your insurer. 

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    11y

    Since it appears that you are self-employed, have you ever considered opening a Roth Solo 401k and then investing in real estate? 

    0Reply
  • Stephen Lovett
    Investor · Royal Oak, MI · Member since 2015 · 63 posts · 20 votes
    11y

    Love those numbers!  What a great find.

    0Reply
  • Chavis Atkins
    Investor · Merrillville, IN · Member since 2014 · 76 posts · 12 votes
    11y

    Excellent find man, can't wait to do that myself one day!

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    11y
    Originally posted by @Susan Maneck:

    I invest in Mississippi properties as well I can attest that these figures are about right. However, I have never paid as much as 37K for a 3 bdrm 1 ba house. The houses I pick up for 30-35K are 3 bdrm, 2 ba. I rent them for 800-850 a month. Generally I expect to put in about 5K into the houses I buy because I buy them vacant and I'm picky about how I want a house to look before I rent it. I figure if I rent a nice house to my tenants they are more likely to keep it nice. I might add I live in the same neighborhood as where I rent my property. I bought my own house for 30K. 

    If you want to buy a 30K pig, Mississippi is the place to do it! 

    Susan, I love those numbers! And looking at the pics that you shared with me those are pretty decent homes. I think you said you were buying them in your Solo(k), right?

    0Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    11y

    I started using a solo401K through your firm after I bought my second rental property, primarily because I no longer had other funds to invest and I'm adverse  The house I sent you a picture of, which is where I currently live I bought with a i401K loan, which as you know doesn't have the same drawbacks as borrowing from a regular 401K, i.e. I can't lose my job had have to repay a big loan at the same time. I borrowed the entire 30K from my solo401K, amortized it over 15 years which gives me payments of slightly over $200 a month. Not bad for a 1700 square foot rehabbed house with ceramic tile flooring, new cabinets, etc. I rented out my old house for $875.  I bought a second house, about 1600 square feet which is owned inside my 401K. It came complete with a two-car garage. I paid 30K for it as well and it rents for $850. Mind you, houses in this neighborhood were selling for more than 100K before the housing crash. I just bought another house last month, again inside my i401K, for $16K. Paid about 4K to fix it up which included installing central heat, along with duct work, since it originally had a floor heater. I didn't put in AC since the house came with a number of window units. It is 1000 square feet, 2 bdrm 1 ba and rents for $700.  It is in a different neighborhood, however, and it would take another Hurricane Katrina to drive its value over 40K. It is a nice little pig, though. 

    All of my houses are on 1/4 acre lots. 

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