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
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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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  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
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    Originally posted by @Susan Maneck:

    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  

    I meant to say I'm adverse to high interest rates. The highest interest I currently pay on anything is the 4.5% I pay on the mortgage of what used to be my primary residence. 

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

    thanks for sharing, what a great way to put your Solo 401k to work!

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  • Gautam Venkatesan
    Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
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    @Susan Maneck how can you live in a house that was purchased with your Solo 401K funds? Isn't that considered self dealing??

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  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
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    Originally posted by @Gautam Venkatesan:

    @Susan Maneck how can you live in a house that was purchased with your Solo 401K funds? Isn't that considered self dealing??

     The house was purchased with a loan from my i401K. Unlike my rental property it is not within the i401K. You are allowed to borrow up to 50% of your 401K to a maximum of 50K. Regular loans must be repaid in 5 years, but if the money is used to buy your primary residence the loan can be amortized over 15 years. Normally the money would probably be used as  down-payment but in my case, I could buy the whole house.  

    2Reply
  • Gautam Venkatesan
    Investor · Dallas, TX · Member since 2013 · 619 posts · 128 votes
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    Got it thanks!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Susan Maneck

      was not aware you can use 401k money to buy a personal resi.. ? how does that work?

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
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    You can take a participant loan from your solo 401k, which is not allowed with an IRA. See following IRS link regarding the solo 401k participant loan rules.

    http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

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

      good to know learn something new everyday on BP

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  • Cynthia Scaife
    Real Estate Agent · Fort Worth, TX · Member since 2015 · 92 posts · 10 votes
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    That's really awesome, why no closing cost?

    Cogratulations

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

    That's really awesome, why no closing cost?

    Cogratulations

    There are closing costs, just not a lot.  Around $500 and that *IS* factored into my numbers.

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  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
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    Originally posted by @Mark Nolan:

    You can take a participant loan from your solo 401k, which is not allowed with an IRA. See following IRS link regarding the solo 401k participant loan rules.

    http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Loans

    Exactly. Taking loans from a 401K is usually not a smart idea because if you lose your job you also have to pay off the debt immediately. But who fires themselves? I have a regular salaried job but I do a little consulting on the side, maybe only 5K worth a year. However, that entitled me to a i401K and once I established it, I rolled my IRAs into it. That is how I was able to loan myself the money (with interest, of course.) Normally a 401K has to be repaid within 5 years, but if it is for the purchase of a house you can amortize over 15 years. I'm finding my solo401K is much less of a headache than my mother's self-directed IRA (which I talked to her into buying so she could invest in real estate as well.)

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

    That's really awesome, why no closing cost?

    Cogratulations

    There are closing costs, just not a lot.  Around $500 and that *IS* factored into my numbers.

     I find by the time the seller pays their share of that years taxes, it pretty much covers the closing costs, at least if you are paying cash, like I do. 

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  • Chonda M.
    Washington, DC · Member since 2015 · 7 posts · 0 votes
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    Wow! That's outstanding! Congrats!

    0Reply
  • Cynthia Scaife
    Real Estate Agent · Fort Worth, TX · Member since 2015 · 92 posts · 10 votes
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    oh, ok that's still an awesome deal. 

    Thanks for responding. 

    0Reply
  • Justin B.
    OP
    Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
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    After the property has been purchased here is what the actual numbers turned out to be. Some are better, others are not, but basically still around the same. But now that I have actuals for everything, I can give the exact numbers. Again, I am not using a vacancy rate or a misc expense fee. I'm sure eventually there will be vacancy and misc expenses, so anyone reading this can adjust what you see based on whatever vacancy rate or misc expenses you like to use:

    Cash on Cash Return: 179.17%
    Debt Coverage Ratio: 2.142
    Vacancy Breakeven: 37.94%
    Operating Expense Ratio: 28.85%
    BreakEven Ratio: 62.06%

    Capitalization Rate: 16.80%
    Gross Rent Multiplier: 4.235
    Net Income Multiplier: 5.952
    LTV Ratio: 95.00%
    Monthly Rent to Value %: 1.97%

    Cash Flow: $284.56/month
    5-year IRR (using 2% appreciation): 184%
    10-year IRR (using 2% appreciation): 184%
    Present Value: $10,148
    Net Present Value: $8,242
    Profitability Index: 5.32

    FYI, I'm trying to get this updated on the original post so that you can compare original projections vs actual easily on the same screen.  I keep getting an error when updating though.  If you see this post as an update to the original one, you'll know I was successful :)

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  • Matthew Jones
    Moreno Valley, CA · Member since 2015 · 14 posts · 7 votes
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    @Justin B. great job!

    Cheers.

    0Reply
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