Wednesday, August 23, 2017

Rental Property (North Carolina #2): All details!


Home purchase #4

This is another property that I believe has great long-term potential.  This deal closed mid-year in 2017, and so it is clearly my latest real estate purchase, with only a few recent months under ownership. As a result, I don't have a ton of data at this point, but what I do have is very encouraging.  

That said, another interesting thing about this property is that this is my first real "real estate investment" as a rental property from day 1; the purchase.  You'll notice with my three other properties that those were homes that my family and I lived in first, for up to at least several years most times, in which we then decided to rent each of them out once the Army moved us to a new location.  With this particular home, however, I took a much different perspective knowing that I would never live in it personally.  Critical change in perspective.

In addition to that, my financing on this property was absolutely INCREDIBLE. What a blessing it was, and I will share more about that below.  The financing alone should make my total returns north of 20% per year.  20% per year! 

And like my other properties, in this page of PassiveIncomeDude, I would like to share as many details as possible of this investment. My goal is to be as transparent as possible and I hope it helps you on your real estate journey as well!  Here we go:


Home Facts
*Purchase Date: Mid 2017
*Purchase Price: ~$259,000
*Layout: ~2300sf, 3 bedrooms, 2.5 bathrooms, two stories
*Finance Details: 30yr fixed, 4.00%
*Amount Financed: ~$194,000, ~25% of purchase price

This property is a great home, in a good housing development and ok area, and I think overall it should generate very nice long-term returns. There is one major concern, however, one that was/is a very big potential problem...with the foundation - some cracking has occurred in the concrete slab.  We did our due diligence on this concern, but we still went ahead and bought the house. Yikes. Only time will tell on this, but the engineers say it is no longer a concern.  We will see.

Anyway, here is a picture of the kitchen to give more perspective on the property. I think it is a very nice home, but like my other properties, not over priced, outdated, or hard to rent.  These factors are key!



 As I hope you'll agree, a very nice, easily rentable floorplan, modern-looking, and clean, home.

Equity Details
*Loan Balance at Start of Rental Period: ~$194,000
*Estimated Home Value at Start of Rental Period: ~$259,000
*Implied Equity: See BELOW!

I wrote more about the way this transaction came about (here), but the quick gist of it is that my friend and I went into this deal as a 50/50 partnership.  The original terms were that he would fund 100% of the downpayment, I'd find the property, and we'd each get 50% of the profits. Awesome. Well, some things changed and I ended up agreeing to fund about 22% of the downpayment, with our original arrangement still being 50/50 profit sharing.  This all came about because I didn't need to cosign with him on another deal, so it sort of made sense for me to adjust this deal for him.  You can read about these details more in my other article mentioned above.

Anyway, though this arrangement is slightly worse than that of my original deal (putting in $0 of my own money and still getting 50% of everything), now, the new deal only requires me putting down around 22% of the original 25% of the downpayment, which really still is awesome.  I'm essentially levered close to 8.8 to 1 on my money, with less than $15,000 total of my own money in the deal.  I know I've said it before, but this is absolutely awesome terms.  Oh how I wish I actually had the $15K and didn't need to borrow it at 6% interest! (I'm quickly trying to pay that off, by the way). But stop and consider these few examples for why this is such great financing: 

1) If the home appreciates only 2%, I'll see a return of almost 18% thanks to leverage!  This doesn't even consider everything else: cash flow, tax benefits, or mortgage paydown.  Simply a little appreciation, and my return is huge.

2) I anticipate my total annual cash flow of around $2500, or $210/mo.  This equates to a cash-on-cash return alone of about 17%. 17%! For dividend stocks, in order to get $210/mo, I would need around $84,000, and with real estate I am getting the same payout with under $15,000.  Amazing! I don't like knocking on dividend stocks (which I love and are my alternative to real estate), but I just cannot get the same leverage with stocks.

Rental Performance
In this section I will detail my monthly cash flow each year, and will also provide a number I call 'Total Earnings,' which is essentially the sum of my monthly cash flow I received plus the sum of the 'mortgage debt' paydown. Here we go:

Current Monthly Cash Flow (my portion): $210.75/mo

So the total cash flow the property is generating is double that number.  If I ever decide to 'buy out' my buddy, I'd receive all of the cash flow/mo; around $420/mo. Awesome.

Current Monthly Mortgage Paydown (my portion): $141/mo

This is only my portion of the principle that is paid down each month by the tenant. I've "outsourced my debt" and each month it is counted as equity for me. Awesome. And the incredible fact of this as well is that this number will grow (on its own) EACH MONTH at a little more than a dollar per month. Yes it is true: as the loan is paid down and more and more of the payment goes towards principle each month instead of interest, the  amount I 'get' to count as equity just increases!

Therefore, with each category, Total Earnings: $350.75/mo

These are actual numbers we've received so far, and it doesn't include any tax benefits, or appreciation, which would typically make them larger.  We thankfully have had a tenant (the seller, believe it or not) in the home since day 1 of the purchase, so thankfully we haven't experienced any vacancy at all, and we're hoping the seller will stay in the home until next summer!  Again, it's not all roses: vacancies and repairs will lower these returns!

But in general, I feel so blessed to add this property to my portfolio.  I'm thinking it will really diversify my short-term liquidity risk, which I NEED! :)  I am asset "rich" and cash "poor"; trust me!

I believe that is it.  Looking forward to updating this page semi-annually or so.

What are your thoughts? I'd love to read your comments below!

Thanks for reading,

Passive Income Dude

4 comments:

  1. Sounds like a great investment, especially with the leverage you're describing.

    When we bought a new house, we decided not to sell (but to rent) our old house. I'm glad we did. Property values have increased nicely and even though we're asset rich and cash poor (like you!), in the long-term we're hoping to reap the benefits!

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    1. Thanks Ferdi, I appreciate it. And yea, the leverage really is what helps juice returns. I definitely am looking forward to seeing what happens with this purchase, but it may not all be rosy! :)

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  2. Awesome purchase PID. And it's your 4th house too!!! I definitely want to follow in your footsteps. I bought my first house last year, lived in it, and now, having moved out, finally got it rented. My tenant will be moving in the first week in September. After the first month worth of expenses, towards the property management company, I should be receiving about $250 in profits, which of course will go back to repairs, vacancy, etc.

    After this first house, I want to definitely buy a second (and 3rd, and 4th, etc). Now, I'm not at the point where I can just buy it straight as an investment property, like you just did, but will hopefully get there soon.

    You make an EXCELLENT point about the ability to use leverage to generate income as compared to a portfolio of dividend stocks. I love dividend stocks too and the DGI strategy. But, you're right. It will take an awfully lot more in stocks to generate the same income than you can leveraging into real estate. Of course, leverage is a double-edged sword.

    Good luck with this purchase. I love the diversity of income source, and it's a nice house too.

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    1. Thanks Div Portfolio! Yea I hope to just keep plodding along with dividend investing, saving, and slowly buying real estate. Should be ok long term, as long as I can survive in the short term! :) Still have much to high of leverage/short-term liquidity risk. But each month that seems to be getting slightly better. One of my leases is about to end, so if that property sits empty for awhile we'll be hurting! :) But if they renew, I'm golden. We'll see,

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