Evaluating Investment Properties and Strategy
| The original condition of the house had holes in the walls, the kitchen island missing and peeling paint in the bathrooms due to excess condensation |
|---|
This is an example of an actual deal that I bought in early 2009. The picture opposite shows the original condition before the rehab work was
done. This house is based in Indianapolis, Indiana and was a bank owned property.
| Property Details |
|---|
| 3 Bedroom, 2.5 bathroom, single family house. Built 2005 |
| Price Paid | $80,000 |
| Actual Rehab Cost | $14,436.86 |
| Closing Costs | $767.94 |
| Property Inspection | $455.00 |
| Total Cost to Buy | $95,659.80 |
|
| Property Size | 2000 sq ft |
| Cost per Square Foot | $47.83 (Typical construction cost is $120-$200!) |
|
| Actual Gross Rent | $13,800 per year ($1,150 per month) |
| Vacancy Rate at 8% | $1,104 per year |
| Property Taxes at 1.5% | $1,200 per year |
| Insurance | $787 per year |
| Property Management at 7% | $966 per year |
| Estimated Maintenance at 8% | $1,104 per year (much lower so far) |
| Net Operating Income (NOI) | $8,639 per year ($719.92 per month) |
| Cap Rate | 9.03% |
The insured replacement cost for this property is $166,000! Which is still only $83 per square foot.
Capitalisation Rate
Many people assess investment properties by just looking at the rent-to-value. But depending on the age and type of property, the expenses
will vary wildly between houses. The Cap Rate is a much better indication and gives you the projected return on your money, if you were to
pay in 100% cash. It doesn't take into account if the property is financed, which would increase your returns even more and it doesn't take
into account any increase in the property's value. So worst case, if you don't use finance, have no increase in value and the rents don't rise
you will still be getting a minimum 9.03% return on your money each year.
Refinancing Strategy
No lets assume the market recovers a bit and the property is now worth the insured value of $166,000 and you refinance the property at 60%
loan-to-value (LTV):
| After rehab pictures. Only 3 weeks it was ready to rent and looking like new |
|---|
| Property Returns With Refinance |
|---|
| Market Value | $166,000 |
| 60% Loan at 7.5% | $99,600 |
| Original Total Cost To Buy | $95,659.80 |
| Immediate Profit | $3,940.20 |
|
| Net Operating Income (NOI) | $8,363 per year ($696.92 per month) |
| Loan Payments | $7,470 per year ($622.50 per month) |
| Before Tax Cash Flow (BTCF) | $893 per year ($74.42 per month) |
So now by refinancing you've got all your invested money back, plus an extra $3,940, you still have $66,400 equity in the property and it
has a positive cash flow each month!
If you'd like to profit from a deal like this one, please fill out my registration form, to receive the latest deals from my brokers in the USA.
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Please Note - The information contained in this section is only my opinion and should not be regarded as legal or tax advice