The Smartass Single Family Investing Strategy
By: The Smartass
In dealing with single family homes and my desire to create
passive income, I had to deduce where I could get the most bang for my buck. I
had to ask myself questions like, “Where is my honey hole? What am I really
looking for?”
I evaluated property based on price point, cash out of
pocket, rehab time and (of course) return on investment. After looking at
thousands of homes online and crunching numbers in my market, I found homes
ranging from $40,000 to $80,000 were where I was going to find the best deals.
Then again, there comes a point in time when you are refurbishing
and renting homes where you run into the dreaded case of diminishing returns.
Simple math led me to this assertion….allow me to explain.
Case study on a home that cost me $70,000:
A mortgage payment on a home in that price point would be
approximately $600.
Rental income should be around $1,000 - $1,100 a month.
My cash out of pocket for closing costs should be
approximately $6,000.
With a rental income of $12,000 to $13,200 annually,
payments equaling $7,200 a year and cash out of pocket at $6,000, this is how
it looks mathematically for my return:
$12,000
-
$7,200
-
$6,000
-$1,200
Essentially, I would be taking a loss in this scenario.
However, if I sold that same house with a $30,000 equity
capture after one year and one day, I gain approximately $25,000 – post closing
costs.
My total investment would be $13,200 for a $25,000 gain: a
return on investment of 189%.
Not too shabby, huh?
Of course, that’s assuming that we don’t have damages, to
replace an HVAC unit….or a roof for the grand total of $13,900 in a year of
owning that same property, taking my returns down from $25,000 to $11,100.
Which sort of sucks.
Anyone who tells you that there is no risk in investing is
blowing smoke up your you-know-what.
Now, let’s look at another example:
A home costing $90,000 worth $140,000 if rehabilitated ($50,000
equity capture):
Note: $1,300/month
HOA fees: $400/year
Rehab cost: $10,000
Out of pocket cost: $5,400
The BEST I could hope for rent on this house is $1,500 a
month. Here’s how the numbers break down on this one:
$140,000
-
$1,300 x 12 = $15,600
-
$90,000
-
$400
-
$5,400
-
$10,000
Return: $18,600
But wait. That’s nowhere NEAR $50,000, IS IT?
At least with the less expensive property, we got a better
return, even when taking repairs into consideration.
And, of course, this is assuming that we don’t have anything
catastrophic happen, which happens, which would take us down, probably a few
more thousand dollars.
Granted, $18,600 is nothing to sneeze at, and it’s not a bad
deal, but it’s important to consider all of the numbers before jumping into any
investment with both feet.
Essentially why my “honey hole” is the less extensive
properties that offer me higher equity capture out of pocket, even with unforeseen
repairs.
Of course, we know every market is different, but in San
Antonio, right now, that’s where we sit as far as a smart ass strategy that works.
What’s yours?
Love,
The Smartass
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