Rental Property #3 Numbers Analysis
As I told you guys in the last post, I’m going to give you the actual break down of my current and future rental property purchases.
For property 1 and 2, I give you the month by month break down of income and expenses.
For this go around you get all the numbers starting at purchase price.
Why Am I Doing This?
I have two reasons for doing this. The first reason is that I want to be 100% upfront with you. Many people have aspirations of being landlords and they usually don’t take the time to run the numbers. I’m not here to sell you a dream. I want you to know exactly what you’re getting into when you decide to get into the residential real estate game.
My second reason is that, it forces me to analyze and review my properties numbers on a monthly sometimes weekly basis. Running the numbers constantly to ensure you’re on track is paramount to success. Heck, when I starting writing my income report for April. I decided that it was time to evict the tenants in rental #1 and #2.
Rental Property 3 Repair Breakdown
Prior to putting in an offer, I already knew what the repairs would be and the time frame for completing them. Here is what my property manager / repair guy sent me.
Description of work:
1.Remove old linoleum from bathroom floor, and re-install new Linoleum tiles. (265.00)
2. Install a used neo-angled vanity and sink. (250.00)
3. Replace 4 interior doors that are cracked/no longer close (375.00)
4. Paint entire interior of house with 2 coats of latex paint. ( 2,650.00)
5. Remove trees growing into foundation. (180.00)
6. Cut back large branches that are extending onto the house. ( 375.00)
7. Install new side-slider window in kitchen. (425.00)
8. Paint front porch. (350.00)
9. Install new locks/dead bolt sets and master-key them. (55.00)
10. Have all Carpets cleaned: 525.00
11. Repair damaged furnace and re-run missing duct work caused by break-in prior to closing: 980.00
12. Sewer line replacement/lot-line clean out as per prior estimation from plumber last year: 1,600.00-2,000.00 depending on the amount of line that needs replacement.
Total for materials and labor: $ 8,430.00
Time frame for completion of work: 7-10 days.
*Upon speaking to the property manager, we’ve decided that 8k would be enough to get the repairs done*
Related Article: We are buying another rental property #3
The next step is obvious, we make the necessary repairs. Then we rent it out. We should have a tenant within the property 2 weeks after repairs are completed.
The tenant will be a section 8 tenant, because we like guaranteed rent, but I hope the tenant gets 100% support instead of anything else. Tenants in this area are horrible at paying rent. I expect between 900-1100 in rent for this property.
After we have a tenant in the property and the county has time to send me the deed. I will pull 60% equity out of the property to finance the next deal. I will write another post explaining this process.
OK, let’s discuss best case and worst case scenario for cap rates. Oh, you don’t know what cap rate is? Here is a nice definition.
Capitalization Rate is the Net Operating Income divided by the Market Value, or rather the Capitalization Rate helps in determining the current market value of a real estate property on the basis of Net Operating Income.
Worst Case Scenario Cap Rate…
So, in my worst case scenario, one where my tenants don’t pay their portion of rent and I have to solely rely on section 8, the cap rate will be..
Gross Rent = $700(monthly) or $8,400 (annually)
Property Management Fee = $70(month) or $840 (annually)
Other Expenses = $211 (monthly) or $2,532 (annually)
NOI = $Gross Rent-All Fees = $5,028
Cap Rate = NOI / Purchase Price = $5,028 / $29,000 = 17.33%
But we are not done! See the cap rate is only acceptable to use if you do not have debt to service. I just told you I plan on pulling the money out. So, when I do I will have another annual expense of $1,656. Let’s take that will bring my NOI to $3,372.
Once I pull the equity the new cap rate will be $3,372/$29,000 = 11.62%
As you can see, that even in a worst cast scenario we will make a serious return on our investment.
Related Article: Shit My Tenants Say
The I wish Cap Rate….
If my tenants pay their portion and section 8 pays their share the cap rate will be….
Gross Rent = $950(monthly) or $11,400 (annually)
Property Management Fee = $95(month) or $1,140 (annually)
Other Expenses = $211 (monthly) or $2,532 (annually)
NOI = $Gross Rent-All Fees = $7,728
Cap Rate = NOI / Purchase Price = $7,728 / $29,000 = 26.64%
Just like above, let’s calculate the true return once I pull equity. New NOI = $6,072
Cap Rate when including debt service = 20.93%
You may be wondering how we make money if the tenant doesn’t pay. Well, our properties house government assistance tenants. Each tenant typically has a portion of their rent paid by the local government.
With those kind of returns who needs the stock market!
You may be thinning.. “Why pull the equity, your returns are so high!” Well, the answer is simple. With the equity I can buy another house. This will increase my portfolio returns tremendously!
So what’s keeping you out of the real estate game? Would you invest less in the stock market and focus on real estate if you could duplicate my returns? Hmm… Should I stop investing in my ROTH IRA (Conversion) and focus exclusively on real estate? If you want more information about my deal check out my one on one real estate sessions by clicking this link