In this real estate case study you’ll learn how we invested in real estate without using of our own cash!
We received a lot of positive feedback from the last case study so we thought we would go back into our archives and highlight another one of our deals. Again, the intent is to open your eyes to some of the many options there are for investing in real estate.
As long-time readers know, we like to make the most amount of money for the least amount of cash outlay. Based on our criteria, is was a “deal.”
We believe in purchasing houses with cash and limiting the need and exposure to mortgages. The total investment for this house was less than $45,000.
The house before we got started…
The background story
We were eager to practice the process of real estate investing. Completing this deal was about confirming the investing strategy and system of identifying deals rather than to make a huge profit.
The original plan was to purchase the house with cash and hold as a rental property. Due to a collapse in financing prior to closing, we had to implement creative methods to get this deal done. Fortunately, Forest Street met our stringent minimum criteria for investment property so there was wonderful profit potential that we were able to leverage to accomplish a successful transaction.
How we found it
As a reminder, we developed a criteria for property that met our investing standards. Some of the main factors included:
- Ability to own the home free and clear, with no mortgage
- The property needed renovation and rehab
- Ability to do a lot of the work ourselves
- Property had to be a 3 bedroom 1 bath at minimum
- Property had to be a HUD foreclosure and had to have the ability to deal with a bank (based on the market conditions in 2010)
We considered other factors as well, including the quality of neighborhood and even the street that the house was located on!
The MLS made it simple to identify properties that fit our investing criteria. Again, it was 2010, a romantic time for real estate investing.
From there, we focused on looking at the home’s asking price and the potential after repaired value. LLP readers know that we are value investors at heart!
That means that we wanted a house that was intrinsically worth more than it was priced.
This happens when buyer circumstances and/or market timing allows it to be purchased for less than a new home may be built – otherwise known as its true value.
Selling out, moving on…sort of
Because we did not have the cash upfront to cover the cost of the deal, we wholesale the property to another investor. We entered into a purchase agreement for the property from the initial owner AND another agreement to sell it to an investor before the closing date. This allowed our investor-partner to purchase the home and we take a small profit for finding the house.
To make thing even more interesting, the investor-partner made a separate agreement with us to complete the development, renovation and initial leasing in return for an additional fee for that service.
The structure of the deal is cool, but keep in mind, performing these services are not nearly as wonderful as the benefits of ownership. However, the goal was to complete real estate transactions. We would gain experience, the investor-partner would gain a turn-key rental property.
Sometimes the deal isn’t always about the direct ownership or money, but more so the process and growth.
We received $4,000 for the house as an initial profit from the acquisition. [step one, wholesale!].
You’ll see mentioned in the auditor record for the property below, we were able to purchase the property at its lowest transfer value. [you make your money when you buy real estate]
Why this house
As we mentioned in the Waverly case study, we were interested in 2 houses and ended up buying both. Now you get to read about the second house!
Real Estate Case Study
Address: 1761 Forest Street, Columbus, Ohio
Original Purchase Price: $11,100.00 CASH
Google Map Location
What renovations did the property need?
Fortunately for us, the house was in great shape, just as the Waverly house was. It was a two-story with 3 bedrooms and a bathroom upstairs. The living room, dinning room and kitchen were on the first floor. Forest Street also had a basement and a detached 1 car garage with a fenced in back yard. Score!
We knew this would be a great rental house that we could buy and hold for monthly cash flow so we made the decision up front to completely renovate the property. Of course we could have done less and kept some of the old features, however we wanted to minimize future maintenance and repairs when the tenant would occupy the home.
We focused purely on improvements that would add value to the property. Our goal was to increase the property value so we could recoup the increased equity after repair.
What was the original fix up cost?
Our cash renovation investments into the property totaled $10,000. Labor cost another $10,000.
We were paid as a portion of the labor. We sub-contracted out the speciality trades and did the remaining work to keep profit for ourselves.
Grand total investment of $31,100 including the purchase price.
We had to pull permits to replace the water heater.
Did you do the work yourself or did you hire it out?
To save money, some of the work was Do-It-Yourself, including:
- Trash removal and clean out
- Carpet removal throughout the house
- Gutting the kitchen and bathroom
- Painting the house
- Refinishing hardwood floors
Renting the house
Once the home was renovated, the leasing process was smooth and simple!
New siding and a brand new interior provided an updated housing product in the neighborhood. By simply placing a sign in the yard, there was high call volume and demand.
We chose not to hire a property management company and decided to handle all leasing and tenant relations ourselves. This was our 4th rental house so we felt fairly comfortable handling those back-end relations. We decided to lease the property using the section 8 housing voucher program.
The total investment in the property was $31,100.
Rental Income: $662.00 per month x 12 = $7,944 gross annually
Here’s why this was a win-win for all parties.
We made $4,000 on the wholesale and approximately $4000 for a total of $8,000 – not bad for 1 month’s work!
For the investor-partner:
Gross Rent Multiplier is a formula used to determine how long (in years) it would take to recuperate the initial purchase price from gross rents. Obviously there are expenses and unforeseen hiccups that can prevent a property owner from recovering all their money in that timeframe but it does offer a check for how long it will take to get your money back. We prefer GRMs of 4 years or less.
Here’s the breakdown:
Purchase Price: $31,100
Annual Gross Rent: $7,944
Gross Rent Multiplier (Purchase Price divided by Annual Gross Rent): 3.915 years
Success! This deal meets the less than 4 year rule of thumb.
Cash-on-Cash- Return is a formula used to determine the annual rate of return an investor will receive on the money they outlay for an investment. Cash-on-Cash is maximized when purchasing property with a mortgage because the cash outlay is much smaller than the purchase price. We prefer CCR of at least 20%.
Here’s the breakdown:
Annual Cash Flow (Net Income Before Taxes/Depreciation): $7,944
Cash Required to Purchase Property = $31,100
Cash on Cash Return (Annual Cash Flow divided by Cash Outlay * 100%): 25.54%
Tell us what bank is going to give you a 25% APR?!?!?!
Neighborhood view of Forest Street
Forest Street ends in the Driving Park neighborhood in Columbus, OH
What to take away from this real estate case study
This is a unique deal with a lot of moving parts! Fear not, in the coming weeks we will show you how you can do this too! Let us know what you think in the comments below, we’ll be happy to answer any questions!