Example Deals: A Low Priced Rental In North Carolina
Here is a property that was sent to me by one of my investor subscribers. I’m going to show you why a deal like this does or doesn’t make sense and help you understand how you can make the original offer so that it ALWAYS makes sense.
Make offers with the exit strategy in mind.
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Read Transcript for “Example Deals – A Low Priced Rental In North Carolina”
Here’s an example deal where I will explain how to get up to 35% average return on your investment when buying and filling rental properties.
Joe: We’ve been analyzing deals, trying to figure out what makes sense, how to determine whether or not a deal is going to be profitable either for you to keep long term or for you to do a quick flip and make some cash flow, and what the person you’re going to sell it to is going to do with it and whether it’s going to make sense to them.
Joe: We’ve covered a whole bunch of things in the past eight or nine videos about this process. In the next ten videos, I’m going to cover specific deals. Each video is going to be a specific deal and I’m going to read emails that I’ve received from you guys and talk about the deal. A lot of the emails that I’ve received have incomplete information, so I’m going to say, ‘Here’s some information that you don’t have that you need to analyze these deals. And here are the different ways that it might play out if it works.’
Joe: Keep in mind that a lot of these deals that you’ve sent me don’t make sense; they’re not going to be profitable. But they sound profitable on the surface. So I’m going to read these deals, I’m going to talk about what makes sense and what doesn’t, and how you might be able to turn them into money even if they don’t make sense on the surface.
Joe: Let’s get started. Some of these folks have asked me not to use their name and some folks have just given me a first name and where they’re from, so I’m going to read it as I go.
“I’ve acquired a foreclosure for $13,700 that needs $10,000 in order to be habitable. It’s in High Point, North Carolina, about 2 blocks from a major shopping center (and convenience is about everything). It’s about 60 years old, 2 bedrooms, 1 bath, new kitchen, cabinets, new floor, new water heater, baseboard, etc.” – John, High Point, North Carolina
Joe: Stop right there. First of all, none of that stuff matters at the beginning. You don’t need to know anything except the numbers at the beginning. If you know the numbers and the numbers make sense, then that stuff sometimes becomes valuable to know. Sometimes you don’t need to know it and it doesn’t matter. So, let’s just stick with the numbers on this.
Joe: Let me finish. It talks about the size of the house, the bath, the house being rehabbed and being painted inside and out. The rehab’s going to take a month, and he goes on and on about things that really aren’t the important part of it. Now, I can understand that everybody would feel that these are important due diligence issues and I appreciate you sending them to me – I’m not trying to beat you up for this, John, so don’t take this personally. What I’m saying is first, look at the numbers.
“The after repair value and the broker’s price opinion are about $45,000 and properties in this area only command rents for $450 a month, which is why I’m not springing for the additional $2,500 to add air conditioning to the house. I would like any help that I can get in selling this property.”
Joe: Again, let’s look at the numbers on this deal. I had to go get my handy dandy HP business calculator I’ve had for 25 years. You can see its even coming apart at the seams here but it still works wonders and I still love it. I’ve bought two of them since then and I keep losing them, but this one sticks with me and I don’t know why.
Joe: So, let’s say he has $13,700 he can buy the property for plus $10,000 in repairs. That means he’s going to buy these properties for $23,700. He thinks that he can get $400 to $450 a month for the property. He didn’t give me the tax income on the properties or the tax bill on the properties. We don’t know how much that’s going to be, but let’s say that its $100 a month. That’d probably be pretty average for a property like this.
Joe: And, let’s say that the taxes or the insurance are going to be around $35 a month. That’s $450 a month times 12, so let’s subtract that from that $1,200 for taxes for a year, and then lets subtract $400 a year in insurance from that – that gives us $3,800. Let’s subtract another $540, which is 10% of $450, for the property management. That leaves us with $3,260 of net income on a property like this, assuming that you paid cash for that property. Now, if you take that $3,260 and divide it by your total investment which we’ll say is $23,700 – your return on investment is 13.76% – it’s okay, but it’s not great.
Joe: You might be able to make more money by reducing the amount that it costs you to repair the property. You might be able to get a little bit more rent. Maybe you can rent it to a Section 8 tenant. Section 8 typically pays a little bit more than market rent, although some of those things have been changing.
Joe: We’ve been getting letters from HUD on properties that we have Section 8 on, reducing the amount that they’re paying for properties, which means it’s not hitting us personally; it’s hitting our tenants, which is going to make it harder to find tenants for properties to get a higher amounts, so we’re losing $50 to $100 a month in potential rental income on those properties.
Joe: If you’re getting 13% return, is that enough to go to an investor and say, ‘Would you like to buy this thing for $23,700?’ They might go for it to get that 13% return; that might be enough for an investor. But you have to make a profit on it as well.
Joe: So if you’re going to make a profit on it and let’s say you want to put $10,000 onto that and that will bring it up to $33,000 and you still have that $3,260 on it – that means that now the investor is at 10%, so you made a $10,000 profit but the investor is now at 10% return. That’s going to be a lot harder to sell than a 15% or an 18% return.
Joe: I’ve been selling these to investors on my list. I have a big list and I don’t get investors flooding in to buy these properties from me but when I put them on the market, I typically will sell them with just one or two emails; I sell them pretty quickly if I market them at 15-17% because there’s no place that people can get investments like this that are this good of a deal.
Joe: I usually sell them to people that have known me or that have bought my programs or been on my list for a long time who have some level of trust for me and feel comfortable with me. That’s what you’re going to have to develop if you’re going to be selling to other people – they don’t have to be in your town, they don’t have to be your family, they don’t have to be through your social network – they just need to know who you are.
Joe: By building a list of investors like I have, it’s made it very easy for me to do it. And by teaching these things, it helps folks feel that I’m more trustworthy simply because they see my face and they feel like, ‘That guy looks like a regular guy. It doesn’t look like he’s going to rip me off.’ And then nobody (well, not too many people) say bad things about me because I’ve tried to deal ethically and honorably throughout this whole process.
Joe: By doing this and acting this way in business, it makes it possible to do long term investing, sell these properties long term and build an investment group where people will buy multiple properties from you.
Joe: So, is this a good deal to buy? I would not buy it. I’d want a higher return. We’re buying properties that are similar to this. We’re paying a little bit more than that, but our return and our rents are $800 – $850. And when you can get $800 for the same property in a different town, then that’s where you should be looking. So, start looking at other towns where you can do this that demands higher rents. If you stay in an area that has lower rents, you’re going to have a harder time making it make sense for investors.
Joe: Now with that said, let’s look at the amount that he’s buying it under market value. If he buys it for $23,700, and again, that’s $13,700 plus the $10,000 for repairs so I’m assuming it’s going to be in pretty darned good condition by the time he turns around and sells it. He puts it on the MLS, and he thinks that the after repair value is $45,000.
Joe: The first thing you have to question is – is that value real? If you’re not buying and selling a lot of properties or you’re not talking to somebody who is, then you’re probably not going to be accurate on your values. Right now, comps are the most inaccurate I’ve ever seen them.
Joe: So, to think that you’re going to get $45,000 – that might be very realistic; it might be true. A broker may tell you that this value really is here, and if that’s the case and you bought it for $23,700 and sold it for $45,000, then you figure there’s going to be about 10% in cost, then you have about $40,000 that you actually get out of the property, so that’s a pretty good return. $16,000 – 17,000$ of profit – that’s a pretty good return if you get it sold.
Joe: But how long do you have to hold it before you get it sold? And if it doesn’t sell, the only way to sell a property when you’re on the MLS and you’re not selling, is to either fix it up so that it brings the value up and you’re competing with other properties, or lower the price.
Joe: The MLS is a good selling tactic and it will work if you’re priced properly for the market. But people look on average at 18 to 23 houses before they buy one and if yours isn’t the best one in the bunch, then they buy another one and all you did is help serve your competitor.
Joe: You have to be able to compete with properties that are priced equal to yours. If your property isn’t as good as the other properties priced to yours, then they’re going to buy something else. So, that means you lower your price if it doesn’t sell.
Joe: There are all sorts of statistics I could give you. I teach this to my mentor students and on the Push Button Method – about how to tell if a property is priced right or not.
Joe: There is a way to do it and a way to analyze that process, and to not take a guess for an answer. You could price a property and test the way you sell it and trust me, you’ll get top dollar for it because it’s all about time and money. The higher the price, the longer it’s going to take you to sell it.
Joe: You could probably sell any property at any price if you wait long enough. It’s just a matter of if you can wait. Does it take a month, six months, a year, ten years, etc. for the values to come to where you can sell it at that price? Eventually it’s either time or its money. If you want to sell it quickly or within the normal span of time, then you’ll need to lower the price.
Joe: So, you could be holding onto this property with a $23,000 investment with no money coming in for months and months and months, maybe even six to twelve months, dropping the price all along to where you get it down. And, if you did the work to the house yourself, you end up making two dollars an hour for all of the work you put into it, and then it’s not worth it any more.
Joe: So, you want to make sure that if you do this, not to use an exit strategy of buying it and fixing it up right now. I don’t think it makes sense. If you’re trying to sell it for cash, all it’s going to do is that you’re going to have to go to lenders and your buyers and then they have to go to lenders, and if your buyer has to go to a lender, it’s going to be hard for them to get a loan right now. So, I wouldn’t put myself in that position right now because it’s going to eat up all of your capital.
Joe: On the other hand, if you can buy this property and just get your 13% return, I think that’s too low. I think you should be making closer to 15-20%. I average about 30%-35% return on the properties that I’m buying because of the way I’m buying them and by putting rental tenants in there, and that doesn’t count all of the equity that I bought into.
Joe: I’m turning around and selling those properties to folks to where they’re making between 15% and 18% return on their investments, plus getting a chunk of equity, so it makes sense to them if I sell it. And whenever I need cash flow or capital or I want to buy more of these, then I’ll sell a few of them off and will buy a few more to replace them, so I’ll have cash flow on top of that – and you can do the same thing. I hope that helps with this deal.