Just talked to a new real estate investor who, because he’s petrified of doing a bad deal, can’t muster up the courage to meet with sellers. Why not? What if a seller accepts his offer? Lions and tigers and bears, oh my!
Don’t laugh. Most real estate investors feel like this in the beginning. We sure did.
To help ease this investor’s fears, I told him about a “terrible” deal we did in 2005.
We bought a little three-bedroom, two-bath, all-brick ranch in 2005 at the Bartow County, Georgia foreclosure auction. Purchase price was about $30,000. The ARV (after-repaired value) of the property was $80,000. We had conservatively estimated that it needed a $20,000 rehab – but didn’t see the interior to confirm this before the auction.
When the old owners moved out, we got our first look at the inside. Ooof!!! It was terrible! Turned out the house needed a $40,000 rehab – twice our conservative estimate! It quickly went from a good deal to a real stinker!
Well, because we were knee deep in it, there was nothing to do but to plow forward. We completed the $40,000 rehab in about 35 days.
Once the rehab was done, we got a $70,000, 30-year, fixed-rate mortgage. Payments (including taxes and insurance) are $570/month.
Today, the property rents for $810/month. In the past five years, we’ve had two families rent the house. The first was there for three years. When they moved out, the house needed no repairs, just some normal cleaning. The current tenants have been there for more than two years.
Let’s take a good look at this awful deal…was it really so terrible?
We thought we would be into this house for $50,000. As it turned out, we were into it for $70,000. At the time of purchase, and after repairs, the property was worth $80,000. Today, it’s only worth $65,000. That’s right, we’re upside down in this deal by $5,000!
On the other hand, we’re paying out $570/month, but collecting $810/month. This is a $240/month POSITIVE cash flow before expenses (taxes, insurance, repairs, vacancies, management). And remember who is actually paying this property off – the tenant!
It gets better. The government lets us depreciate the property by $2,545 each year for the next 27.5 years. In other words, our taxable income drops by $2,545 each year due to this write-off. This helps us to pay LESS taxes and keep MORE of our money! We also are allowed to write-off the mortgage interest along with any repairs and/or improvements. Ka-ching!
Let’s shift into high gear. In 2005, our payments were $570/month, same as now. But – and this is a HUGE question – do the 570 one-dollar bills we was sending to the lender in 2005 have the same buying power as the 570 one-dollar bills we’re sending to them today? Hasn’t the purchasing power of the dollar fallen about 30% in the past five years? In other words, I’m repaying the lender with cheaper dollars than I borrowed!
So when you look at this “terrible” deal, is it really so terrible?
Do you seek real-world real estate investing information? Go to BillandKimCook.com. It’s packed with free creative deal structuring techniques and strategies. Bill and Kim Cook have been investing in real estate since 1995. Their portfolio consists of single-family rentals, a small mobile home park, plus notes and options. If you have questions, give Bill a call at 770-815-8727.
