Foreclosures

[Account Closed]

What are your thoughts on foreclosures? In the Kansas City area there seem to be some great deals out there on primarily single family homes. While multi-family rentals are what I am most interested in, the initial equity in some of these homes seems irresistable. While research still needs to be done and physically viewing the properties, I have compiled a list of homes where appraisals, comps, and past sale prices far exceed the asking price. What are your thoughts?

[Simon Campbell]

I believe that you would be in a better position to leverage (keep bank loans) on the investment properties. This keeps cash in your pocket rather than wrapped up in a property's equity. In this way, you will greatly increase your cash on cash return. Let me show you how it works. We will assume that you have $100,000 to invest. (I know your 18 and most likely don't have that - but bear with me here.)

You have a property worth $100,000 which you paid cash for it and it rents for $1,000 per month. We will set aside 50% for vacancy and all expenses. This gives you a net profit of $6,000 a year or 6% cash on cash ($6,000 / $100,000).

Now, take that property and refinance it at 20% equity. You now have a $100K property which you paid $20k (not including loan fees which for the sake of simplicity we will leave out). Let us create a 30 year mortgage at 3.6%. Your monthly payment is $363.72. Your cash in pocket at the end of the year is $1,635. You now have a cash on cash return of 8.2% ($1,635 / $20,000).

Take the $80,000 you pulled out of Property #1 and invest it in 4 more $100,000 homes under the same cash flow scenario. Now you own 5 properties with the same $100,000 investment. Your annual cash before tax now totals $8,175 ($1,635 x 5 properties) and you are getting a 8.2% cash on cash AND now have 5 properties appreciating.

You have to love leverage!