A Humble Beginning in Real Estate Investment = a Modest Townhouse in Hammond, IN

[Roman A Elizarov]

“Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
Robert Kiyosaki

For me, the path to financial security wasn't paved with stocks and bonds but rather with bricks and mortar, as I embarked on a journey into real estate investment. Working 3,000 hours a year for 4 years in a row, I realized that only investments can save me from poverty at the end of my days. But I did not want to invest in the stock market (I just know nothing about this market). So I collected information about the real estate market in the USA and looked for houses to buy with the help of loans and rent them out. One rule helped here (I simplify a lot): you should always count how much money will be left in your pocket after all expenses (including mortgage payments, taxes, fees, utilities, as well as the reserve fund for the current repairs of the property). If, in principle, I can make it so that I have extra income left over after deducting all expenses, I have a positive cash flow.

Seasoned investors use certain metrics to calculate cash flow. For example, at the very beginning, I liked Cash-on-cash return, CoCR, which is a great measure of return for rental properties.

CoCR measures the proportion of income received from a rental property in a year to the amount of cash invested in the property over the same period (one year, or 12 months). Here is a specific example of the calculation as I did it in the beginning. It's very conservative, which gives you less chance of making mistakes when investing (I'm only saying what I think - it doesn't work for everyone and not always).

So...

On February 8th, 2021, my family purchased our first rental property - a tiny townhouse 2 beds / 1 bath in Hammond, North West Indiana, built in 1945. The sale price of the house was $80,000. My spouse and I invested money as a down payment - that was 20% of the price of the house, or $16,000. In addition, we had to pay all the closing costs, which rounded up to $4,000. After that, I did some serious renovations and invested another $5,000 (I do not calculate my time to make those renovations myself, but, anyway, it is a good starting point).

Each month I have to pay the mortgage, taxes, and insurance premiums totaling $550, or $550 x 12 months = $6,600. For two months of the "dead period" (see below), I will also pay utilities of $200 per month - that is, $400.

My total investment in the house is as follows:

$16,000 {20% downpayment)

+ $4,000 {closing costs}

+ $5,000 {rehab costs}

+ $6,600 {total payments of mortgage, taxes, and insurance for the first year}

+ $400 {utilities for the period of holding costs}

= $32,000.

At the same time, the gross monthly income on this property was $1,200. In the first month, the house was not rented out, as repairs were being made and we had no tenants. This period is called "holding costs" - the costs to keep the house for some time before you get cash flow. It turns out that for a year, minus the first "dead" month, I assume to extract a return of $12,000 (I also deducted one additional month based on the assumption of the necessary "additional investments" in repairs annually): $1,200 * 10 months = $12,000.

Cash-on-cash return = Real estate income received for the year before taxes/amount invested.

With a gross monthly income of $1,200, the townhouse emerged as a beacon of financial promise in the sea of uncertainty. Despite the initial setbacks, we got a remarkable cash-on-cash return of 37.5%, far surpassing industry standards: Cash-on-cash return (Hammond Townhouse) = $12,000/$32,000 = 0.375 = 37.5%.

We bid farewell to our beloved townhouse on April 26th, 2023, when it was sold for $129,000, as we embarked on a new chapter of our life - now in South 

West Florida. The appreciation of this property by 48.25% (129,000 sale price -10,000 closing costs - 80,000 we bought it for/80,000 = 48.75%) in just two years stood as a testament to the transformative power of real estate investment.

See the house here: https://www.realtor.com/realestateandhomes-detail/723-169th-...

P. S. The presented pics of the house were taken after remodeling in February-March 2021