Cash flow on a $500,000 home - Experiment in scaling SFR

[Joe Kim]

Here is the actual home:  https://www.zillow.com/homedetails/4170-Secret-Shoals-Way-Buford-GA-30518/172439897_zpid/?view=public

$469,000 to be exact was the purchase price of a brand new construction in A+ property, A neighborhood, A schools. (I admit I fudged the number up to $500,000 in the title which sounds catchier than $469k).  This school district has one of the most desirable high school in the state.

After 3 years of trying buy/hold rentals with largely turnkey providers from 2013 to 2016 - 9 turnkey SFR and one duplex, I wanted to scale without having to buy multifamily or creating a giant real estate machinery (rapid growth in # of units like many investors do). Also, I was not a fan of the $100,000 typical buy/hold rental home -explained below

I wanted to stay "passive" (experienced investors laugh at the word -so do I after many "passive" adventures that were not passive at all).   At the same time, I'm not a fan of the property management so I wanted something "turnkey" in terms of easy to self-manage remotely.

Also, the multifamily market was heating up and I didn't have the time or the will to dive into that market(yet).

Here were my goals with buying a $500,000 Single Family home (5/2017)

#1 SCALE: Cash flow MORE than just $200/month that is typical for buy/hold rentals.

My numbers:

Rent: $3000/month

PITI (mortgage + taxes + insurance) : $2000/month

Interest rate was extremely low at 3.75% for 7 year ARM (ARMS are no longer available for most investement properties)

Property management: $0 –self managed

Repairs/Capex: Brand new, under builder warranty - $0

Vacancy: $0 (found a tenant immediately after closing)

NET cash flow: $1000/month

#2 "PASSIVE" : Make it as passive as possible. (aka least amount of headaches/problems)

Plan - buy a new construction which should have no repairs and under warranty

Plan - Get a great tenant since it's A+ Grade home/location.

#3 APPRECIATION: Not crazy coastal California or New York like appreciation but better appreciation than your typical 2-4% annual you get with typical midwest/south linear markets during normal cycles (not like the one we just experienced).

#4 LEVERAGE: Maximize the loan amount. It's the same amount of work to buy a $100,000 home as it is to buy a $500,000 but your loan is way bigger, principle pay down is WAY bigger each month, bigger tax breaks from larger mortgage interest, etc..

#5 TAX: I was starting to apply the 80/20 principle - Read Perry Marshall's 80/20 principle. I started selling my least profitable properties. $100,000 houston property I bought in 2013, I sold in 2016 for $120,000 to another investor. Retail price would have probably gone for $125 - 130K. Instead of doing a 1031 exchange, I had saved up a lot of depreciation losses gathered up from my sizable portfolio ranging from 7-10 doors at the time depending on when I sold properties. If you cannot qualify as a real estate professional or cannot qualify due to income limits, the depreciation loss you don't use gets SAVED up every year. You can use the aggregate of the depreciation losses from mutliple properties and apply it to the sale of a home to offset any gains. This is ONE great way of avoiding a 1031 exchange and still pay no tax on capital gains.

ONE more thing about taxes. The more expensive the HOME (aka $469,000 home), the greater the depreciation losses that you can accumulate. I sold 4 homes I sold in 2016 and 2017 for a profit and paid ZERO capital gains tax from this strategy. (Amanda Han is my CPA - this is legit).

Anatomy of the deal approximately $500,000 buy/hold:

5 bedroom/4bathroom Giant 3902 sq ft home with a huge additional 1800 sqft unfinished basement.

By the way, I’m selling this home NOW. In my next post, I will explain how it went all wrong!

https://www.zillow.com/homedetails/4170-Secret-Shoals-Way-Buford-GA-30518/172439897_zpid/?view=public

[Joe Kim]

Originally posted by @Account Closed:

Not fond of your accounting method of allocating ZERO expenses.   Whatever floats your YACHTs.

Whats the taxes on a 1/2 m dolar home used as a rental?

Not that we lords of land are battling tenants but in this case i say Big Win for the tenant.  Gets complete use of a haffy M $ home for $3,000.  Im not surprised the tenant wanted the deal done immediatley.  Snooze you lose.

Account Closed   -  yes, I agree Zero expense is not realistic even on a brand new construction with a warranty on it.    Zero vacancy is not realistic even with a tenant found immediately after closing.

I totally agree.   That's why I said, to wait for my next post on what went wrong.    

Here is a tip,  there are good reasons why investors focus on the $50,000- $200,000 price points and typically in B and C type homes and neighborhoods.   

I'm too tired to give a FULL detailed reply but yes,  it was NOT a success story.   That was the punch line at the very end of my post.     

You can lay out a great plan, but it may still not work.     So you and I are seeing eye to eye.

Just upvoted your reply.   thanks,