Case Study: Cockroaches to Cash Flow
Property Acquisition
I found this property through MLS. It was listed by David. He is a realtor that I previously purchased a small portfolio from and therefore had a good professional relationship. The home was a bank foreclosure from a reverse mortgage. This is a 4-bedroom, 2.5-bathroom single family house. It was built in the 2010s and located in an established neighborhood with convenient access to schools, amenities, and major transportation routes. While the property's location was desirable, it was evident that the house had been neglected for several years. The interior was outdated, the landscaping was overgrown, and several deferred maintenance issues were apparent. The biggest problem was that the home was infested with insects and rodents. Many pest companies stated this was the worse infestation they had ever seen.
Despite its condition, the property presented an attractive investment opportunity due to its below-market listing price. After conducting thorough due diligence, including a professional inspection and market analysis, the property was acquired for $72,000.
Renovation and Transformation
The renovation aimed to modernize the property, enhance its appeal to potential tenants, and maximize its long-term value. The scope of work included:
• Interior: Major pest remediation that took 3-4 weeks. A complete overhaul of the kitchen and bathrooms, including cabinets, countertops, LVP flooring, electrical and plumbing fixtures.
• Exterior: Landscaping improvements, including tree trimming and shrub removal. Power washing the exterior, repairing the driveway, and painting the front door.
• Systems: Servicing the HVAC system, replacing the water heater, and updating the electrical panel.
The renovation was completed in 13 weeks and totaled approximately $35,600. The project was managed by one of my property managers for a 10% fee.
Leasing and Property Management
With renovations complete, the property was ready to be leased. Market rent analysis was done using 2 different property managers and Zillow. The property was leased for $2,150 per month.
Refinance and Return on Investment
After a stabilization period of 6 months, the property was refinanced to leverage the increased value created through renovations. The new appraisal came in at $160,700. Doing a 70% cash our refinance allowed me to get our initial purchase and renovation investment. This provided a substantial return on the initial investment and freed up capital for future projects.
Financial Highlights
• Acquisition Price: $72,000
• Renovation Costs: $35,600
• Total Investment: $107,600
• Funds: raised from personal savings and private lender
• Appraised Value: $160,700
• Monthly Rent: $2,150
• Cash-Out Refinance: $3,200 after paying off private lender and myself
• Rate and Term Refinance: 30 yr amortization, 7.25% interest, 70% LTV
• DSCR: 1.45%
Here's the breakdown of rental income and expense analysis:
1. Annual Gross Income: $25,800 (Monthly rent of $2,150 x 12)
2. Annual Expenses: $25,800 * 0.40 = $10,320
3. Annual NOI: $25,800 - $10,320 = $15,480
4. Annual Debt Service: $10,680 (Calculated previously using a mortgage calculator with a loan of $131,775, 7.25% interest, and a 30-year term)
5. DSCR: $15,480 / $10,680 = 1.45 (approximately)
With a 40% expense ratio, the DSCR is approximately 1.45. With a 40% expense ratio, the DSCR is approximately 1.21
Hindsight Critique
• Continue to build relationships to increase deal flow
• Property manager (Mercer Hughes) is critical to completing renovations and quick tenant placement
• Continue to build relationships with private lenders and personal investors
• Have cash available to make quick competitive offers