Here's my deal(s)

[Joe M.]

Hey guys here are my first two deals that are set to close at the end of this month.

Deal 1: HUD property (2/1 SFR) purchased for $14K. Rehab estimate is $7.5K. Should rent for $550/mo. Home sold in 2006 for $49K.

Deal 2: REO (3bed 3 full bath) purchased for $27K. Rehab cost is about $1,500 (seriously only needs paint and maybe carpet). Should rent for $750/mo. Comps in the area put the house value around $70K.

I'm closing both deals with cash. I feel like I got a really good deal on both of them. I had home inspections done on both of them as well as pest inspections just for my own peace of mind and neither turned up any surprises.

So did I get a good deal?

[Jon Holdman]

First property:

Rent: $550
Expenses: $275
NOI: $275/month
No debt, so cash flow = NOI
Cash flow: $3300/year
Total invested: $21,500 (plus costs)
Cash on cash return: 15%

Second property:
Rent: $750
Cash flow per year: $4500
Total invested: $28,500 (again, plus costs)
Cash on cash return: 16%

If you're managing them yourself, you'll generate another $130 a month or $1560 a year in property management fees not paid.

15% cash on cash return is reasonable, though not outstanding, for real estate.

Consider if you were to apply leverage. Lets assume you mortgage that first property for 70% of the purchase plus rehab value and spend $1500 in costs for the loan. I'll assume 6.5% interest and 15 year term, since I think that's where you would end up if you want to do a bunch of these.

Loan: $15,050
Payment: $131.10
Cash flow: $143.90/month, $1726.78/year
Total cash invested: $7950
Cash on cash return: 22%

22% return vs. 15% return is significant. On the $50,000 you're investing, that would give you $10,860 in cash flow vs. $7,800 you're getting paying cash. In addition, this would get you about seven properties rather than two. Total rents would be about $4550 a month. So your PM earnings would be another $455 a month or $5460 a year rather than $1560. So, total income on $50K invested in these two properties in cash is $9,360. With leverage its $15,320. Certainly using cash is a less risky approach. But depending on your goal, using leverage might get you there quicker.