Single Family in Beaufort

[Eric Berman]

Investment Info:

Single-family residence buy & hold investment in Beaufort.

Purchase price: $120,000
Cash invested: $300

2 bedroom, 1 bathroom, 1026 sqft SFR.
​Currently rented for $1,250/mo.
www.bermanpropertygroupllc.com

What made you interested in investing in this type of deal?

Solid little cottage in a growing community near business development.

How did you find this deal and how did you negotiate it?

Relationship with Real Estate Agent (she's awesome and brings me all kinds of deals).

How did you finance this deal?

Private lending bridge loan (12 months int only @ 6%). Will cash-out refi in ~6 months.

What was the outcome?

Pretty much turn-key. Previous owners did a lot of renovations and had to move, so they were trying to get rid of it fairly quickly.

Lessons learned? Challenges?

Property disclosure statement said the property was on sewer. After trying to get utilities set up, I found out that it was actually on septic. Found out about this after closing (yes I know, should've checked during the due diligence period). Had my agent contact the sellers agent. Seller said they didn't know and assumed they were on sewer while there. Bottom line, seller paid for someone to come out, inspect, and service the septic system. Not a biggie, but a lesson learned nonetheless.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes! Allison Greco! She's a rockstar in Beaufort, SC.

[Eric Berman]

@Dan Hertler, @Ryan Shannon, @Dylan H. thanks! 

I'm going to try and address each question in turn w/ enough depth to hopefully give some insight into the project and how I planned to execute it.  If I miss something or make a mistake, let me know!

Cashflow is sitting around $285/month.  The private loan was unsecured and didn't require any down payment.  The terms were 6% annually, interest only, for 12 months w/ an additional $2,000 payment on top of principal owed when paid back in full.  The additional $2k helps boost the lender's overall yield.  Also, no prepayment penalty.  This set-up can work pretty well for both you and the lender if you're doing them often enough to make it worth the lender's while.  What do I mean by that?  Well, if you can conduct this transaction every 3 months, the lender will make a lot more money than they would if you only do this once every year.  See examples below.

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Example 1:
Say you pay the loan back in 3 months; the lender gets $1,800 (interest payments for 3 months @ $600/mo) plus $2,000 on top of their original 120k back.  This nets the lender a total of $3,800 for three months.  In effect, the lender earned $1,266.66/mo for 3 months.  Annualized, this would yield ~12.66%, not too shabby for a passive lender.  

This only works out for the lender if you conduct transactions like this every few months.  If you do this once a year or once every 8 months, the lender's overall yield goes down.  

Example 2:
Let's say that you only have the one deal this year and you plan on conducting a cash-out refi at month 8 to pay the lender back.  Then the math goes like this:

$4,800 interest-only payments ($600/mo for 8 months)
$2,000 additional fee at the time of principal pay-back
Total payment = $6,800 for 8 months. 
This yields ~ $850/mo which annualized would yield the lender ~8.5% ROI. Still not bad, but not as good as 12% for the lender.

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The Cash-out refi;  I don't think it'll appraise much higher than 120k, probably around 135k.  Its in an area that's being gentrified and there's a lot of business development happening near there (i.e. Publix is being built, Panera Bread, etc.), but values are still suppressed.  The cash-flow will sustain the property and give me a few bucks, but I'm hopeful that it'll appreciate greater than normal as well over the next 5 years.  

That being said, I anticipate that the cash-out refi will only get me to 75% of what I paid initially. Thus, I expect to get around $90k from the cash out, and will have to put-up an additional $32k to pay-back the private lender. With that, my total investment would shoot up to ~$33k, which gets me ~10% CoC ROI @ $285/mo cashflow. These numbers sit well with me, and I'd normally be good with just that, however, with this project I'm trying something a little different.

Instead, I have a fix & flip project going concurrently that I plan on using to fund the rental.  Therefore, the private lender would be paid back by the proceeds of the flip + cash-out refi.  This might reduce my take-home profit on the flip, but it'll basically get me the rental for no money out of pocket.

If I missed anything or something's not clear, let me know.  Also, if y'all have any ideas that might have been better or more efficient, I'm all ears!