Behold, the Power of Debt in Real Estate Investing. Watch what it does to the rental I bought today in North Carolina.
Just a quick little Friday post to tell you about this house I bought in Jacksonville North Carolina. That’s right, North Carolina. It is just outside Camp Lejeune Marine Corps base. It’s a little town in the South East region of the State.
The house itself is less than 800 square feet. It has 2 bedrooms and 1 bath. It is actually a duplex but I only own the one side.
Why would I buy such a little place in a little town? The numbers are great and the market is stable! It’s all about the ratios. This little place rents out for $500 per month which is $6,000 per year. As homes in the area get bigger and nicer their rents go up only fractionally as compared to the sales price. For instance a home twice this size only rents for about 75% more but they cost 100-120% more. It’s not like that in every market. You always have to do your homework.
I lived in a home just like this when I was stationed at Camp Lejeune some sixteen years ago. I still own that home as well. I’ll tell you now; Marines make the best tenants. I’m biased but it’s true.
There is nothing sexy about this market but I don’t like sexy markets.
I closed on this home for a price of $27,750. I’m putting on a new roof for about $3,000 and I’ll do some other small maintenance projects on it but I expect the total repairs cost will come in at less than $5,000 total. With closing costs and repairs I’ll be into the home for about $34,000.
You can’t just go look on the MLS down there and find a deal like this. The home is easily worth about $40,000 as is. I believe Zillow values it at about $45,000.
I bought this home and 3 others just like it all from the same seller who has been renting them out for years. Two of them have tenants in place already. This deal was brought to me by my property manager down there. She knew I was looking to buy (because it’s my business to make sure everyone knows I’m always looking to buy). She managed these homes for the seller who came to her saying he needed to sell them quick and he would take $27,750 for a no-nonsense buyer who could close quick and would not play games.
That’s what I am and that’s what I do. I knew it was a great deal the moment it was presented. So I jumped at it. All of the homes need some repairs and touch ups but I didn’t try to play games with the seller. I didn’t risk losing a great deal by trying to nickel and dime the guy.
Here’s a breakdown of the numbers:
| Expenses | Monthly | Yearly | |
| Tax | $39.33 | $472.00 | |
| Insurance | $60.00 | $720.00 | |
| Maintenance | $40.00 | $480.00 | |
| Vacancy | $20.00 | $240.00 | |
| Management | $55.00 | $660.00 | |
| Total Exp | $214.33 | $2,572.00 | |
| Gross Rent Income | $500.00 | $6,000.00 | |
| Net Op Income | $285.67 | $3,428.00 |
| Cap Rate | 7.62% |
I bought the home all cash so that yields me a return of nearly 8% per year. Is that impressive? No, not really. But watch what happens when I apply debt.
Once the home is repaired and rented I’ll take this to one of the local banks I work with. They’ll lend me between 75-80% of the home’s (Appraised) value on a commercial portfolio loan (A portfolio loan is typically a loan the bank keeps in house. They are not restricted like a national retail loan.) So if the home is worth $45,000 then they’ll lend me about $33,750 to $36,000.
Assume I borrow $33,750. Now I won’t quite be able to pull every dime I have out of this deal because I’m going to have to cover the refinance costs. So, let’s assume that I’ll take a loan for $33,750 and I have to bring about a $1,250 to the deal to cover the closing costs. Here’s what my cash on cash return looks like.
| /Month | /Year | ||
| Debt Service | $33.7K @ 6% | $203.9 | $2,446.2 |
My net operating income is $285,67. Now I deduct my monthly debt payments of $203.90 and my before tax monthly net income on the property is $81.82 or about $982/year. Not real impressive, right? Well I’ve only got about $1,250 into the home so that’s yielding me a return of over 78.5% per year.
78.5% Cash on Cash Return!
And, that’s not counting the reduction of principle in my loan that the tenant is, essentially, paying. Nor, does is account for any appreciation in the property. You can easily expect another $50 per month getting added to my net worth, making my overall rate of return much higher.
I love this stuff!
by: Justin Pierce Real Estate investor, owner and founder of Snow Goose Homes, LLC. We Buy Homes and Land for Cash. www.snowgoosehome.com justin@snowgoosehomes.com 703-680-6855 Office