In the last 60 days we’ve purchased two units in Indianapolis, two units in Mount Vernon WA, and this flip and new construction multi-family project, which will add an additional 4 units once the new fourplex is done. The total purchase price of all three projects is $683,000. Our after repair value for all three is $1,195,000. By buying right, we almost doubled our money in equity alone!
These three different projects, once completed, will bring in $3,987 per month in cash flow or $47,848 per year! Even better, our projected total investment in all three projects will be $112,000 for a 43% ROI on just the cash flow (when you calculate the ROI with the equity in year one and cash flow on these three projects it’s a 499% ROI) So far 2017 is turning out to be a great investing year!
Read about project #1 here, #2 here and for the details on project #3 Read below….
We don’t normally look for flip projects. We’ve done a lot of flips and new construction spec homes in the past, though we prefer to build long term income streams instead of a one time profit.
This property was intriguing and caught my eye, since there were two parcels included in the sale. One parcel has a 3 bedroom 1.75 bath single story home with a new roof and newer windows. The second parcel was a vacant lot and both were zoned MR for multi-family use.
The vacant lot itself is worth at least $145,000 because all of the local builders are looking for land and driving up the land prices.
After verifying utility connection costs, confirmation of zoning with the county, and estimates on power I decided it was a project worth doing even though we’d (mostly my husband) have to flip the single family since it was all a package deal.
My offer price was $310,000 cash estimating that it would cost $50,000 to remodel the home (including financing and holding costs), and I believe I can resell the home for $365,000.
The seller countered my $310,000 cash offer and we eventually settled on a purchase price of $325,000.
Based on the new purchase price, less the real estate commissions earned, and including the rehab costs, we will be into the project for a total of $365,700. When the house is flipped and sold, our net will be $346,750 which leaves us with the lot next door for only $18,950. While we wouldn’t be making a profit on the house, it does leave us with $126,050 in equity for the lot, which is exactly what we need in equity for the construction loan “down payment.”
Since the zoning is MR, which allows for multi-family up to four units, our plan is to build a brand new fourplex on the extra lot. Based on our projections, the fourplex will cost around $490,000 (land included) to build and be worth between $725,000 – $750,000 when it’s completed. This will leave us with more than enough equity to refinance with no money out of pocket and leave us with $235,000 in equity. While I have to use projections for property taxes and rents, the expected annual cash flow is $20,908.
We expect the house rehab to take about 45 days, and it will take about 60 days to get the building permit for the fourplex and another 4 months to complete it.
Here’s how we structured the financing in order to maximize our ROI even more:
A few weeks ago I mentioned we got a $165,000 line of credit on two of our rental properties from Coastal Community Bank. We used the entire balance of that line of credit (which is at 5.5% interest) and the rest of the purchase price from a short term private finance loan at 2 points and 12% interest. We’ll use another line of credit we have on a different property to fund the rehab.
You might be wondering why we would use three different loans to fund this purchase, as opposed to just getting a traditional loan or using our own funds…. one reason was to be able to offer the seller cash terms for a better deal (we did get $35,000 off the price), the other reason is so we can retain our capital for any new rental opportunity that becomes available while we’re doing this project, which may require a 25% down payment from our funds using a conventional mortgage.
While the 12% interest loan is expensive, it’s also a write off and very short term. We expect to have the house completed and sold within 90 days, so in the big picture it’s not that much.
Coastal Community Bank will do the development loan on the fourplex at 6% interest. Once the fourplex is done, I’ll refinance with Caliber Home Loans, and get to use the new appraised value. So long as I keep the total costs under $500,000 AND the new appraised value is at least $675,000 I will not have to invest any of my own capital into the new fourplex.
This project may seem like it has a lot of moving parts, though it’s actually the same strategy that we’ve been using for years.
Our strategy is pretty simple; find an undervalued property (for the potential of what the project could be), add value by applying a different strategy along with good operations, maximize the ROI by leveraging alternative financing and then refinance at a higher valuation with little to no money out of pocket. For us, it must also produce high cash flow.
We’ll be posting monthly updates on this project and the others, and feel free to ask any questions you have.
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