New Rental Property Purchase


This post is an update to my post back on March 18, 2013:
http://www.lifetimeinvestor.com/blog/indiana-single-family-house-profile/

Sometimes good investments take time to develop……

Back in March I visited my property manager in Indiana to look for more rental properties.  We looked at about 10 properties, and I ended up making offers on three single family houses.  I liked this one the best:

front

It is a cute 2+ 1, 1,041 sq ft, with a large backyard.  It was remodeled in 2010 with new windows, a new roof, remodeled bath, and more. It is a short sale that was drastically reduced to $25,000.

I offered full price for it, and the offer went back to the bank for approval.  Nothing happened after that, so I assumed the offer was not accepted.

Fast forward to September 2013.  My property manager (who is also a broker) texted me to tell me that the bank had listed the house for $58,000 but got no offers.  They called him to ask if we were still interested.  With property values rising we knew the house was worth more, so we got a new appraisal done, and submitted a new low offer at $28,000. To my surprise the bank accepted it.

I ended up getting a credit for property taxes, so my final purchase price with closing costs was $26,783.  I had one additional cost to upgrade some electrical in the house, which was $1,150.  Total costs for this property was $27,933.

THE NUMBERS

Here are the numbers:  Monthly rent is $695.  I paid cash, so there is no mortgage.

TRANSACTION AMOUNT
Monthly Income: $695
Monthly expenses:
Property management: $69.50
Property taxes: $192
Insurance: $52
TOTAL MONTHLY EXPENSES: $313.50
NET INCOME: $381.50
ANNUAL NET INCOME: $4,578

The property has a cap rate of 24.64.  The higher the cap rate, the better the potential return will be.  A cap rate of 9 or more is generally considered good.

ROI (return on investment) is 29.86.  The return on investment (ROI) calculation is also known as the cash on cash return.  This is one of the more important calculations, as it shows the return you are getting from the cash you spent on the investment.  It is calculated by dividing the net operating income (NOI) by the initial investment.  In most cases this will be the down payment and any closing costs paid by the buyer.

GRM (gross rent multiplier) is 3.15.  The lower the GRM, the more undervalued the property is. In general, a GRM under 10 is considered a good deal; however, this varies from market to market.  A property with a low GRM and potential for increasing the revenue could be a great deal.

So, overall this little rental property will be a nice cash cow!  Keep looking for good investments – they are out there!

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