The Hard Work is Done Upfront
To begin, for me I believe that I add value to a unit by purchasing it and renovating to a standard that increases the overall value and not just dollar for dollar. So if I purchase a home for $80,000 and add $20,000 of fixed cost, I’m looking for at least $20,000 of added value on the rehab portion alone. And now with tightening market conditions, low inventory and increased competition, I look for even less of a discount upfront, so let’s say roughly 10% which would mean I purchased the unit for $80,000 and it is worth $88,000 or more.
Now in this example, I will have spent $100,000 in total for a unit that should be valued after the rehab is complete at or above $128,000. Then for me, the unit has to rent for 1%, so $1,280 a month at a minimum. Now, keep in mind with all these “minimums” I have proposed in my model, I’m actually planning to do better. However, for a simple quick example of a month, this will suffice. So, at this point I’ve spent $100,000 and have an investment property valued at $128,000 or more that I should be able to get financed at some point pulling out nearly all or all of my equity or more if I want to.
It’s important to keep in mind that at this point there are a lot more factors at play, like time and expense in sourcing units, gross value on paper vs. actual sold value that incurs expense reducing paper profit, plus taxes, insurance, and vacancy, etc. but my point here was to create a real live example of what I do in a macro sense so that I can further my point later in this composition about “Peace” in investing.
Whether I finance the rental unit once it is occupied or later in a bulk deal with say 5 or 10 units, I do use leverage and therefore take on more debt obligation as part of my goal which is ultimately to create a passive income stream that is not a big headache. The “creating wealth” side I could care less about because to me that just becomes more responsibility to have to manage more investment dollars.
The goal here is “investment peace”.
So, lets say I have ten of these units that all have 30% equity in them and I have recouped all of my investment dollars or “hard money” and I am achieving at least that 1% of total value in monthly rent. With leverage, even at today’s low loan rates, owning B class units or better and hiring a property management company to handle everything including marketing, lease-up and maintenance & turns where the management company is surely making some money, I’m still only returning 4-8% on my investment if I really, truly account for vacancy, deferred expenses, and upkeep accurately.
For simple math, let’s take the lower end of that return scale and say I’m at 5%. Whether we calculate 5% on roughly $130,000 of unit value or the $1.3M value of 10 units, the same principle applies.
Keep in mind that in this example I created value so I was able to get my actual dollars spent out at some point when I financed. Now, whether we take the 5% on the dollars spent of $100,000 or $1.0M or the paper value of the unit it’s the same. Roughly 30% difference, which is the difference between $5,000 a year and $6,500 a year. This is still not all that important right now, although if you do want to go down this road, every little tick helps and prudent work and diligence are required to succeed, which means anyone attempting to do this needs to have some sort of degree of passion for this type of work.