Case Study
Birmingham was one of my 3 target turnkey markets and this was my third purchase from the same turnkey provider, whom I was very familiar with and liked. Relationships mean a lot to us but lets walk through this like it was any other property.
This particular home was a very typical 3 bedroom, 1 bath single-family residence, located in one of the better neighborhoods on the east side of town. This was a middle-class area, which would have a rating of about B, B-.
Here is what else I dug up on the property:
Based on the home facts and location, the property looked good so far. Next I started to look at the projected cash flow, here’s the numbers I used for my analysis:
It was advertised for $49,000 and I managed to get that lowered to $47,000 as a repeat customer with that turnkey company. Again, it is not common to get a discount on turnkey properties, but it can happen.
30 year fixed loan with a 4.15% interest rate and 25% down.
$300 for inspection, $450 for appraisal, $2,000 in loan origination fees and other closing costs. These estimates came from the other 2 homes I purchased in the same area through the same lender and escrow company.
$750/month, which was the standard going rate for 3/1 houses in the area. There wasn't anything special about this one to make that any higher.
10%. This may seem high for a single-family home in a B neighborhood, but I knew this property was most likely going to have a Section 8 tenant and the Section 8 administration is Birmingham is notorious for taking weeks to process a new application. Assuming a tenant turnover every 2 years, this gave me about 10 weeks to get a new tenant moved in and also left some room for unexpected events like missed rents or evictions.
○ Property Taxes: $860/year ($71.6/month). I didn't use the previous year's tax amount, because I knew the property was going to be reassessed after purchase and the taxes were going to adjust. Another thing to check is whether there were any homeowner's tax deductions on the previous year's bill. As an investor, you will not be able to take advantage of them, since you will not be living in the home. I used the purchase price and the approximate local tax rate (about 1.8% of the purchase price) to get this number.
○ Home Insurance: $560/year ($46.6/month), from a quote I got from my local insurance agent.
○ Property Management: $75/month, or 10%, which is what the PM company I was going to use charged.
○ Tenant Placement and Leasing Fees: The PM company I was going to use had a 1/2 month's rent tenant placement fee and a $50 lease renewal fee. Assuming I was going to pay the tenant placement fee one year and the leasing fee the next, the average yearly amount came out to $212 = ($750 / 2 + $50) / 2 or $17.6/month.
○ Maintenance and Capital Expenditures: Based on my assessment of the condition of the property and the expenses I was going to have, I estimated $120/month for maintenance and capital expenditures, combined.
○ Utilities: $50/year ($4.2/month). The tenant was going to be responsible for all utilities, but I would have to pay them myself if the house was vacant, so I budgeted $50 per year to cover any gaps.
Purchase Breakdown
Next, I calculated how much money I would need to complete this purchase:
Total Cash Needed = Down Payment + Closing Costs
Total Cash Needed = $47,000 x 0.25 + $2,750
Total Cash Needed = $14,500
I needed approximately $14,500 to close on this home, which was within my budget at the time.
Cash Flow Analysis
I first added up all of my operating expenses to get a $335/month total. I then calculated the monthly NOI:
NOI = Gross Rent – Vacancy – Operating Expenses
NOI = $750 – $750 x 0.1 – $335
NOI = $340 / month
Before subtracting the mortgage payment, this property was going to generate approximately $340/month or $4,078/year. The cash flow is:
Cash Flow = NOI – Mortgage Payment
Cash Flow = $340 – $171
Cash Flow = $169 / month
My total cash flow, after all expenses and the mortgage payment were paid was going to be $169/month or $2,022/year.
One important thing to note is that this was just an average projected number. In reality, there may be months when you’ll receive significantly more cash flow than projected, but there will be others when you’ll receive less or even none at all due to expenses (like taxes, insurance, repairs, etc.) not occurring every month
Investment Returns
Finally, I calculated the cap rate, COC and RTV ratios for this turnkey property:
Cap Rate = Yearly NOI / Purchase Price
Cap Rate = $4,078 / $47,000
Cap Rate = 8.7%
COC = Yearly Cash Flow / Total Invested Cash
COC = $2,022 / $14,500
COC = 14%
RTV = Monthly Gross Rent / Purchase Price
RTV = $750 / $47,000
RTV = 1.6%
I used conservative vacancy and maintenance estimates when doing the cash flow analysis, so the cap rate and COC returns came out lower than what they could have been. The property was advertised with a cap rate of 10.5%, which was definitely not the case according to my calculations.
But even using the estimates above, the cap rate came out to almost 9%, which was above my 8% minimum. The COC was a decent 14% and the RTV was at 1.6%.
I completed the investment property report with the DealCheck mobile app that shows a full summary of the purchase and performance of this property.
I wouldn’t say that this was a spectacular investment, but it was definitely above average for what I’ve seen in the Birmingham turnkey market and elsewhere around the country.
The home was in a good neighborhood and most importantly – in very good condition. I went through with my purchase and now about a year later, I’m still happy with it and plan to keep it for a long time.