Let’s deep dive into one of the best property investment case studies we have seen lately.
This property was purchased at a great discount to its true value and renovated within a nice budget, which allowed the owner to realize a lot of ‘instant equity’ relatively quickly after buying the property.
Here is a more detailed breakdown of the numbers. Don’t worry if you don’t understand some things just email and ask or wait for the future email lessons that go into more detail.
Purchase Price – $810,000 + Renovations of $160,000
Total Expense – $977,724. This incl legal and holding costs
Final Valuation – $1,100,000 post renovations ($122,276 in gain the months after buying)
Final Rental Income – $1,650 per week
Mortgage – 80% of the $1,100,000 valuation
Mortgage Rate – 2.65% (average)
Conservative Vacancy Rate – 5% (2.5-3 weeks with no tenants each year)
Maintenance – 10% of Rent (budgeted – unlikely to be that high)
Management – 10% of rent paid to the property manager (budgeted)
Cash On Cash Return – 36.83% from the initial outlay
Gross Yield – 8.82%
Mortgage Coverage – 9.75% (importance of this explained later)
Net Yield – 5.22% (after topping up)
Net Income – $34,088 (annually, after expenses)
This property will generate the owner $34,000+ in income annually (using interest-only lending). With the capital gains in the next 10 years – there is every possibility that this one deal made the owner $500,000 (and will keep producing) – from one deal!!!
The 10year numbers run as follows –
$34,000 cash flow multiplied by ten years plus the gain in the months after buying because of the good entry price and the renovations is
Income $34,000 x 10 = $340,000
Instant equity gains = $122,276
Projected capital gains* = $220,000
*(at 2% average – $22,000 is 2% of $1.1mn x 10yr)
Expected 10year upside for the owner = $682,276 — WOW!
If someone said to you that by buying and renovating one property, and getting a property manager to manage the tenants for 10 years, you could bank half a million bucks or more, would you pay attention?
Would you put the work in to find a property and get things done?
The two key questions –
In this case, within 2-3 years the owner would be able to recycle out all their initial capital outlay and release funds to buy again.
How much net cash flow can I get from this house at 100% finance?
You have seen the spreadsheet – the numbers work well, especially with current low-interest rates (I realise rates have gone up since but the numbers still work well even on higher interest rates).
After the 5-year interest-only term, the owner could probably switch to principal and interest using only funds from the property and within 15-20yr have the property fully paid off without putting in any extra money. This would produce over $80,000 of income annually for the owner as a freehold investment.
Working with a mortgage adviser will help you assess investment options rationally because it really is about the numbers. If you need help with the numbers (and let’s face it we all do) then take advantage of the spreadsheets we provide our clients.
www.mhq.co.nz/profile is a great place to start if you want to get access to your own spreadsheets.
Even the most sophisticated property investors we work with want to chat and double-check their numbers and projections. We often get clients supplying their own information on spreadsheets and find it to be out of date, inaccurate, and the wrong data. Most clients switch to our spreadsheets when they see the easily understood numbers.
Some clients with 20-30 properties come to us with their own spreadsheets and these are a shambles. They’ve done amazing things without even having accurate information – just think about what they begin to achieve when the accurate numbers are presented to them. Decisions about buying and selling are much easier with the formulas provided to you.
If you’re looking for a property investment already or have one in mind, flick it through and let’s do the numbers together on a spreadsheet of your own.
Check out case studies from this video.
These types of deals are not unicorns, they are common if you know how to look for them and create them. Sign up for the mortgage masterclasses to see more case studies – many that are not covered in the free 21 Days emails.
Andrew & Blandon
P.S. Tomorrow we are going to chat about BRRRR investing to get you started on equity building strategies.