enter this market is substantially low- er—and for this reason, we favor buying low and renting high. 4 MINIMAL MARKET COMPETITION Let’s face it, playing in the C/D proper- ty class game is for experienced inves- tors—or it should be, in our opinion. For this reason, it’s safe to say that, on average, less competition exists overall. located, code-compliant, very clean, well-run, Shared Living space. Our longer-term, low-hassle tenant base reflects these conditions and amenities that are certainly unique to this age- old neglected asset class. Further, these residents often have limited options in finding a clean, habitable, safe environ- ment. Strict screening, application and income requirements play directly into the success of our system. It’s worth noting that we do not accept Section 8 vouchers. While Section 8 is a great program, we have decided to leave this alternative to other investors. There’s little debate that acquiring $30,000 properties has its challenges for real estate investors. It’s our belief that whatever strategy one chooses to implement when investing in low-cost opportunities, it should entail a stream- lined and systematic approach to ensure success over the long term. • 5 INCREASED RENTAL DEMAND Our company offers a centrally
forma data makes this fact abundantly clear. So why suggest using a property management company to run one’s shared-living property? Well, to be clear, we suggest this only as a fallback or safety option—for a few reasons. First, this is beneficial for the veteran owner-manager who experiences some form of change in life circumstance. Yes, life happens, and from time to time, we are forced to make drastic changes. Second, if the investor must hand over management of the Shared Liv- ing property or portfolio, it’s important to understand that not all companies may take over the management of such properties. Still, there are plenty that will, due to the functional similar- ities to small multifamily dwellings. Nevertheless, we suggest seeking the services of a firm that specializes in this form of property management. Referring to the chart, a quick glance at the property management fee reflects the only variance between this scenario and the previous self-managed example. However, it’s a fairly substantial variance. Why is the management fee 15 percent ($312) as compared to 10 percent for the traditional model? This reflects the likely increased cost associated with a manage- ment company taking over a room-rental property as described above. Based upon this pro forma, the cash flow for this room rental property—with a property management company in place—is north of $400 per month, or just shy of $5,000 per year. Again, depending upon one’s philosophy toward an adequate CAPEX allocation, the cash flow could be sub- stantially higher. This scenario results in a 10.1 percent cash-on-cash return.
two years of experience managing their own property portfolio before testing the Shared Living waters. Again, the benefits are tremendous, but organization and experience in investment real estate is a must. More detail will be provided to this point in the next example. For now, contrast the traditional low- cost scenario with that of the scenario wherein a local investor purchases the same property for $30,000. The acqui- sition costs are identical, with the exception of an increased allo-
cation of $15,000 for rehab expenses. The additional
rehab costs are due to the conversion of the interior of the prop- erty (most often, the common area space)
into two additional bed- rooms. From experience, we have learned that the cost to “add” two bedrooms is relatively inexpensive. The glaring difference one will notice is a much higher monthly gross rent: $2,080 per month, compared to $600. (No, that’s not a typo!) Notice the gross rent per room is $520. We have found this to be a consistent number for our local Shared Living Model. We typically see an average gross rent per room of $500 to $550 monthly. Based upon this pro forma, the cash flow is quite impressive at almost $800 month- ly and approaching $10,000 annualized. Depending upon one’s philosophy toward an adequate CAPEX allocation, the cash flow could be higher. In this case, we’re very satisfied with a 19.1 percent cash-on-cash return. OUTSOURCED PROPERTY MANAGEMENT / SHARED LIVING MODEL Before we review the pro forma, it’s important to understand that the most successful implementation of the Shared Living Model is by the local owner-manager. The respective pro
BY KELLY EDWARDS AND CHRIS EDWARDS
Kelly and Chris Edwards have been active real estate investors in Raleigh, N.C., since 2002. They are Managing Principals of Edwards Capital Partners, a real estate investment firmwith a focus on Private Capital Trust Deed investments. Contact them by visiting www.EdwardsCapitalPartners.com or www.TheEdwardsCompanies.com.
3 LOWER ACQUISTION COST The point here is obvious. The cost to
22 | think realty magazine | mar :: apr 2016
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