NUTS & BOLTS THE BIG PICTURE
STRATEGIES: REITs STR I : FLIPPING
This proven model, while very profit- able, is missing a key component that can make it even more profitable. This key component will also attract more inves- tors to do more transactions. THE IMPROVEMENT The component that has been missing from the turnkey model, until now, is the ability to offer seller financing to the turn- key rental property investor. Adding seller financing in today’s financial market opens up the opportunity like never before. What we have found is: • Seller financing can be structured so that the net operating income (rent after expenses) can cover the debt service (monthly seller financed mort- gage payment) • Interest on the seller financed loans can be as low as 5 percent • The term on the seller financed loans can be as short as 5 years • The down payment by the borrower can be 10 percent to 50 percent Passive rental property and IRA investors are extremely attracted to this model because: • They don’t have to pay all cash, so they are able to purchase more assets • The debt service is covered by the rent • The short-term financing means that they will own the properties free and clear in a short period of time This model works exceptionally well in the Midwest and Southeast, where rental rates are very strong as compared to property values. Rental property investors seek out these same
CASE STUDY LOCATION: DAYTON, OHIO
geographical areas because they offer the highest returns nationwide.
CASH COMPS: $40,000
RENT: $750/MONTH
CASE STUDY This property in Dayton, Ohio, shows comparable sales of $40,000. Three-bed- room/two-bath homes in this area rent for $750 per month. After taxes, insurance and management fees, the monthly net operating income is $459. The annual net operating income is $5,508. While a real estate agent placed the comparable sales value at $40,000, real estate investors today are utilizing the income approach to value. This approach to value is applied because of the market inefficiency of property valuation in the lower price band space.
This approach shows that an investor looking for a 10 percent return on invest- ment would pay $55,000 to receive $5,500 per year. Think of it this way: if a cash investor placed $55,000 into a moneymak- ing machine and it spit out $5,500 per year to that investor, his return on investment would be 10 percent per year. Is 10 percent an acceptable return on a tenant-occupied property? Absolutely. According to DSNews (2/16), the best
INCOME APPROACH
ANNUAL NOI
PROPERTY VALUE
ROI
$5,500
10%
$55,000
36 | think realty magazine march :: april 2017
Made with FlippingBook Online document