In Fall 2022, I mentioned that we started aggressively pursuing new acquisitions. My thesis was that the real estate market uncertainty would create buying opportunities. At the end of last year, I saw a duplex with a 2 bedroom-2-bathroom unit on each side listed at $340,000. In the table below, you can see the numbers to determine that I needed to get the purchase price to about $250,000.
Initial projection before purchase:
Financials after purchase:
Use the following formula to calculate Cash on Cash (CoC) Return:
Cash on Cash Return = (Annual Cash Flow from property/ Actual Cash Invested in purchasing property) x 100%
The monthly cash flow (or profit) was only going to be $50 per month and my cash on cash return (CoC) would be 0.57% if I got $2700 in rent, a 9% mortgage, and paid $28,000 in repairs. In other words, for every $100 I spent to buy the property, I get $0.57 a year. Those kinds of returns are terrible, but we pressed forward.
In the end, my realtor did a great job negotiating the price down to $246,500. In addition, I had to put down 25% of the purchase price and pay $5000 in fees to get a 7.5% interest rate. I will pay about $1300 for my monthly mortgage including taxes and insurance. As predicted, my property manager found tenants to pay $2700 in monthly rent. As you can see from the rightmost table above, my monthly cash flow from the units will be about $400. Currently, my cash on cash return is only 5.25% for the time being until I refinance the property. This drastic change is because the interest rate on the loan was estimated to be 9% but is actually 7.5%. As I predicted in my previous post, Predicting Future Interest Rates, interest rates are falling, and I believe I will be able to cash out refinance a significant portion of my down payment thereby increasing my cash on cash return.
Overall, this purchase ended up being a decent cash flowing asset that I believe is in an area that will rapidly appreciate in the years to come. My estimate is that in 10 years, I will receive more than 20% annualized total return. If you are interested in making similar purchases, reach out to me and we can discuss partnering.
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