One of the many things that attract real estate investors to Detroit is the incredibly low price tag. $35,000 buys you a nice house in a nice neighborhood that rents well, putting cash in your pocket every month. However, many investors pass over Detroit because the numbers are small and they are looking to make more money. What these investors are doing is looking at the amount of profit they will make versus their rate of return. Let's look at a few examples of what I'm talking about.
Here is a deal you can do in Detroit right now all day long.
Purchase/Rehab: $35,000
Profit: $5,000
Turnaround time: 90 days
Cash on Cash Return: 14.3%
Annual Yield: 57%
Now, let's look at an opportunity in California. I know a few guys doing this right now.
Purchase/Rehab: $300,000
Profit: $30,000
Turnaround time: 90 days
Cash on Cash Return: 10%
Annual Yield: 40%
Without looking at the numbers, I know many of you would rather go with the California deal. Now that you have had a chance to really look at the numbers, which deal is the better investment? Of course the Detroit deal is.
Now let's talk exit strategy. What if something goes wrong? You finish your rehab and you are ready to flip and now the President of the United States outlaws flipping for 2 years. Now what do you do? (This might seem a little ridiculous however we should always plan for the worst case scenario.) Now it's time to refinance your cash out of the property and rent it out until you can flip it. Time to take a look at cash flow!
Real cash flow calculations take into account 10% maintenance, 10% vacancy, and 10% property management. I did this for Detroit. For California I reduced it to 7% to try and be a little bit more fair.
Detroit Deal
Mortgage: $40,000
Interest Rate: 7%
Mortgage Payment: $266 a month
Monthly Rent: $850
Taxes Annual: $2,000
Insurance Annual: $800
Vacancy/Maint/Prop Mgmt Fee: $255 a month
Your Monthly Cash Flow: $95.66
California Deal
Mortgage: $310,000
Interest Rate: 7%
Mortgage Payment: $1996 a month
Monthly Rent: $2,000
Taxes Annual: $2,000
Insurance Annual: $1200
Vacancy/Maint/Prop Mgmt Fee: $ 419 a month
Your Monthly Cash Flow: -$881.67
How do you like that California deal now?! The point I'm making in this week's blog is ACT like a professional real estate investor. This means REALLY looking at the numbers and also planning for a worst case scenario. This is what makes us professionals.
If you haven't already, go and downloaded our cash flow calculator to determine "REAL" cash flow.
Jeremy Burgess
Detroit Market Expert
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Cash Flow and Property Analysis Spreadsheet.
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