Finding money to invest in rental property is typically one of the struggles that most newbie investors have.
Most of us don’t have a large sum of money sitting around just waiting for us to invest.
We have to work a second job or save for a few years or even downsize our lifestyle to find a way to save for that rental property.
While it’s hard to sacrifice now, realizing that the fruits of that sacrifice in the future can and will be so worth it.
It's the cost of financial freedom.
While many of us think that we have to kill ourselves working overtime or saving every penny we earn….what many of us don’t realize is that we may have a large sum of cash that we have access to, but didn’t realize it.
There can be cash in the properties you already own.
The Gist…
Would it be crazy if I told you that we have an infinite ROI on one of our properties?
Sounds too good to be true, right?
It’s not.
With the particular property I'm telling you about in this case study, we have no money invested into it, have earned cash flow for nearly four years and our tenants have paid down the mortgage.
Pretty sweet.
And guess what…
This isn’t the first time we’ve done this.
This is a strategy that we've actually used twice now and it’s been a great play both times.
I’ll preface this by saying that it doesn't work all the time. But more often than not, if you can get the numbers to work and you really buy a property right it can work.
This case study is really here to help you see how you can use different strategies to maximize your cash from a property.
We want to show you how you can take a property that you bought and later get your investment back out of it so that you too can get an infinite return.
Even more…
You can then take that cash and roll it into another property to grow your portfolio.
This is exactly what we did and what I’m here to share with you.
The Property Background...
We bought this property in December of 2012, it was our second true investment property and we bought it knowing it needed a light renovation.
The property was vacant when we bought it so we went in right after we bought it and fixed it up.
We did some of the basics: paint, flooring, light fixtures, hardware, etc.
But then it needed a few deeper fixes such as replacing some doors and a hole that was in the sub-floor.
By no means was it a terribly distressed property. We could have rented it ‘as is’ when we bought it and probably got a tenant.
That tenant probably would have paid us $800 per month.
However, the property wasn’t up to our standards that we have for the condition of our properties and so we undertook another rehab (2 months after we finished another one).
Fast forward….after the rehab we were able to rent it for $1,000 per month.
Just click the button below to get pictures, videos and spreadsheets of our renovation.
But let’s not move too fast.
As far as numbers go, we bought it for $75,000, practically the same cost that we had for our first property.
At the time that we did the closing, it basically cost us about $16,000 all-in with closing costs to purchase the property.
We put 20% down
When we did the original loan, we actually had an interest rate of 3.75%.
Our all-in payment on this place was $394.
This included PITI (principal, interest, taxes, insurance) and our HOA fees because it was a townhouse.
Our principal and interest on the original loan was $278.
With those numbers, our original return on our investment was around a 34% including the renovation expense which was about $5,300.
That’s insane.
Those of you who are rookies, this is a pretty high ROI and a testament for if you buy a property right that you can really make some cash.
Over the course of the next few years we had some tenants come and go and our monthly rental amount went down and up as well.
At one point we were renting it for $875 and now it is back up to $925.
If you’re reading this and going ‘yikes what a price drop, didn’t that kill you?’
I mean, yes, I hate to see monthly rent drop.
But it didn’t really hurt us because we had such a cushion in our return, we have been able to move with the market and still make great money.
It was more important to us to have the property occupied, then it was to wait around for an extra $100.
That’s a lesson to all rookie investors.
Buying a property that’s a great deal and has enough spread with what the rental market will demand is key to making money with rental property.
In our new workshop, ZerotoProperty, we show you how to find great deals, how to analyze rental markets to see what it will demand in rent and how to use financial strategies to buy your property. Click here to get on the waiting list.
Why We Decided on a Cash Out Refinance…
…a couple of months ago,when we were looking to sell one of our other properties, we had our realtor do a comparable market analysis on essentially what some of our properties could sell for. And when we started to see the value and how much it the values had gone up, we realized we needed to actually sit down and take some action.
Whether it was going to be unloading some of these properties or doing the strategy with the cash out refinance, we had an opportunity and needed to capitalize on it.
After some deep discussions and running of numbers, we went with the cash out refinance strategy.
Although it was difficult to give up that low interest rate, looking at the whole financial picture of the deal helped us realize that losing that rate was a small price to pay.
We realized if we sell the property right now, then we were going to have to pay capital gains tax on the money that we earn. We could make a decent amount of money, but how much of that would be taken out in capital gains tax?
If we did a cash out refinance, we could still get most of that money and not have to pay that tax.
This was actually one of the main selling points for us in doing the cash out.
That’s something for you all to consider as well, no matter where you are, whether you're just starting off, whether you have properties or you are looking at coming up with a different strategy to add into your toolbox.
When it comes to unloading properties you have to pay attention to that capital gains tax if it’s a true investment and not a property that you’re living in.
The new numbers…
Our new appraised value on the property was $124,000. If you recall we bought the property for $75,000.
Our rate went to 4.25% from 3.75%
We had to give up that low interest rate that we had. But I think it was worth it.
Our total payment now all-in is $570.13.
Before, our all-in was $394, so you can see the change that our all-in price has taken.
Rent Payment: $925
Right now, our positive cash flow is $354. Obviously our cash flow dropped some after we did the cash out refinance, but we were able to take out this lump sum of cash and not have to pay any capital gains tax on it.
The total cash that we ended up taking out after all the closing costs were factored in was $33,362.
The difference in payment is $176, but we’re okay basically giving up $176 because now at this point we’re still making $354 on this thing every single month.
It would have taken us a approximately 5.2 years to earn that same amount of cash and we were able to make that with one bank transaction.
Not to mention the cash flow we've been earning for the last 4ish years.
Stop Focusing So Much On The Interest Rate…It’s Not the Only Thing to Consider
I think a lot of times people get caught up on the rate.
People call and rate shop loan officers all of the time.
So, for those of you who get caught up on the interest rate….think about this.
Our original rate was 3.75%, our new rate is 4.25%.
Literally for giving up 50 basis points or for half a percent in interest, we got over $33,000.
Yes, our interest rate went up. But you’ve got to factor in that you’re going to be writing off a little bit more in taxes from the interest.
Our effective interest rate probably didn’t even go up by half of that. I mean, we’re not really dramatically increasing our interest rate to take out this enormous amount of cash that we can then invest someplace else.
Sometimes, it may be more beneficial to take the higher rate because it may be better on other terms whenever you're looking at the overall analysis.
The Whole Financial Picture
Like I mentioned, our all-in is $570.13.
Right now, our positive cash flow $354.87. We did drop a little bit obviously in our cash flow, but we were willing to take that drop because we had such a large sum of cash flow from the property.
But like we said, we got to take out $33,000 and not have to pay any capital gains tax on it.
I mean, the difference in payment is $175, but I'm okay basically giving up $175 because now at this point we’re still making $355 on this thing every single month.
We have zero cost basis in this.
We have no investment in this property.
When you think about the difference of $175 in cash flow….
…it would take us about 15 years to make that same $33,000 cash that we took out from the refinance.
And we would have been paying income tax on that $33,000.
Whereas, now we were able to get that money tax free.
If we were to pay the personal income tax (varies depending on tax level) on this cash, it would take us 26 years to earn that cash.
Crazy, huh?
If that’s not proof that this strategy can be awesome for investors, I don’t know what else to tell you!
We can effectively take this money and recycle the cash into either another property or use it to pay off another loan that has a higher interest rate of 4.25%.
I mean, that is another way you can do it. It doesn't have to go right into another property. We could take money that we borrowed at 4.25% and pay off another loan that is at 4.75% and still be on the right side.
It’s just this shift in cash and capital that we have and the ability to open up opportunity.
Our Infinite ROI
If you think back to what we said, our all-in cash when we bought the property, including our rehab, was $21,300
When you look at that, we’re on the upside of nearly $12,000.
We’ve made all our money back, plus $11,700 in just under four years.
That doesn’t even include the cash flow that we've collected over the last four years, the principal pay down by the tenants and the tax write off.
Recycling of Money
This strategy allows us to leverage the property.
But now we can take this money and hopefully invest it wisely someplace else. Based on our history and track record of investing, we could take $25,000 to $30,000 and buy a property that makes $500 a month.
We've taken one set of money and we're now recycling that money into multiple properties with a lot of equity and basically diversifying our risk a little bit more.
Rookie Take Aways
I think the biggest take away from this transaction and the only reason that all of this makes sense is because we bought the property at the right price.
We ran our numbers, we knew exactly what we could get out of the property as far as like a range of rent, and we had a spread, we had a cushion.
You take all of that stuff out and none of this works.
If we paid too much for the property, if we couldn’t rent it for the cost of it, if we had a little bit of wiggle room, we didn't have too much wiggle room in the rent.
I mean, you take any one of those little legs off of this chair and it doesn't work. The most important thing you can do is get into a really good property at the right price.
That’s the most important thing.
Focus all of your time on finding the right property. And once you find the right property, a lot of other things either just fall into place, line themselves up, or if there's a setback, it doesn't hurt because you’ve got a cushion.
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