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My agent just got back to me today and let me know the status on Rental Property #2. As readers may know, I won a short-sale back in early November, and deposited a check to escrow shortly after. In general, short-sales take a long time to process, so up to this point, I’ve kind of just stopped paying attention to it completely.
The Next Step
Today, I received news that the bank has finally gotten to my file and is starting the process of reviewing the short-sale. As part of the process, they sent over some forms/notices for me to initial. Since this is my first time dealing with a short-sale, naturally, my first reaction was “how close are we to a final decision?”
According to my agent, this is a good first step towards making progress to an approval. From his own estimate, he thinks the odds of winning jumped up from 20-30% to 50-60%.
The next step would be for the bank to ask me for my bank statements. At that point, the odds would jump to 80%, and we would expect to close in two months timeframe.
The Numbers
Since I’m an optimist, I’m going to anticipate that things work out 😉 If so, that means I only have a few months left to come up with the downpayment. As a refresher, the short-sale was for a purchase price of $285,000, with 25% down.
Here is a breakdown of the numbers:
CAP Rate:
I am anticipating that rent will be $2100/month, which is just around market value for this type of property. Rental Property #1 is currently renting for $2090/month, so I am confident this property can command a similar rate. For a purchase price of $285,000, the CAP Rate is 8.84%.
There was a time when the real estate market was still down and everyone was scoring deals with CAP Rate’s over 10%. Sadly, those days are long gone in my area. Though, 8.84% doesn’t sound too bad to me!
Monthly Operating Expenses:
Interest Rate: 3.5%
Rental Income: $2100
Principal: $336.40
Interest: $623.44
Property Tax: $285.00
HOA: $306.00
Vacancy: $42.00
Maintenance: $35.63
Insurance: $20.00
Total Monthly Expenses: $1648.47
Monthly Net Cash Flow: $451.53
Effective CAP Rate:
Net Operating Income (Rental Income - Expenses):$1411.37/month
The Effective CAP Rate is just under 6.0%.
Total Cash Return Rate:
The TCRR calculation assumes that the downpayment will be 25% of the purchase price, or $71,250. In a given year, the rental property should return $9455.16 (free cash flow + principal). This puts the yearly yield at 13.27%, which is higher than what I’m getting for Rental Property #1.
What’s Next?
The numbers look good, and the property is located in a very good area. In fact, the neighborhood is even more desirable than that of Rental Property #1. Vacancy is also expected to be low, and rents should more than keep up with inflation. This is a deal I really don’t want to miss out on.
As part of my new strategy for 2013, I am anticipating that I won’t contribute to my 401k until the second half of the year. This should give me some time to come up with the downpayment.
Still, to come up with $70,000+ in a short period of time is no small task. Depending on when the short-sale finalizes, I may have to sell some stock in my taxable portfolio to fund this purchase. I have a candidate in mind to sell, so if the market keeps rising, I’ll make a sale, book the profits, and temporarily remove the funds from my brokerage account.
I never want to remove funds from my dividend portfolio, but, hey, something’s gotta give here. In this instance, the real estate deal looks too tempting to pass up on. I’ll just have to redouble up my efforts to fund the dividend portfolio at a later time. No one said it would be easy to juggle both a dividend portfolio and rental properties, right? Hoping for the best, but planning for the worst! I’ll keep readers apprised of the situation as events unfold. Stay tuned 😉
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{ 13 comments… read them below or add one }
No 100x rule, but do you think you’ll get any appreciation out of the property?
Also, how are you making the math graphics, they look good. Might need to steal your methods!
these are images probably created in any math writer (open office has a math.org which can be to do this) and then print screen. That’s how I would do it. 😉
Martin,
Yep, I use the print screen 🙂
PK,
I use Math Type, which can be downloaded for free. Check it out, it’s pretty nifty.
Take care!
Yeah, it’s hard to find any properties that fit the 100x rule in my area. Those days seem to be long gone. I do anticipate some good appreciation from the properties. I’m already up about $40,000 from the first property I won in July. The market has been surging since, so it’s not too surprising.
Take care!
These numbers look great. I can imagine how it sucks taking money out of your dividend portfolio but for a return on your money like this that you have full control over you can’t beat it. Thanks for laying out all the numbers so clearly, it makes it very easy to understand.
Marvin,
Thanks. I’m glad the numbers/calculations are proving useful. The return is really solid, so I don’t want to miss out on this deal.
Best wishes!
Good luck on this endeavor, sounds promising so far. I flirted with the idea of buying a duplex, living in one side, and renting out the other, but couldnt quite make it work out. I like the idea of diversifying income streams. As much as I love dividend stocks, it is good to have a backup plan.
David,
Thanks. I feel the same way. I love dividend stocks and believe in the philosophy, but also feel it’s a good idea to mix in some real estate as well. Historically, both methods have made a lot of people wealthy, so they are both proven to work.
Take care!
How do you get cash for buying properties or is it all mortgages? I was able to buy my own apartment, expensive as hell since it is in a ski resort and I am deep in debt unable to take another mortgage to expand. More over I am under water so I cannot sell it.
I wish you good luck.
Martin,
I put 25% down on each property. The rest is borrowed from a lender. Though it does take a long time to save up for the downpayment. In this case, I would have to sell some stocks, since I don’t have that much cash on hand.
In my case, I was pre-approved for more than I spent the first time around. I’m anticipating that I can get a second approval from the bank, but we’ll cross that bridge when I get there.
Thanks for the well wishes. Best of luck to you as well!
Congrats on making the next step in the process. I would really like to get into some rental properties to help diversify my income sources. It never hurts to have multiple ways to have your living expenses covered. Are you planning on using some of the cash flow from the properties to pay off one of the mortgages or bank it to be able to add to your collection or invest?
JC,
Thanks! At the moment, I’m planning on using the cash flow to pay down the mortgage when the market is not compelling me to buy. If the markets are down, I’ll most likely use the cash flow to purchase more dividend stocks. I guess it’s up to me to judge, but all things being neutral, I would probably lean towards paying down the debt. But that’s mostly for peace of mind, and the fact that I really want to be mortgage free in sooner than 30 years.
Take care!