Real estate investors across the country are acquiring foreclosed properties for pennies on the dollar, rehabbing, refinancing, and renting them out for incredible cash flows. So what’s holding you back? Is it the lack of funds? Or is it no interest in being a landlord? If dealing with tenants has you scared of starting your own million real estate portfolio, hire a good property management company to handle those headaches. If it is for lack of funds, then you haven’t looked hard enough. Hard money, private money, local community bank money is available. The deals that are out there right now are too good to pass up.

Here are real world numbers of a rehab near Chicago, IL.

• Bank Foreclosure – 4 bedroom, 2 bath, brick home
• Purchase Price: $26,000
• Buyers are brokers and made $2,700 in commission from the bonus being offered
• Actual Rehab Cost: $32,150
• All in costs: $59,500 after a full cash-out refinance
  • Lenders cash-out refi criteria allowed for a full cash out up to 65% ARV
• After repaired value: $120,000
• Loan obtained was for $59,500 at 6.5%, 15 year amortization, 5 year balloon
• Section 8 rent is $1,500 per month plus one month’s security deposit– all utilities paid by tenant
• Monthly Cash Flow after PITI (principle, interest, taxes, insurance) is $603
• Amount of time to payoff mortgage if the ENTIRE cash flow is applied to the monthly mortgage payment:

5 YEARS AND 3 MONTHS!!!

Quick Cash Flow Calculator Details

Lather, rinse, and repeat as needed.

No Property Management Fees

Notice that that the property management expenses are zero. The investment group purchasing this property does their own property management. Their keys to successful property management are to address maintenance concerns immediately and collect rent aggressively. In this case, rent collection is easy since it is directly deposited into their bank account from the local housing authority. Property maintenance is easy due to the quality rehab performed.

Vacancy Factor

The vacancy factor is zero since happy section 8 tenants in quality homes do not move very often.

Property Taxes

Notice that the property taxes are very high for such inexpensive housing. The high property taxes are a cost worth dealing with since the crime rate is much lower and the neighborhood is much better than most areas with housing this cheap. Many neighborhoods with foreclosed homes selling for $20,000 are typically rough areas with higher crime rates. It takes some research to find the right balance between cheap home prices and reasonable crime rates.

Cap Rate

Notice the ridiculous capitalization rate of 22.6%. That is almost unheard of when comparing rental properties. Most good cap rates are between 10 – 13% on rental properties that are considered cash cows. The cap rate is typically calculated by dividing the purchase price by the NOI. In this case the cap rate was calculated by dividing the end loan amount by the NOI.

No Money Down

Notice that the cash on cash and total return cannot be calculated since the initial cash investment is ZERO after the cash out refinance. The returns are infinite when you are making money with no money down.

Debt Service Coverage Ratio (DSCR)

Most banks like to see this number be at least 1.2. This indicates that the property’s income after expenses is 20% greater than the mortgage payment required. In this case the DSCR is 2.16 which is incredible. DSCR is calculated by dividing the NOI by the monthly mortgage payment to generate a ratio.