First off, it’s been a minute. Well, a lot more than that really. We’ll be posting a lot more often in 2018 and beyond. Now to the meat of the post. Turning a doo dad (Thanks, Kiyosaki) into an asset. In 2014 I had purchased a used Ford F350 truck. It was a work horse and performed admirably. I bought it for cash so there was no note. Purchase was $8500. The reason for the purchase was to have a heavy duty truck to haul materials for my flipping company, which at the time was doing a decent volume in rehabs, etc.
Fast forward about a year or so and the need for the truck no longer existed. First Property Management was growing by leaps and bounds and the focus was elsewhere. Around this time the opportunity to take down a couple duplexes in an attractive part of Chattanooga arose within several months of each other. The truck was sold coincidentally right about the same for the same amount ($8500) as I paid for it. Here’s the anatomy of the deal:
Duplex 1 – A 3 bed 2.5 bath unit and a 2 bed 1.5 bath unit. Purchase was $180,000 with me putting $2,000 down and assuming the existing owner carried note. We quickly pushed the rents up to a combined $2095 total.
Duplex 2 – A 3 bed 2 bath unit and a 2 bed 1.5 bath unit, both freshly rehabbed and empty. Purchase was also $180,000. We rented both units at $2095. Here’s where things get interesting. I borrowed 20% of the purchase price from a business partner at 10%. I put that down and borrowed the balance from a private money lender at 10%, interest only and another 2 points in loan costs.
For those doing the math at home, my out of pocket was $2000 on the first deal, and $3600 (10% on the $36,000 borrowed for the down) plus another $2880 in points with the lender on the actual 1st TD for the second deal. That’s a total of $8480 in out pocket loan costs (real costs were somewhat higher for closing, title, etc.) Both properties appraised for $210,000 each. I did a refi loan on a fully amortizing, 17 year loan at 5% combined for both at $360,000, taking out the owner finance loan, the bridge loan, and the down payment loan. In short, I now owned two properties appraised at $420,000 and my out of pocket was roughly 2-3% of that value. Not bad.
The reality check is the cash flow is not fantastic (I average about $300 after everything) but I have appreciating assets in a high demand area that I control and my actual exposure is nowhere near what one would normally need from an acquisition stand point. Plus the 17 year amortization pays down quickly giving me an accelerated equity stake in each. We also need to look at the original point of this post, which is turning a negative into a positive. The cash flow isn’t bad but when compared against the $8500 investment, the ROI is actually pretty strong. The intent here is to be illustrative. You are only limited by your own knowledge.