Increasing Cash On Cash Return For Rental Investments

Lately I’ve been dabbling the numbers to maximize the cash on cash return for rental properties. I’m interested in helping others, as well as myself, acquire properties in the Houston area to build wealth, and maximize investment.

I’ve put together a sample deal to explain how to maximize your returns when financing real estate. The goal of this post is to educate buyers on how to increase their returns on their money. I’m also going to prove why real estate is a better investment than the stock market.

Since 2011, the stock market has returned on average a return of 8.3%. Since 1990, the stock market has returned on average a return of 9.4%. Inflation is sitting around 2% annually right now, so realistically you’re getting around 6%, on average, in the stock market.

Here is my sample real estate deal. This is one I’ve found in the Houston area:

Purchase Price: $47,000
Repairs: $5,000
All in: $52,000

Rental rate: $900 / mo – $10,800 / yr
Cash flow: $450 / mo – $5,400 / yr (financed)

Down payment: $11,750
Repairs: $5,000
Closing Cost: $750
Inspection: $300
Total Expenses: $17,800

Cash on cash return: $5,400 / $17,800 = 30%

Purchase: $47,000
Repairs: $5,000
Closing Cost: $750
Inspection: $300
Total Expenses: $53,050

Cash on cash return: $8,640 / $53,050 = 16.28%

Origination: $1,560
Appraisal: $500
Inspection: $300
Closing Cost A-B: $750
Closing Cost B-C: $0
Total Expenses: $3,110

Cash on cash return: $5,400 / $3,110 = 173%

If you notice my last analysis, the hard money to 30 year conventional, I paid 3% for loan origination, and closing cost twice. This is due to having to refinance into a conventional 30 yr mortgage. Note: this can only be done on specific deals that have substantial amounts of equity. Typical HML lenders require 70% LTV.

Also, I did not include closing cost from the B-C closing due to you should be able to negotiate a $0 closing cost if you refinance and let your HML hold the 30 yr note. They are making thousands off the note, they should waive the fees up front. If not, adjust for that in your numbers as well.

Great returns here in the Houston area.. As you can see, leverage is critical in real estate investing. This is how you maximize your investment.

Happy investing


The Rules of Thumb for Landlording

This is going to be a short post today for a short concept, The 1% Rule of Thumb.

The 1% Rule of Thumb was invented by real estate investors to sift through piles of houses. This rule of thumb will quickly determine if the deal is good enough to make you some money (cash flow) or at least break even.

Keep this in mind: all markets are different. In my market, 1% of the appraisal value for Houston is good for rent. Some markets can get up to 2% of appraisal value in rent. You won’t see that happening in Houston.. because its cheaper to own than rent in Houston!

Do not confuse appraisal value with purchase price/repairs!

 Lets break this deal down real fast:

  • Purchase Price: $65,000
  • Repairs: $32,000
  • Total all in: $94,000

The 1% rule of thumb on the “total all in” cost would be $940 per month in rent. I could get that easily. I would probably have too many applications to even review for that house. I wouldn’t cash flow much at all, but I could get that in rent.

Now I bought the house for $65,000 and put $32,000 in. We’ve found that were $94,000 all in. But here is the kicker..

The house appraised for $137,000.

1% of appraisal value – $137,000 = $1,370 per month in rent.

So now we know the difference between the 1% rule of thumb on appraisal value / purchase price.. but what about a rule of thumb for PITI?

Estimate 50% of your collected rents will go towards PITI, vacancy, property management, and maintenance. So really, you should profit 50% of what you collect in rent per month.

So a quick snapshot on landlord rules of thumb:

Appraisal value: $137,000 x 1% = $1,370 per month

50% rule = $685 cash flow per month.

Although it’s not going to be like that every month, I’d say it’s within $15 of what is actually performing on that property for me.

If you can learn these basic rules of thumb, your life as a real estate investor will be much easier.

Merry Christmas!

How to Analyze & Purchase a Multi-Family Complex

I am working with more and more investors lately, and it seems that they are all interested in a very hot item right now: multi-family complexes.

If you ask any seasoned real state investor, they will tell you that they would rather own a complex of 4 units, rather than 4 single family homes. It makes logical sense, due to the fact it is easier to manage, you have 1/4th the maintenance, and you have one location.

I’ve worked with investors who buy multi-family properties and have great innovative strategies, such as maximizing by renting “per room”, instead of renting “per unit”. This works best in areas where students are living near by, and want to rent rooms on a “per room” basis.

Below is the break down I use to analyze a multi-family deal:

I’m not going to go over cost estimation, appraisal value, after repair value, or LTV value. I have gone over this in previous post. This information is calculated by due diligence, and finding out what repairs the place needs. You also need comparable sales / appraisals for the true value of the complex.

Take note of the cap rate. The cap rate is a tool many investors uses to look at what percent they capture the first year on the deal. Some investors will take cap rates of 6.45% – others want high cap rates, of 20%+.

You can calculate the cap rate by dividing the net operating income by the sales price. So in my case, 14,724 / 215,000 = 0.0685, or 6.85%.

Maximize your cap rate by finding cheap properties that need repairs, and get the repair work done at a good cost. You can also adjsut your cap rate by increasing rent. Just think the higher cap rate, the higher your first year return.

Look at my buying cost column on the bottom left hand side of the deal. Some of those are fixed costs, and some are variable cost. As you might know, fixed cost stay the same, variable cost are based on variables in the deal. Majority of the variable costs you’ll run into are based off your loan amount / purchase price. These are your out-of-pocket expenses, around $9,000-10,000.

On the top right hand column, you see the “Rent Roll”, which is where you will find what each unit is renting for. So each 3 bed, 2 bath apartment is renting for $900 total, or $300 per room. So that’s $3,600 a month gross rent, or $43,200 annual gross monthly rent.

Below that is your expenses, broken down in both annual and monthly expenses. You subtract those from your gross rent, and you have your monthly / annual cash flow.

I like to divide my monthly cash flow by my out-of-pocket expenses, which will give me a break even point in months. So after 7.95 months (lets call it 8), I will break even on my investment. That’s not too shabby…

How about we look at this deal now, on what that “creative” savvy investor did, renting each room for $500..

You will notice some numbers stayed the same (fixed costs), and some changed (variable costs). Your monthly note stays the same. Your taxes stay the same. Your property management fees increase (budget 10% of monthly rent for property management fees – even if you’re managing yourself, you can write it off).

Most importantly, you might notice that he increased his cash flow to $2,955 per month, from an original $1,227 per month – that’s a gain of $1,728 per month, or $20,736 per year!

He broke even on his initial investment in 3 1/2 months with a cap rate of 16.49%.

Obviously, more tenants will result in more stress, more occupancy, and more maintenance.  You will need to adjust your numbers accordingly.

Multi-family investing is a tried and true way to gain passive income from the real estate market. I am a firm believer that having control over your money, and investing right, will lead you further than any stock market, mutual fund, or index fund.

With a little knowledge, and the right real estate agent, you can go far in real estate investing.

Houston Area Market Snapshot: What you can buy for $65,000

I’ve been working this past year with numerous real estate investors, both in and outside of the Houston area. Most the real estate investors I work with have only been to Houston 2-3 times, but know the market here is thriving for buying real estate.

According to NAR statistics, Houston is ranked as one of the best places to find value in real estate in the country. Although values have not significantly dropped in markets such as Phoenix, or Los Angeles, there is still considerable investment opportunity in the Houston market.

Many real estate investors are finding their way to the Houston area from forums such as, or Flip This House Houston (which they are currently shooting in the Heights area), or other methods drawing them here.

Some agents will tell you that “house flipping” does not exist in this market. I beg to differ, and you’ll see why. It might not be the best market for house flipping in Houston, but I have seen areas where it is happening. I will go over the parts of town that investors are currently capitalizing on, and my thoughts on the next “up and coming” area of Houston in my next blog post.

So, is the Houston area real estate market bad right now? I would say no. Based on a study done by Trulia, real estate sales in Houston have increased by 7.6% from 2010 to 2011.

We’re going to call this blog post: Houston Market Area Snapshot: What you can buy for $65,000. All of these deals are taken from the MLS, and are currently active on the market. These deals were taken randomly, and not selected for best / worst condition.

If the Days On Market has an astrict next to the number, then it means the house has been listed more than once. If the price has an astrict next to the number, then it means the price has been adjusted (most likely reduced).

Also be noted: some After Repair Values are less than list price. This reflects sold comps on each house, and the comps came in lower than list price, sometimes significantly lower. If the ARV could not be determined by comps, then I pulled Harris County Tax Appraisal District records and gave tax assessed value for ARV, which is noted.

Take this info and use it however it can help you. Notice the significance in the year built of the home. If I was buying a house to fix / flip or to rent out, I would pay close attention to the year built, due to maintenance issues.

North/Spring area:

List price: $65,000* / Days on market: 89 / After Repair Value: $84,000
Price Per Sq Ft: $35.91
Rental rate: $1,100
3 bed, 2.5 bath, 2 car attached garage
1,810 sq. ft
Year built: 1979


List price: $65,000 / Days on market: 254* / After Repair Value: $60,000
Price Per Sq Ft: $45.01
3 bed, 2 bath, 2 car attached garage
1,444 sq. ft
Year built: 2004


List price: $65,000 / Days on market: 17* / After Repair Value: $66,000
Price Per Sq Ft: $45.14
Rental rate: $1,050
3 bed, 2 bath, 2 car attached garage
1,440 sq. ft
Year built: 1979


List price: $59,999* / Days on market: 104* / After Repair Value: $85,000
Price Per Sq Ft: $35.38
Rental rate: $1,300
3 bed, 2 bath, 2 car attached garage
1,696 sq. ft
Year built: 1983

South East:

10906 NEWTON ST, HARRIS, TX 77075
List price: $65,000 / Days on market: 14 / After Repair Value: $80,324
Price Per Sq Ft: $34.74
Rental rate: $N/A
3 bed, 2 bath, no garage
1,871 sq. ft
Year built: 1958


List price: $65,000* / Days on market: 135 / After Repair Value: $80,000
Price Per Sq Ft: $41.94
Rental rate: $850
3 bed, 2 bath, 1 car attached garage
1,550 sq. ft
Year built: 1949


List price: $65,000 / Days on market: 16 / After Repair Value: $85,000
Price Per Sq Ft: $38.28
Rental rate: $1,175
3 bed, 2 bath, 2 car attached garage
1,698 sq. ft
Year built: 2006


List price: $64,500 / Days on market: 14* / After Repair Value: $84,500
Price Per Sq Ft: $54.66
Rental rate: $1,150
3 bed, 2 bath, 2 car attached garage
1,180 sq. ft
Year built: 1980


List price: $59,900 / Days on market: 86 / After Repair Value: $95,000
Price Per Sq Ft: $41.28
Rental rate: $1,000
3 bed, 2 bath, 2 car attached garage
1,451 sq. ft
Year built: 1978

Clear Lake:

List price: $65,000 / Days on market: 13* / After Repair Value: $25,000
Price Per Sq Ft: $70.27
Rental rate: $825
3 bed, 1 bath, no garage
925 sq. ft
Year built: 1955


List price: $65,000* / Days on market: 146 / After Repair Value: $103,910 (tax)
Price Per Sq Ft: $29.76
Rental rate: $N/A
3 bed, 2 bath, 1 car detached garage
2,184 sq. ft
Year built: 1956

Are you a Houston area real estate investor? Are you looking to invest in the Houston real estate market? Leave feedback/comments on my blog and let me know what part of town you like to invest in.

Intro to Investing in Foreclosures

Hello and welcome to my new blog,

The propose of my blog is intended for real estate news, market information, facts, and how-to materials. What inspired me to start writing this blog came from other members in the social media world. Others were asking questions, but could not find answers – better yet, did not know where to find answers. Some people could find answers, but did not know how to ask the right questions. Hopefully I can shed some light on subjects that will help you out, with real life examples – and you can learn from them.

I do not have all the answers, and I am constantly still learning as well. I am here to share with you the knowledge I have gained over the past few years.

Let me say first that real estate is an amazing business. There are all kinds of ways to make a living, or investments in real estate. You can work full time, or part time – and still be very pleased with the income you receive. There are narrow niche markets in real estate, and wide markets in real estate. This post is an introduction to a niche market of residential real estate, investing in residential foreclosures.

What is a foreclosure? A foreclosure is a property that was once owned by an individual who lost the property for some reason. Typically, the individual loses their property due to financial woes. Some reasons why homes go into foreclosure is known in real estate as “The 3 D’s”: death, divorce, and debt.

The typical process of home ownership goes something like this:

Couple A decide to buy a house. Together, they come up with a down payment and finance their house.

Once the house is financed, the original lender will typically sell their mortgage on the secondary mortgage market, to another buyer. The first lender makes money, and sells this note to decrease their risk (borrow default).

The buyer who purchased the original note now holds the mortgage. Currently, Fannie Mae and Freddie Mac are the largest buyers on the secondary mortgage markets.

If the home owner defaults on their mortgage (non-payment), the company who owns the note will usually begin the foreclosure process after 3 months of delinquent payments. This puts the home owner in a bind, because of many stipulations, such as the acceleration clause, which gives the owner of the note the legal authority to call in the entire note once the payments are delinquent. If the home owner can not come up with this amount, than the house will be taken from them and sold as a foreclosure.

If you have been watching the news lately, you will notice that right now there is an all time high foreclosure rate in the United States. In fact, 2011 is expected to have the most foreclosures ever on the market – over 1,200,000 houses are expected to flood the market.

Other media outlets talk about homes being “underwater”, which means the owner owes more than the house is worth. This induces the dilemma of the homeowner walking away from their mortgage, and taking a hit on their credit score for the next few years. Each individual case is different, and homeowners facing foreclosure have more options today than ever to resolve this type of issue.

What does this mean? Well, this type of news can be good – or bad, depending on where you are in your life, and what you are trying to accomplish. If you bought your house in the 90’s, the market was a lot different than what it is today. You could have paid top dollar for the house, waited for a few months, and it would appreciate in value over that time – tremendously. This is what got many states in trouble, artificial inflation of home values.

This can be great news for first time home buyers. Interest rates are tremendously low, and home prices are dropping. Currently, 1 in 4 home sales, or 25% of US home sales are a foreclosure. Foreclosures sell anywhere from 95% to 60% of fair market value, depending on the state of the house.

This can be bad news for an established family who bought in at the peak, and who now need to sell and take a loss on their equity, or worse, who are now underwater.

Again, this all depends who you are, and where you are at in your life.

Flip This House on A&E shows crews from all over the country who buy foreclosures, pre-foreclosure houses to renovate, and sell. They are able to do this because they are buying these properties at pennies on the dollar. Many people watch these shows and see the entire scouting/purchase/rehab/sales process in an hour show, while the investor makes anywhere from $20k – 150k.

Real estate investors know that although this makes great TV shows, this is hardly the case in residential real estate investing. Typically investors look at over 10-20 properties, before they decide to make an offer on one. These types of shows do not show this process. There are other costs associated with fix & flip deals that are not shown on these shows, that will need to be taken into account as well.

Hopefully we can give you a realistic idea of how much you can make depending on what you can put in. There are many ways to make money in real estate. I am currently focusing my efforts on foreclosure investing due to the fact that there are so many in the US right now.

I will be creating YouTube videos on location to help out people who are new to real estate investing. My first video is an introduction to foreclosure real estate investing (fix & flip or buy and hold). My company focuses on the fix & flip strategy.

As a real estate investor, what you should take from this is:

  1. Banks DO NOT want to hold real estate. They will be more inclined to negotiate with you.
  2. Home owners facing foreclosure are motivated to sell. They want to sell fast, because they are on a time crunch. This is typically called a pre-foreclosure or short sale.
  3. Typically foreclosures are in bad shape (interior and exterior). The house isn’t doing anyone any good. Banks don’t want it, it is making the neighborhood look bad, and it drives down other home values which are being sold.
  4. Gurus selling “real estate systems” for thousands of dollars are NOT turn key make money quick ideas. Invest 1/20th of that money in books.
  5. The best resources for real estate investing are usually free
Hope this helps. It should get you started in the real estate investing world, and hopefully save you some money.

Until next time,