Here are the final numbers on House 3:
Purchase Amount | -$138,280 |
Fix Up Costs | - $29,443 |
Insurance | - $303 |
Utilities | - $517 |
| Costs Subtotal | - $168,543 |
Selling Price | $195,000 |
| Selling Costs | -$18,874 |
| Property Taxes | - $491 |
| Income Subtotal | $175,635 |
| Misc. LLC Expenses | - $400 |
| Profit | $6,692 |
| Time Property Held | 168 days |
Total Return (ROI) | 4.0% |
Annualized ROI | 8.6% |
Misc. LLC Expenses include the costs of running the business - a fax line, office supplies, etc. While not technically related to this property, this is the only property I've sold this year, so the profits of the entire LLC are really the same as the profits made by this one property.
Not the best ROI in the world and definitely below what I was shooting for. However, I'm reminded of an old adage of stock traders - never complain about a profit. If you compare these results to those of the last house I flipped, it's not so good. On the other hand, I owned the house for a shorter period of time and at least $3,000 of expenses were due to break-ins. If I hadn't had to spend that, my annualized ROI would be up around 12.5%. A lot of my profits from the last house were due to the red hot real estate market - since I had to hold the property longer, I was able to benefit from the run up in prices. In the current cooler market, I didn't get the rapid appreciation to help improve the ROI. My selling costs were also higher. To move the property quickly, I paid the buyer's agent 4% instead of the customary 3%. That cost me an extra $1,950. I also contributed 3% towards the buyer's closing costs and prepaids. This was another $5,850 that I paid on this sale that I didn't pay on the sale of the last house. However, given the relatively poor neighborhood, I knew when I bought the place that I would be required to contribute some money to the seller at closing since they would likely be cash poor.
My next post will go into the lessons I've learned from this property.
15 comments:
Since you held the property for less than 1 year, the profit is subject to income tax, isn't it? How does that effect the ROI?
Congratulations! Maybe the ROI was not as high as you would've liked, but there is huge value in lessons learned. You cannot put a price on experience. I imagine you have better relationships with various team members now as well, which will short cut some time and (likely) expenses next time around. Can't wait to hear what you've learned.
Congrats. What you didnt make in $$ you made in experience. Those break ins really set you back. thanks for posting. Im looking forward to your next project so that I could continue to be a real estate investor vicariously through you.
Scott - any property that is flipped (i.e., not held for income) is subject to capital gains tax. You cannot 1031 exchange a flip, even if the rehab takes 3 years. I don't look at how the tax rate affects the ROI. This is partly because it's more complicated than I want to get. Also, this project was done via an LLC that I am the manager of. There are multiple investors in the LLC and it is their money I am using. (I get paid a fee, of course.) Since each member owns a different percentage of the LLC and each one also probably has a different tax rate, any attempt to adjust ROI for taxes would be futile. I let their accountants worry about that :-)
Anesia & Anonymous - Thanks for the kind words!
Andviv - This was an all-cash project, so the returns shown are my cash on cash returns.
Stu- You did great- selling as quickly as you did in this market, and not taking a loss is enough in and of itself! Money is money! Sweet!
Shaun, if you had told me you only made 6K with a 55K spread going in and at 70% of FMV (138/195), I would not have believed you. I am glad you posted all the numbers. Close to 10% selling costs does hurt. Also, we try to keep our repairs to 10% of the value of the house and it keeps us pretty safe. Good luck on the next one.
that's a good point on the llc...it's a pass-through entity, so everyone's taxes will be different for their own situation.
the person who asked about cash-on-cash return has a good point. i mean, if you put 0% down, then you're return is virtually infinite. how much were you in it?
anyhow, like the others say, good work and congrats...this isn't an easy business, so i'm happy you're succeeding!
You seem honest and successful. Is the LLC open to new investors?
It didn't seem to me like this one was worth all the time and effort. That's worth money too, but not worked into the ROI.
Anon 2 - when you put the numbers that way, it sounds like this deal really sucked! :-)
Anon 3 - This LLC is currently closed to new members.
Anon 4 - Well, that's a valid point. However, the plan going in was to make much more than I did! As it was pointed out, there was a $55K cushion to work with. Things happen. There are always unforeseen costs and problems with every rehab. If you want a guarranteed return, put your money in the bank.
Would you mind elaborating on your insurance costs? Did you insure it with a builder's risk policy or a vacant dwelling? Did that include liability or did you add it? Was it fully earned, or do you get a credit back for any unused portion? Who was the underwriter for the policy? I had a lot of problems with insurance before, thus all the questions, and the price you listed seems quite low for the time you held it.
Regarding insurance: I just called a local agent and asked for a quote. I told them it was an investment property and I needed landlord's insurance. I forget the exact liability coverage it included. Since I knew I wasn't going to keep it to rent out, I wasn't too concerned that. (I know I had people there working, so I should have at least some liability. I know there was some with the policy, but I don't remember the exact coverage and I don't have the policy in front of me.) I think the total cost for a year was around $600. I went with the monthly payment plan though, so I wasn't out a bunch of money up front. (Again, I knew I would be selling the place quickly.) I don't know if I'll get any money back. I think the first payment was two months worth and then monthly after that, so if I get anything back it'll be a small amount. I think the underwriter was Allstate, but I'm not sure.
I found an old email regarding the insurance. I had Landlords Indemnity coverage. $200K dwelling, $20K other structures, $10K personal property, $100K business liability, $1000 medical payments per person, $1000 deductible. $690.31 per year.
Thanks for posting the information. I'm very new at this, only having done one of these, but was under the impression that I had to have builder's risk coverage instead of a landlord policy because of having people working on the property versus it being a rental. I wonder if something had happened while the contractor was working on it that required the user of the insurance policy if they would have covered it. I use Allstate and went to them to get coverage on the property I did. They tried all kinds of ways and couldn't do it. I ended up getting a builder's risk policy underwritten by National Lloyds through another agency. I believe it had liability with it. It was a fully earned, meaning I had to pay for the full 3 months even if I only needed it for 2 weeks, and didn't get any unused portion back. I'm trying to figure out if it is acceptable to go with a landlord policy as you have done or would I need to continue with the builder's risk. Mine cost me like $500 for 3 months, so your option sounds better from a cost perspective, but I worry about the risk in doing so. Was the insurance company aware of what was happening to/at the property?
I think it all depends on how much rehab you are doing. If you are going to be tearing down walls, building new rooms, changing the building's structure in any way, etc., you'd probably want a builder's risk policy. My rehab was just everyday maintenance type stuff like new paint and carpet. Typical things you would need done after one renter moves and and before the next one moves in. To say you need a builder's risk policy for that seems ludicrous to me. I went through an agent told him what I was doing. You should also check to see if you contractor has his own insurance.
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