Some investments need a little work.
Purchase Price: $80,000
Repairs: $40,000 Total Cost: $120,000
Tenant with Purchase Option: $166,000 Rent: $975/mo
Current Market Value: $175,000
Cap Rate: 0.06
Bakersfield presents amazing opportunities to generate returns while helping people move forward in life. This case study reviews a fixer-upper that has become the home of a family that never thought it would be possible to own a home. Now the home is almost theirs.
A Little Extra Work
Some investments need a little extra work. This tri-plex was unloved for many years. We picked it up for $80,000 and put a lot of elbow grease into it. The transformation is most impressive when viewed from the back yard.
We added white stone to make the driveway look more attractive.
We spent a lot of time making the exterior of the property look good. Buyers and tenants will never look at the inside of a property if the outside does not look good.
Fresh stucco, paint, and a little landscaping transformed the back yard.
Inside the property, we upgraded the electric, installed a new main panel, fixed the windows, and removed evidence that this single family unit used to be three separate units.
A previous owner tried to convert three tiny units into one large house. This was most clearly evident by the unusual location of bathrooms and the fact that there were three main entrances to the house. One in the living room. One was in the kitchen, and one was in the bedroom.
We removed the entrance to the kitchen and gave the new owners the option to seal off the last bedroom and bathroom for an Air B-n-B suite if they wanted extra income.
Helping Others Move Forward
It is always a goal of ours (my wife and I) to help others move up in life. We found buyers who could not qualify for a home loan and offered to sell them the home at market price. They have three years to purchase the home from us at the market value at the time they moved in. Until then, they pay just enough for us to cover expenses. $975/mo. This price is well below market rents, but we feel good at night knowing that a family will have a chance to own something that they previously could not.
By the numbers
Because this is a case study, we have to break things down to the numbers. At $975/mo and a current market value of $175,000, this investment property has a Cap-rate of 6%. This is a low rate, but sometimes investments are not just about the money. Occasionally, they are about healing the soul and putting good energy into the world.
If the current tenants choose not to exercise the purchase option, we will find new tenants at the market rate of $1200/mo and keep the property for several more years. At $1,200/mo, the Cap-rate is much more reasonable at 8%.
As a general rule, I recommend buying properties at 9% to 11% cap rate and investing into maintenance. As long as the cap rate is higher than the interest rate on your mortgage, you are winning as an investor!