Introducing – NOOP

For those of you familiar with the real estate market in the Detroit area, you know that this is a ONCE IN A LIFETIME opportunity to build a real estate portfolio.

Yes, I’m sure that you’re all used to the bombast and hyperbole inherent to bogs. But I’m serious about this. Dead serious.

Why? Let me ask you this – where else can you routinely find single family homes priced at forty to fifty cents on the dollar, with a minimum of $40,000 in equity, that need LITTLE or no rehab?

Tell me – where else?

There is no other market like this. Is it risky? Sure. And even more so with the sub-prime crash. But is good, solid suburban property ever going to go to zero value?

No.

When you take into account the fact that General Motors and Ford BOTH turned a profit last quarter for the first time in a long time, you begin to see that the real estate market in this area is not as it seems on the surface.

So as I discussed in a prior post, I seriously recommend that you add some “buy and hold” to your mix. I know that you flippers and wholesalers are all groaning now, (and apologies to Mark) but stay with me for a minute and let me show you what I mean.

Actual Example

Purchase Price – Cash:                 $ 45,000

Total Rehab and holding costs:    $   6,000

All in:                                        $ 51,000

Appraisal after rehab:                 $107,000

New mortgage after rented:        $ 65,000

Monthly NET cash flow:               $     175

What’s wrong with this picture? You buy, rehab, and rent. You take ALL of your money out of the property, PLUS some of your profit when you refinance, the house still cash flows, AND you still have over $40k in equity.

Question - – what’s the ROI when the “I” equals zero?

Hmmmmmmm. How about – infinity??

How many times can you do this? How many times could you do this even if the cash flow was zero?

The question everybody asks is, of course, how do you find these properties? My answer – they’re all over the place on the MLS right now. And I’m not talking about the City of Detroit either. I’m talking about clean, suburban homes in good to excellent school districts where all I have to do is put a sign in the window during what I laughingly call my “rehab” (usually just paint and carpet) and get a dozen qualified applicants before I’m even ready to rent.

You just need to understand the math. And that’s pretty straightforward, because you just work backwards.

Here’s are the process steps:

1. Determine what market rent is for your property
2. Determine your costs (taxes, insurance, maintenance, vacancies, etc), or use a cost factor. (Personally I have a cost factor that I use in the cities where I have rentals.)
3. Subtract your costs from your rent, and you have Net Operating Income (NOI).
4. Determine the amount of cash flow you want/need every month. Subtract from NOI.
5. What you have left is the amount of money you have available every month for debt service. If you’re familiar with present value concepts, you can use them to determine the maximum loan that the amount will support.
6. Divide the loan amount by the LTV percent you expect to have on the property. That yields your total, all-in price. (Purchase price+holding costs+rehab costs, etc). I call it the NOOP number, where NOOP is No Out Of Pocket.
7. If your all-in number is less than or equal to the NOOP number. Congratulations and welcome to the world of infinite ROI.
8. If your all-in number is greater than your NOOP number, then the deal still might make sense. For example, if it’s $2000 over your NOOP number, and you’re cash flowing $100 per month, could you live with an ROI of 5% per month, every month??

If this doesn’t make you sit up and take notice, I don’t know what will. When you have the opportunity to acquire properties with equity that are cash flowing, with no out of pocket cost, personally I can’t think of a better way to build a portfolio of of assets and build real wealth. Can you?