This was the first completed private mortgage deal for Meadows Enterprises. In March of 2014 a group of our investors provided a loan of $90,000.00 to a Jacksonville, Fl “turnkey” rental provider. The company handles the acquisition, rehab, tenant placement, and ongoing management of single family rental homes in the Jacksonville area. Most of the client landlords are from out of town and live in regions of the country (New York, San Francisco) where it is difficult to buy a modest sized rental property that cashflows. The Jacksonville market, while slowly heating up after the 2008 crash, still has plenty of affordable inventory.
The turnkey provider facilitates all of these transactions in such a smooth manner that many of the investors purchase the homes sight unseen and may not ever see them for months or years. All the while they are steadily receiving rent checks as passive, distant landlords. Besides the ongoing management fees, the turnkey company makes the bulk of its money on the sale of the homes to investors. They need to routinely buy below market price and have confidence they will be able to rehab and “flip” the property to an investor within a relatively short (6-12 month) time frame. That’s where the private lenders come in. Traditional banks do not lend on ARV or the after rehab value of a home. They lend on the “as is” condition of the house relative to the market value of comparable nearby properties. In exchange for providing the capital to acquire a home requiring rehabilitation, private lenders are routinely provided with a double digit interest rate of return on the investment. Go back and peruse all of the popular “flip this house” type shows that were all the rage a few years ago. If you pay attention to the financing costs, most of the rehabbers were paying 10-15% interest rates. That is part of the urgency to get the project done quickly.
The key is the ARV being sufficiently above the acquisition price, generally by 25-30%, such that there is enough “fat” in the deal to both pay the private lender and provide profit for the turnkey provider.
The property was a 4 bedroom, 3 bath, 2000 square foot home in a solid working class neighborhood. It rents for approximately $1,300.00 per month.
It was acquired in March of 2014 and ultimately was sold in Jan 2015.
Acquisition price = 90,000 + 11,000 renovation costs = $ 101,000
Monthly interest payments = $750 x 10 months = $7,500 (Meadows Enterprises profit)
Including some additional costs for insurance and property taxes, the all in price tag to rehab and hold this home for 10 months was approximately $112,000.00.
After a couple of near misses, the home ultimately sold for $155,000.00 netting out $33,000.00 of profit for the turnkey company and a return of Meadows Enterprises initial capital.
If you don’t have a spare 25, 50, or 90K cash sitting around, it is possible to set it up where you can use IRA money in some circumstances. Also, real estate crowdfunding is an emerging arena where it is possible to do private lending with as little as 1 to 5 thousand dollars. One of our favorite methods is to partner with outside investors on deals like these. If you would like to learn more about these opportunities, please contact us!
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