Frankie's Single Family Residence (SFR) Example # 2 (A Good Deal)
Property Details
Property Type: Single Family Residences
Beds / Baths: 4 / 2.5
City, State: Lancaster, CA
Strategy Before Purchase
I viewed this as an appreciation play. It was in a great neighborhood, but didn’t seem cheap at the time (e.g., didn’t meet the 1% rule). I also had a goal to buy a property at each of my assignments.
Deal Analysis
Purchase Price / Current value: $198k / $395k
Rent: $1750/mo
PITI / Current loan type and rate: $1457/mo.
Management: $0/mo
Maintenance: $87.50 (5%)
CAPEX: $87.50 (5%)
Differential $118
Original Strategy
I viewed this as an appreciation play. It was in a great neighborhood, and I also wanted to buy a property at each of my assignments. This time I ran the numbers, but they still didn’t make sense at the time based on the principles of Bigger Pockets.
Lessons Learned
I feel like I got lucky with this deal. I used my VA loan to get into this property at 3.25% (e.g., this includes a refinance which brought the rate down) with virtually no money down. At the time, the rents compared to the purchase price still didn’t make much sense from a Bigger Pocket’s perspective (e.g., it was at about .85% vs. 1%).
When I run the numbers now, it’s clear to me that this is probably my best property in my portfolio. Currently, the rents are below market, though I manage it myself. I’m on my second tenant in over 10+ years, and they have been there for 2+ years. This property has been been beyond easy. I probably spend about 1 hour per month managing this property.
As you can see, the cash flow is “average”, but the appreciation has been phenomenal. However, I purchased this property in the depths of the Great Financial Crisis (GFC). This was a scary time for me even though the purchase price had dropped by over 50%. Additionally, I realized that my first property was going to be an alligator (i.e., negative cash-flow).
Looking back now, this was an obvious opportunity, and I should have purchased many more. Hindsight is 20-20 and, as Warren Buffett has been known to say: “Be fearful when others are greedy, and greedy when others are fearful".
Since I’ve owned this property, I’ve taken out an ~$50k Home Equity Line of Credit (HELOC). I also gave myself a “credit” of $800/mo while living there. My one regret is that I didn’t restructure the refinance into a conventional loan and left it as a VA. This will bite me when I move back to D.C.
This property has produced an ~35% Internal Rate of Return (IRR) over the 10+ years on the original investment. Granted, I used a VA, but I count the cost of living in the property for 3 years as well.
albeit, that was only about $25k. The ultimate lesson is to always run your numbers!!!