Real Estate Investing Case Study

Everyone love’s to learn from real-life case studies.  Here is one that shows the process of using private lenders to buy and hold rental property.

There are 2 parties involved:

1.  Catalyst –  This is the deal maker and real estate investor

2.  Private lender – This is the financier who puts up the money for the deal

cash flow idea

The catalyst markets and finds a great deal on a 3 bedroom, 2 bath home at a 40% discount price point (60% loan-to-value ratio). What that means is the purchase price and all fix-up costs will not exceed a total of 60% of the after-repair-value of the home.
Purchase price: (includes closing costs) $ 40,000
Fix-up costs: $ 20,000
Total investment required: $ 60,000
After repair value: $ 100,000

The total investment required is $60,000 and the after repair value of the property is $100,000, which leaves $40,000 of equity once the fix-up is completed on the property. The catalyst found the deal, negotiated it, and performed the fix-up, while the private lender funds the entire transaction expense of $60,000.

In my market here in Richmond, VA, a house like this one will be a typical 3 bedroom, 2 bath house in a working class neighborhood. This house in Richmond will rent for $950 per month creating a nice income stream for the joint venture investment.
The catalyst used none of his own money to get monthly cash flow and an infinite return.

The primary on-going expenses associated with holding real estate are taxes and insurance. In Richmond, the taxes and insurance combined will be about $150 per month for the house in this example which leaves $800 net rental for the on-going monthly income stream for the joint venture.

The $60,000 investment has now been used to pick up $40,000 of gross equity and a $800 monthly income stream. I hope you are wondering how this gets applied back to the members of the joint venture because the answer is… any way that the Private Lender and Real Estate Catalyst come to terms.

For simplicity sake, let’s assume that the two joint venture members agree to a 50/50 split in this venture.

With a 50/50 split, the $800 monthly income stream is split so that both members receive $400 each month; along with this monthly income stream both members also will share the upside equity at some point in the future.
What Did Each Member Earn?

Let’s make one last assumption to show how the ultimate return can be easily calculated for both members of this joint venture.

Let’s assume that both members hold onto this investment property for five years then sell it for $100,000, which is today’s value of the house. What did both members earn on this joint venture?
Private Lender earnings:
$400 per month for 60 months: $ 24,000
Upside equity split of the total $40,000: $ 20,000
Total return over the five years: $ 44,000
Total investment made: $ 60,000
Annualized return for private lender: 14.66%
Real Estate Catalyst earnings:
$400 per month for 60 months: $ 24,000
Upside equity split of the total $40,000: $ 20,000
Total return over the five years: $ 44,000
Total investment made: $ 0
Annualized return on investment: Infinite

Everyone Is Happy

The private lender made a very strong return of 14.66% annually and his $60,000 investment turned into a $104,000 at the end of the five years.

The real estate investor (catalyst) used none of his own funds, enjoyed $400 per month in cash flow and an overall return of $44,000 over the five years. The catalyst enjoyed an infinite return because he used none of his own money in the investment.

How many houses would you want to buy and hold this year and earn $400 per month on each house?

I challenge you to establish a plan and invest in yourself, so you can easily structure investments similar to this one.

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Comments

  1. Russell Joyner says:

    Jim, This is a great case study. How do you prefer to establish ownership: LLC; S-Corp; private owner + separate financial contract; other corporate structure?

    • Jim Ingersoll says:

      You can use an LLC, share equity note and deed of trust or a Joint Venture Agreement. Great question!

      Jim

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