I am a strong believer of investing in under market value real estate property with all cash and owner financing them. When you buy distressed properties with all cash and finance them to qualified buyers, there is one overwhelming advantage with these below market value investments:
- You have no mortgage on your property investment, so if the property is ever vacant for any reason, you do not have overwhelming financial pressure bearing on you. Over leveraged real estate investors were a major factor in the real estate meltdown five years ago.
Of course, on the other side of the ledger, you cannot purchase as many distressed sale properties as you could if you leveraged your capital and use 20% down conventional financing. This is always a valid concern for people with limited capital to invest in the best San Antonio investment property.
Still I would like to illustrate how the smart and patient investor can take three fixer upper homes and turn it into 6 and possibly more in 5 years, assuming you have no additional cash to invest after the initial investments. The illustration below assumes you owner finance the houses, so you do not have any maintenance costs. This is our tried and true positive cash flow model!
That $275,000 in Your IRA
I run across many aspiring investors that have savings and IRA assets of $275,000 or so. In current market conditions in San Antonio TX, that $275,000 can fund approximately three solid distressed sale properties in cash. Let’s illustrate with three houses we have right now:
- Property 1 – 262 Bogle St., 78207: $50,000 + $30,000 rehab = $84,500 investment + $2500 closing costs, $2000 commissions = $89,000 total investment.
Total Owner Finance Cash Flow Per Year: $8940 ($745 per month after tax/ins.)
- Property 2 – 109 Llano, 78223: $29,900 + $40,000 rehab = $69,900 investment + $2100 closing costs, $2000 commissions = $74,000 total investment.
Total Owner Finance Cash Flow Per Year: $9,000 ($750 per month after tax/ins.)
- Property 3 – 1027 Sams Dr., 78221: $59,900 + $40,000 rehab = $109,000 investment + $3000 closing costs, $3000 commissions = $115,000 total investment.
Total Owner Finance Cash Flow Per Year: $12,000 ($1095 per month after tax/ins.)
Total Income from 3 Properties Per Year: $29,940
The next step would be to bank that positive cash flow from your three properties for up to five years. At the five year mark, you will have approximately $149,700 in your tax deferred IRA.
At this point, how many property investments you can buy depends upon the state of the San Antonio real estate market. Right now, the prices are higher because unemployment is lower, and more rehab is necessary to sell the houses. However, there is a high probability that in the next five years, there will be a substantial downturn in real estate prices.
In the last crash from 2008-11, the price of my distressed houses dropped from $50,000 median to $30,000 median. I was able to purchase many more homes during the downturn.
If the prices go down to approximately $35,000 per property plus $10,000 in rehab (possible in a slower economy given people simply want any house to live in), you could buy at least 3 more houses, and possibly 4. With three more houses, you would have approximately $45,000 in total cash flow from your grand total of six houses!
If the prices stay the same five years from now (which in my 15 year experience is very unlikely), you could purchase at worst two more properties, with a total cash flow from your five properties of $40,000 or so.
In either case, that cash can be banked in your IRA to buy more of the best San Antonio investment property whenever market conditions warrant buying more.
I am waiting until the next downturn to take my banked cash flow from my current portfolio to buy at least another 20 houses. You can and should do the same thing!