Moses Kagan on Real Estate

Here’s a worthwhile strategy

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Got some cash and looking for a strategy? Here’s one I like but don’t do myself:

  1. Buy a REO single family home on a 6,000 sq. ft. lot zoned R3 or RD1.5 all cash for maybe $300k
  2. Rip it down
  3. Build 4,000 sq ft fourplex made up of 4 2 bed / 2 bath units, for $600k
  4. Lease out three units for $2,300 / month (leaving last unit for owner-occupier)
  5. Sell for 11x annual fully-leased gross rents ($9,200 month x 12 months x 11 grm) = $1.2MM
  6. Buyer buys using 5% down FHA loan, putting down $60k and borrowing the rest
  7. You net $300k pre-tax on a $900k investment

Or do the above, but lease out all four units, then re-finance at a $1.2MM valuation with 70% LTV loan, allowing you to hold onto the asset while getting out $840k of your $900k investment. Then rinse and repeat.

You could probably go from being somewhat rich to very rich by doing one of these a year for 10 years. No need to thank me.

P.S.: I need to thank new reader Jeff P., who asked me if I had any interesting ideas yesterday while we were having coffeee. This was the one I came up with.

Written by mjkagan

04/04/2012 at 6:55 am

Posted in Development

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