Why rentals are better than assignment fees
I read a great social media post this morning. It was from an investor who was writing to explain why long-term rentals are something wholesalers need to consider when they get houses under contract. And to support his position, he went through the numbers on a recent deal.
(Now, I went back to try find you the post so that I could report the numbers exactly, but I couldn’t find it in a timely fashion. So, I’m going to do my best to recite them from memory.)
The subject property was an older, two-bedroom, one-bath house that he had bought for cash. And I gathered from the pictures in the post that the house was in great shape, so little to no rehab was needed.
The investor was going to rent the house and said that after all monthly expenses he would have a positive cashflow of $850. This amounts to $10,200 a year in passive income. He also said that his return on investment (ROI) would be 10.52% if he held the property for 20 years, which is a pretty good return.
Now the investor said that he could have made an assignment fee on this house of $10,000 to $15,000. And what he was cautioning wholesalers on was that that assignment fee is not what you actually make. He said by the time he paid for staff, advertising, and taxes, that his actual income off that assignment fee would only be somewhere between $5,000 and $7,000. And he pointed out that that was best case scenario. He said the income could be as low as $3,000.
He then pointed out how much better it is to receive a passive income of $10,200 a year, along with the tax advantages associated with owning investment property, than to receive a onetime assignment fee that was less than that annual income.
I thought this was a well thought-out post. You see, it’s easy to get caught up in making $15,000. Chunks of cash like that, received quickly, feel really good. And it’s almost addictive to some — chasing that quick cash.
But is that the point of real estate investing?
It is not for me. I don’t want to constantly be on a chase. That’s a lot of work. And the point of real estate investing is to earn money without having to regularly work for it. That is what passive income is all about. And passive income is far superior.
Let’s test this notion by evaluating a rental we have had since early 2013.
The house was a beautiful three-bedroom, two-bath house with a one-car garage and vinyl siding that was in great condition. It had new appliances, a new roof and the air conditioning unit was new. The seller got our contact info from a coworker of his that we had done a deal with the previous year. He was selling due to divorce. He was two months behind and had no idea how he was going to get the money to keep the house afloat while he tried to sell and also moved.
We came up with a subject-to offer where we caught up his back payments, gave him sometime to move and then left his mortgage in place after the sale. And he agreed to leave the house broom swept clean when he left, and allowed us to show the house to prospective tenants.
Ya’ll, we had someone moving in the day he moved out. We literally had no turnover.
The interest rate on this mortgage was an attractive 3.1% on a 30-year fixed, and the monthly payment was $435. The rent rate at the time was $795, which meant we were making a cashflow of $161.35, which was awesome at the time because our target was $150. That meant we enjoyed a yearly income of $1,936.20. But since we leveraged his mortgage, our investment was only $900. That gave us an ROI in the first year of 172%. Not too shabby, huh?
Flash forward to today, and that same house rents for $1,300 and has a positive cashflow of $496 a month after all expenses. And over the 9 1/2 years we have owned it we have had only two tenants, and it has only been vacant for 2 1/2 months. That’s a vacancy rate of 2.2%. That means we have had consistent income this entire time, and we have had very little maintenance cost as well. But here is the thing: the rental paid for the maintenance without us sacrificing our cashflow. Awesome, right?
But here’s the other thing: at the time we purchased that house, it was worth about $70,000. Today we could sell it for $220,000 easily. So, not only does a good rental property yield consistent passive income, but it also grows in value over time. And that’s why rentals are better than assignment fees.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.