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The New Approach to Investing in the 21st Century
Research: Decreasing the Group Size Making the
Second Move
The time was ripe to make the second move on our quest to
become millionaires. The proceeds from the first sale were traded, into another
property. By keeping up with the research, we knew exactly where to purchase
the next apartment building.
Since we did so well
on our first move, we were able to make the second move with a smaller group of
investors.
Our second move involved a property that would require a
$175,000down payment. Consequently, we needed only half of the original group
to reinvest in the second property since each of the original investors now had
$35,465 instead of the original $6,000. So, with a group of five members we
made our second move.
Using our Research Report, Market Cycles, we
discovered that Boston , Massachusetts
As with the Phoenix area,
market conditions indicated that seller financing was available in Boston . There were many
different types of financing packages to choose from, but our cost analysis
pointed us to seller financing. In fact, seller financing is usually the most
economical method to use.
The availability or lack of seller financing also gives
additional clues as to current market conditions. While seller financing
indicates a “soft” real estate market where buyers can make good deals, the
lack of seller financing indicates a “hot” market. Since a hot market is one
that favors the seller, it usually means that the seller can maximize profits. A hot market is a good time to sell real
estate, but not a good time to buy.
Our second apartment building was purchased for $1,750,000.
Our group had five investors, each contributing $35,000. The $175,000 pool was
then used as a 10 per-cent down payment on the property.
The total number of units in the complex was based on the
total square footage and the unit mix to yield 44 units. The most desirable unit
mix for this area was three to one.
The first trust deed was 70 percent of the purchase price.
Seller financing amounted to 20 percent; therefore, only a 10 percent down
payment was required.
Operating income and expenses per square foot were compared
to those published by both local real estate associations and IREM. Local property
management firms were consulted to evaluate operating conditions, assist in the
estimates, and verify ratios.
Gross annual rental income was derived by multiplying the
average rental rate of $8.01 per square foot times the total square footage of 32,258
square feet, for a total of $258,387. Per IREM’s reports, projected annual
expenses of 35 percent of gross income were broken down as follows:
Sales conditions in Boston were very good.
The recent drop in the vacancy rate drew many sellers back into the Boston market. It was definitely
the right time to sell.
A selling price of $2,325,000 was calculated by multiplying
the total square footage of the property (32,258) by the selling price per
square foot of $72.13, as listed in the National Real Estate Index for Boston . Total cash flow
from the operations of the property combined with the equity from the sale yielded
a total of $740,574 as of December 31, 1987.Since there were now only five
investors in our pool, each investor netted $148,115 for each $35,000 invested.
This represents a return of over323 percent, or approximately 162 percent per
year.
At the end of the second move, some people might be tempted
to stop here, count their winnings, and leave the real estate game. For those
of you, who wish to make the last move and gain real financial independence,
please follow along next month for part 6.
ABOUT THE AUTHOR: Eugene E.
Vollucci, is a real estate advisor and Director of The
Center for Real Estate Studies, a
real estate research organization in Torrance ,
California
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