Gem Rental LLC Update. 8-1-2011

Let me first remind everyone of this five year projects goals. The goal is to create $2,000,000 million in equity with net spendable free cash flow of $160,000 a year. My partner thinks it should be $240,000 a year divided by two, I won't argue with that.

Each property purchased must produce $200 to $300 free spendable cash flow a month (per front door). The debt to equity may not exceed 66%.

The re-hab of the 5 unit property in Seguin is almost at an end. It has been a long process. We will be out of this project by December. The only thing left will be the parking lot. You can read more about this re-hab in the Gem Rentals articles.

This was our first project that we took on in January 2010. The reason we purchased it was to get started, getting started as soon as possible after you have made up your mind you are going to be in the cash flow business is important. The other reason we purchased this property was that the bank was willing to finance it with 10% down.

We paid $66,000 to purchase the house and four unit apartment building and we spent about $130,000 on the re-hab. The income will be $3,000 a month. Our payment, taxes, insurance and utilities comes to $1,100 a month. Giving us a cash flow if $1,900 a month. The value of the property after the top to bottom remodeling is $$285,000 I will post before and after pictures next month.

We re-financed this property taking out $150,000 in cash to buy more properties. With that money we finished the re-hab of the 4-unit building, purchased three more properties and a real estate note.

First we purchased a 2 bedroom, 1 bath house that someone had added a room to but stopped at the shell stage. We will make this one a 4 bedroom, two bath property that will rent for $900 a month. Cost was $26,000. Cost to re-hab will be about $20,000.

We purchased a first lien real estate note for $7,500 with a balance owed of $20,000 payable at $350 a month with a balloon note due December 2012.

We purchased a 2 bedroom, 1 bath house with a one car garage. It will rent for $750 a month. (See the green house blog post above) Cost was $23,000. Cost to re-hab will be about $12,000

We purchased a 3 bedroom, 2 bath manufactured home of about 1,800 square feet on a corner lot. We will clean this one up, slap on some lipstick and new carpets, new landscaping and sell it on an owner carry note for $90,000 with $5,000 down at 8% or 10% interest. Cost was $25,000. Cost to re-hab will be about $10,000 maybe $12,000.

The property in Poteet, Texas is still rented to the same school teacher, To date,(assuming we get all these projects completed) we will have net equity of $385,000 in all the properties.

So sense January of 2010 we have purchased 5 single family homes, 1 four plex, 1 first lien note. These properties will produce $6,450 a month in income. The net free cash flow should be about $3,500 a month.

We have spent $48,000 in cash another $40,000 in trade and we borrowed $249,000. Our debt to equity is 41%, Total rehabbed value of properties and notes is $605,000.

We can borrow another $150,000 and still be at our 66% debt to equity ratio. We will do that to free up money for more purchases. Three of the six properties are debt free and can be used to secure new loans.

Our return cash on cash is 40% a year. I am making the assumption that we will complete the projects and get the intended rents. So far renting has been easy and I have been doing this a few decades, so I am confident of my numbers.

We wanted to have 16 front doors at end of year 2 of our plan and it looks like we will end up with between 10 and 12 front doors. We currently have 10 front doors on 7 properties (counting the note receivable as one front door). We will need to add 12 or 16 more front doors next year to stay on track.

I put more importance on the free cash flow per front door, and the debt to equity ratio, then I do on just the total number of units rented out.

One must keep in mind that you make your money when you buy, you gain equity when you rehab, and you need free cash flow to grow as well as to have spendable net income. The net spendable cash flow is what allows you keep your loans paid during extended vacancy periods. It allows you to pay for unexpected expenses and generally keeps you out of trouble.

So when I look at a property to buy I want to double my money (purchase and re-hab cost), I want a free cash flow of $200 a month or more, assuming I will borrow up to 66% of the improved value at 8% interest. If a property will produce that it gets considered. So far we are beating those numbers. I will post pictures of all this as soon as time permits.