Given the extremely low cost to acquire the properties within our scope, it will take twelve to forty-eight months to break-even for acquisition costs and an additional twelve months to recoup material expenses and fees associated with the purchase. Rehab costs vary from property to property. However, at this point the cost of material has ranged from $3000 to $5000 to bring the properties up to occupancy standards.
An example of a property that is on a twelve-month break-even for acquisition and twelve-month recovery period for materials is a single-family home Ferventure Realty LLC purchased in Alton located at 2521 Clawson Street. The property was purchased for $6,700. Property taxes are $358. The material cost required to update the property was approximately $4000 and there were about 80 hours spent on the premises to complete updates. Photos of before and after rehab updating can be seen in EXHIBIT B. Total costs associated with this property equal $11,000. Presuming the property rents for twenty-four months at $550 a month, the property will generate $13,200. Based on these numbers, the property can be unproductive for approximately 5 months and still break-even within the anticipated time frame.
While break-even projections are important, calculating capitalization rates are even more significant. Cap rates are meaningful for the property owner, the bank, and future investors considering purchasing one of our properties. Cap rates are calculated by subtracting monthly expenses from monthly income. To establish an annual figure, this number is then multiplied by 12, and divided by total investment in the particular property. Finally, the resulting number is multiplied by 100 to establish the percentage. For example, we will use figures from our property on Mather Street. As follows:
Mortgage (assumed) (130)
Materials (Home Depot) (40)
Property taxes and insurance (80)
Total monthly income $300
X 12 months 12
Total annual 3,600
/ Total investment 28,000
X 100 = 12.9%
According to several meetings, the attorney said 1% cap rate is sufficient. However, the accountant and banker feel 8%-12% is a strong cap rate and will solicit favorable responses.
We project by January 2010 Ferventure Realty LLC will have approximately $16,000 in cash on reserve for its next acquisition. See EXHIBIT(S) C, D, and E for Pro Forma balance sheet, income statement, and cash flow, respectively. To briefly describe where the numbers are coming from, with an optimistic perspective, the balance sheet and income statement cash indicates current cash on hand. The accounts receivable reflects income from rent (assuming 100% occupancy) and buildings indicates current market value of rental properties. Accounts payable includes property tax, insurance, and credit card obligations for the purpose of rehabbing.
Critical Risks Pro Forma Balance Sheet