In his recent article Here is How to Find Market Deficiencies, W. Eddie Speed, owner and president of Colonial Funding Group LLC, breaks down how investors can safely make a profit from distressed assets.
Speed says that many properties are undervalued. “How could you look at that neighborhood and say it’s (the property) only worth $40,000? The reality is it’s because there wasn’t any bank financing for $40,000, so every house…was basically a cash deal. Yet it would rent for $850 a month.”
Using a 50/50 model and a 10 cap rate, Speed explains his method, “Let’s say that the net operating income on the house…is $6,000 a year. With the 10 cap rate…the house is worth $60,000…If I could sell (to the investor) the house for $30,000 down and finance $30,000, then the monthly payment on that house for a fully amortized six-year loan at 6 percent interest…is exactly the net operating income on that house. The investor’s not making any cash flow, but the operating income is not coming out of his pocket.” After the loan is paid for, Speed goes on to say “the house is straight paid for free and clear. But (the investor) didn’t pay $60,000 for the house, he paid $30,000 and the tenant paid for the other $30,000.”
To read the entire article, click here: http://www.dsnews.com/daily-dose/01-16-2017/find-market-deficiencies