Case Study: 42% Cash-On-Cash Return in Hialeah, La Ciudad Que Progresa!

Seasoned investors in Miami will mostly agree that Hialeah is one of the best rental markets in the area. During the mortgage crisis, Hialeah boasted what some call a “negative vacancy rate.” With the constant influx of immigrants from Latin America, Hialeah is the “go-to” neighborhood for newly arrived renters, making “La Ciudad Que Progresa” an extremely in demand rental market. With families of 10 packing into one bedroom apartments, one can see where the “negative vacancy rate” comes from.

For those investors looking to make a steady return, rentals in Hialeah are highly coveted, and few and far between. When one such deal pops up in the market, you can almost be sure to see it snatched up almost immediately, and when a vacancy does occur, it is filled almost as quickly as it came to exist. We were privileged enough to find a great property back in 2015, and even more privileged to have been able to optimize and sell this property in 2017 at a great return.

Property Overview & Optimization Strategy

This particular property was a 3-Unit Multifamily rental (i.e. a Triplex). It consisted of a 3 bed / 2 bath house with a detached duplex in the back which contained two 1 bed / 1 bath units. When we found this property, the units were being rented for $1,200, $600, and $600 respectively, for a total of $2,400. According to our rental market analysis, there was potential to raise rents to $1,600, $1,000, and $1,000 respectively, raising the total gross rents to $3,600 (a 50% increase in rents!).

 

 

 

We purchased the property for $270,000 with a conventional mortgage of $202,500. After closing costs and the 25% down payment, we were all in for about $76,460. We raised the rents on all units on day 1. The tenants in the front unit elected to stay (and still live there today). The two tenants in the back decided they could not afford the increase and moved out. The crazy thing about Hialeah is that word of vacancies travels so fast that within hours of a tenant moving out, your phone is ringing off the hook with new potential tenants wanting to rent your property. Within 24 hours we had new tenants in those units paying $1,000 each.

Another key to making a rental successful is in the property management. Most landlords have absolutely no process, which causes the property to not perform to it’s fullest. One issue that this property had was that the tenants were not paying their own water bills, despite the property having been separately metered for water. We immediately required that tenants begin paying their own water. This also increased cash flow!

We also implemented a property management software that allowed us to do proper accounting and provided the ability for tenants to pay their rent online. This eliminated the potential for tenants paying late and having excuses, since they could pay their rent from the comfort of their own homes.

We held this property for a little over two years, enjoying great cash flow, until we finally sold it in late 2017 for $387,500 ($117,500 more than our initial purchase). After closing costs, broker commissions, and the pay off of our mortgage, our net proceeds were $164,014, more than doubling our initial investment of $76,460.

Cash-On-Cash Return

There are typically two ways to calculate a return on investment in real estate. The first and most common is the Cash-On-Cash return. This consists of taking your initial cash investment, in our case $76,460 and dividing it by the total cash generated by your transaction. In our case, this number was $180,240.

Total Cash Flows = $9,848 (cash flow year 1) + $3,078 (cash flow year 2) + $3,300 (cash flow year 3) + $164,014 (proceeds from sale) = $180,240

This gives us the following calculation for our cash-on-cash return

Cash-On-Cash Return = $76,460 / $180,240 = 42%

This investment generated a 42% cash-on-cash return. Show me a stock, or any other investment that will provide such a high return on your equity. It doesn’t exist!

Internal Rate-Of-Return (IRR)

The second method of calculating the return on an investment is the Internal Rate of Return (IRR). This is a more precise calculation because it takes into account the time value of money, a topic I will not get into. Without getting into too much detail on the finance side, I will just tell you that under this formula, the internal rate of return comes out to 35%, which is still an amazing return. Feel free to read more on IRR here.

Conclusion

It is clear that this was a very successful and profitable investment, further reinforcing the fact that real estate is probably the most powerful wealth building tool today. What made this particular deal great, besides being in Hialeah, was that it was a true value add deal. This is a perfect example of a property that had been mismanaged for years. Rents had not been kept up with market levels and there was no management structure. All it took was the right team to acquire the property, raise rents, and establish a property management process that maximized the return and performance of the property. This in turn forced the appreciation of the property allowing us to exit at a much higher price than we entered.