Cindy Clinton, a freshman fashion design student at Parsons The New School for Design in New York City, has a fix for the foreclosure crisis.
And it’s already proven profitable — to the tune of $5,000 she won in a Foreclosure.com contest for her 2,000-word essay describing her proposal.
Given the opportunity to invest $150,000 in the distressed housing market, Clinton said she would focus on the rental market. She laid out her plan with an executive summary, market analysis, implementation, assumptions and closing statement, and it was selected as the top essay among 10,000 submissions.
Clinton described how she would use the hypothetical $150,000 investment to convert some distressed Miami-area homes into rentals.
"I wanted to focus on something that would allow me to have a huge return on investment for a long period of time," Clinton told Foreclosure.com.
She said she thought about coming up with a plan to buy and flip homes, but instead settled on a plan to build a portfolio of rental properties, some of which she would sell at opportune times.
By year five, Clinton’s plan forecasts more than $230,000 in yearly profits.
Her winning essay is republished here with permission of Foreclosure.com:
Essay prompt: "You’ve acquired $150,000 in cash to be used specifically for a distressed real estate purchase. Outline a detailed strategy that ensures the maximum return on investment, whether it’s in terms of financial profit or personal satisfaction … or both."
Clinton Investments LLC is a startup company created for the purpose of investing in residential real estate. This business plan lays out the simple strategy for developing a real estate investment and property management company by leveraging an initial investment of $150,000.
The goal is to market the company to motivated sellers who are willing to accept discounted wholesale prices for their property. This property is then renovated and leased to middle-income renters to generate positive cash flow for the company.
Clinton Investments LLC was formed in November 2011 to invest in distressed properties that require minor renovations for use as rental properties. The company will invest in properties located in Miami, Fla. Clinton Investments LLC is solely owned and managed by Cindy Clinton.
The first year will be spent setting up the business. The company will strive to create a reputation in the industry as an honest and professional business. This will be done by focusing on networking and developing strong partnerships with key professionals, i.e., Realtors, financial institutions, law firms, building contractors and others.
During this period the company will purchase, renovate and lease one apartment building. Due to depressed property values, as a result of the current real estate market conditions, the company will use a buy-and-hold … strategy (and rent out) the acquired property.
The goal will be to realize a positive return on investment within the first 12 months. This will be the beginning of a long-term investment strategy around rental income properties, and the development of an expertise in property management.
During the second year, the company will use revenue from the first rental property to purchase, renovate and lease one to two more properties. The addition of more rental properties will work toward the goal of building a rental portfolio. The company will also benefit from additional cash flow from more rent.
The property values of the real estate market will determine how long the properties are held. During times of low market values, the properties will be held for rental income.
Further, during times of high property values, properties in the rental portfolio will be assessed. At that time it will be determined if the property will remain as a rental or be sold for a profit. If it is sold, part of the profit made will be reinvested into purchasing more distressed properties to be either renovated and sold, or added back into the rental property portfolio.
Clinton Investments LLC will focus its operations on the city of Miami. Not only was this area chosen because it has beautiful year-round weather, is near a beach, and has great entertainment and nightlife, but also because it is located in one of the hardest-hit states when it comes to foreclosures.
According to recent industry statistics, Florida is among the top states in the country for foreclosure (activity). Furthermore, in Miami-Dade County, 1 in 15 properties is (in a foreclosure process). Therefore, there is a significant amount of distressed property that can be found in our target neighborhoods.
Per the U.S. Census Bureau, as of 2010 Miami has a total of 183,994 housing units in the area. Of those housing units, 59 percent are multi-unit structures. Furthermore, the median value of owner-occupied housing units is $289,800.
Therefore, it can be deduced that Clinton Investments LLC will have very few problems finding a multi-unit property within its target price range of $200,000 to $400,000.
Clinton Investments LLC will locate properties through a variety of sources, such as local newspapers, websites, courthouse records, and the multiple listing service (MLS). The target price range for the purchase is $200,000 to $400,000.
This will allow the company to make a 20 percent down payment on the property and have enough of the $150,000 initial investment left over to absorb any renovation and acquisition expenses incurred to get the property ready for lease.
Only properties that require minor renovations or cosmetic repairs will be considered. Any property that has mold/asbestos, major foundation or structural problems, extensive roof damage or significant plumbing issues will be rejected.
A price differential of at least 30 percent between the purchase price and the fair market value of the property is necessary for the acquisition. This will ensure that the property has equity from the moment of its purchase.
This equity will be valuable in the event the property is sold for a profit, or in the event the equity has to be borrowed against for emergency or investment purposes. To make sure the purchase price of the property fits within this guideline, a Realtor will be used to obtain recent comparable sales, or "comps," in the area of the potential property.
Target market: sellers and renters
Due to the high foreclosure rate in Miami, there are many distressed sellers who will be motivated to sell their property at a discount. The company will attempt to locate them, as it is anticipated that these property owners will be willing to negotiate on price, terms, or possibly both. We will seek out short sales, foreclosures and bank- or government-owned properties.
Once the property has been acquired, attention will be turned to locating potential renters. Per the 2010 U.S. Census, Miami has a total population of 399,457. About 66 percent of the population is between 18-65. About 70 percent of the population is of Hispanic/Latino origin and about 57 percent are foreign born. Slightly more than half of the population (50.2 percent) are women.
Furthermore, statistics show that 81.5 percent of individuals have lived in the same house for over a year and there is only a 36.6 percent homeownership rate. This means that not only is 63.4 percent of the population potential renters, but also potentially long-term renters.
Additionally, 67 percent are high school graduates, 22.2 percent have earned a bachelor’s degree or higher, and the median household income is $29,812.
Based upon this information, it can be deduced that a large percentage of the population is relatively young and of working age. Not only is there a large amount of potential renters, but their employability, and thus their ability to make rental payments, is quite favorable.
With these facts in mind, our target customer is young, middle-class and from a dual-income family who will most likely be of Hispanic origin.
Marketing and advertising plan
A professional marketing firm will be consulted, in the beginning, to assist in developing a corporate brand and image. After that, marketing will be handled in-house.
The company plans to place advertisements in the yellow pages, apartment rental guides, newspapers, and bandit signs throughout the target area and surrounding neighborhoods. The company also plans to maintain a company website.
Due to the demographics of the target market, all forms of advertisement will be in English and Spanish.
The real estate industry in Miami-Dade County is competitive, with a large number of potential rivals. A couple of the company’s competitors are the Sovereign Real Estate Group and South Beach Investment Realty.
Both firms are established companies that have been in operation for several years and have a presence in Miami.
Each firm is much larger than Clinton Investments LLC in size, function and market capitalization. While each company has a presence in Miami, both target different areas. However, both companies target high-net-worth clients and properties.
With this in mind, Clinton Investments LLC’s strategy will be to market itself as a boutique firm that is friendly to middle-class clients, specializes in affordable housing, and is built on personal attention and service.
The company’s small size is an advantage, as it will allow it to be nimble enough to move on real estate transactions quickly. Additionally, the company will be able to serve potential clients better than larger firms by having more favorable contract terms and more flexible and reasonable leases.
The renovation process will be important on both the front end and the back end. On the front end, the company will make sure not to underestimate the repair costs or pay too much for the property.
On the back end, the company will match the budget to ensure that costs do not overrun $75,000 of the $150,000 in funding that has been allocated for renovations and repairs.
The investment strategy for the company includes a renovation for every property purchased. To perform these renovations, the company will enlist the help of building contractors to complete each of the tasks needed.
The project is expected to be completed over a four- to six-week period, depending on the complexity of the renovation.
The property purchased for this project will be renovated as follows:
- repair minor problems (i.e., fix leaky roof, holes in walls, plumbing, etc.);
- perform cosmetic improvements (i.e., paint walls, upgrade appliances, replace the carpet);
- add curb appeal (i.e., upgrade landscaping).
Projected profits and sales forecast
1. Purchase price of apartment building: $375,000.
2. $150,000 capital investment to be used as follows: $75,000 as a 20 percent down payment and $75,000 for renovations, repairs and miscellaneous expenses.
3. 30-year loan obtained at an interest rate of 4 percent, with mortgage payments of $1,430 per month.
4. Estimated property taxes and homeowners insurance: $9,500 per year ($792 per month).
5. Total monthly payments of $2,222.
a. Gross rental income: $1,000 times 4, times 12, equals $48,000 per year (four apartments in the building).
b. Total yearly payments: $2,222 times 12 equals $26,664 per year.
c. Estimated yearly maintenance and advertising expenses: $2,000 per year.
d. $33,620 minus $10,000 yearly depreciation equals $23,620 potential tax liability after the deduction for depreciation.
Annual cash flow: $48,000 minus $2,880, minus $26,664, minus $2,000, equals $16,456 in positive cash flow in Year 1.
Return on investment: $16,456 divided by $150,000 equals 11 percent.
For my apartment building example, it is assumed that the value of the land it is on is valued at $100,000. Hence, depreciation of this property will be calculated as follows:
1. $375,000 minus $100,000 equals $275,000 building value.
2. $275,000 divided by 27.5 years equals $10,000 per year in depreciation.
3. $16,456 plus $26,664, minus $9,500 in taxes and insurance, equals $33,620 potential tax liability.
4. $33,620 minus $10,000 in yearly depreciation equals $23,620 potential tax liability after the deduction for depreciation.
Real estate investing sales forecast
|Yr. 1||Yr. 2||Yr. 3||Yr. 4||Yr. 5|
1. Average rental rate will increase 2 percent per year for current tenants and 5 percent per year for new tenants.
2. Average profit from sales will be $40,000.
Clinton Investments LLC assumes that the real estate market will recover and property values will rise. When this happens, the company will switch from a buy-and-hold strategy to a sell strategy. Another assumption is that demand for rental units by renters will remain strong in Miami.
It is Clinton Investments LLC’s goal to establish a good reputation in the real estate industry quickly through building relationships with key professionals in the industry.
The growth plan for building the real estate investment portfolio is realistic and achievable. The company is confident that it has the right funding and processes in place to achieve its goals.