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Monday, July 6, 2009

Quadruple Cash Flow on Rental Properties

No, this isn't some get rich quick scheme, but a great way to increase the net cash flow on rental property and at the same time help deserving individuals who desperately want to get on with their lives.

But first, let's provide a definition of a Social Entrepreneur:

Someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to improve that problem and make a profit.

We found just such a niche in real estate - purchasing SFRs in working class neighborhoods, furnishing those homes, and renting individual rooms to paroled non-violent offenders recently released from the Colorado Department of Corrections (DOC)."

The Problem and the Need

Most owners of apartment buildings and multi-family units automatically shun anyone with a criminal background, not to mention applicants they turn away because of poor credit."There are so few options for this population of renters. Crashing at a family member or friend's house is commonly a very temporary solution,and that's only if the Parole Board approves it prior to release. Many former offenders will not be released to a family member or friend because those people may have contributed to the person's past criminal behavior. So they're stuck looking for housing, and with no job and very little money theymust go to a shelter. Homeless shelters in urban areas house a variety of alcoholics and drug users, notthe best environmentfor a former offender to start reintegrating back into society. That type of release doesn't do anything to reduce recidivism in our communities.

An Answer

We have found that renting to this population of non-violent former offenders is not only financially rewarding but also personally rewarding. How? We charge $420 a month for a private room and $370 a month for a bed in a shared room. That's right, a semi-private room. That two-bed room generates $740 monthly. Our rule of thumb is that the gross monthly rent must be a minimum of $1000 more than the sum of your PITI plus utilities. That's enough profit to repay the furnishing expense over a reasonable time period, less than one year. Here are some examples:

Example #1: 4 bedroom/2 bath single family residence, which would accommodate seven men. One private room that rents for $420 and 3 shared rooms that rent for $740 monthly ($370 per bed), each. That adds up to $2,640 gross monthly rental income. Then deduct your PITI and Utilities of $1,264 (approx.) and you are left with $1,376 net income.

Example #2: 4 bedroom/2 bath per side duplex. This configuration would allow for 4 private rooms and 4 shared rooms total. Gross rent would be $4,640, less PITI & Utilities of $2,000 (approx.), and that gives you $2,640 net monthly income.

Sure you're furnishing the home and paying the utilities, but you'reincreasing your net cash flow 3 to 5 times the normal neighborhood rental rate.

Do these guys have any money?

Any person earning minimum wage can not only afford these rates, but also will be able to save money to eventually put down on a studio or one-bedroom apartment that requires first and last month's rent in advance.

We screen the prospective tenant to see if they or their family will pay the first month's rent and a refundable damage deposit of $100. In Colorado the DOC will assist with a month's rent for qualified applicants. Those qualifications are the inmate's skill sets and job prospects.

We just lost three renters last week and we're ecstatic. They graduated to their own apartments and we have a waiting list of approved applications who want to move in. Our waiting list for this housing is always full, and the average stay with us is about three months. Rents are paid on time. There is only a three-day grace period with a $10 late fee charged for each day they're late. Tenants make their rent payment to an account set up at a convenient local bank, so there's no need to stop by and collect rent all the time.

In Summary
For the social entrepreneur, providing transitional housing to former offenders is an endeavor that offers both economic reward and personal satisfaction. Our sincerest hope is that real estate investors all around the country will explore this unique holding strategy, which can help former offenders start off on a new path to the benefit of us all.

Alf_Gizzo

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