That is not a typo. I bought a 4-unit property in North Phoenix in 2018 and since then have refinanced it three times and received cash out after closing those refinances (I’ll get into the details of that later.) One of the reasons the property appreciated so much is because of large incremental increases in rent after fixing up the property, which helped me maintain positive cashflow, and making it a place people WANT to live. But the main reason it’s appreciated so much in value is because of where it’s located.
Choosing a Market — the story of Phoenix, AZ
We all know the cliché: the 3 most important components of real estate are Location, Location, Location. But it’s a cliché because it absolutely rings true.
The ONLY thing you cannot change about a piece of property is where it’s located so choosing a great location when you’re looking for property to invest in is VERY IMPORTANT. So what makes for a great location?
The two MOST Important metrics I use for choosing a market are: Population Growth & Job Growth. Without getting too into the weeds, the basic rules of supply and demand dictate that when there is a shortage of supply and/or an increase in demand of a product or service, its value increases.
When you apply that logic to real estate in a specific market, if more people are moving in and more jobs are being made available (especially high-paying jobs) the value of the existing property in the market needed to house those new residents and job seekers increases.
So now that we understand the basic economics of property value, let’s take a look at how Phoenix, AZ measured up in recent history:
Ø This article written in 2021 explains that from 2010–2020 Phoenix had the largest absolute population increase in the United States at 262,000 people and is the 5th largest metro in the country
Ø This article also written in 2021 explains that 270 companies from around the world are establishing operations in the area which represents 16,000 jobs and $50 billion in capital investment
Even with new housing being built, the overall demand for housing in the market was and still is strengthening due to the economic growth of the region. This phenomenon increases market rents in the area which in turn, increases property value substantially.
SO, how was I able to take advantage of what most investors would say was a strong market to invest in:
In May 2018 I purchased a 4 unit property in North Phoenix, AZ for $230,000.00. I invested $57,500.00 for the down payment which was 25% of the purchase price.
I then immediately invested an additional $10k into capex & repairs for one of the units that was in terrible shape (even had to jackhammer through the kitchen floor to fix broken pipes underneath) as well as deferred maintenance around the building. Since then I’ve invested anywhere from $2–3k a year in general upkeep of the property.
Rents at the time were ~$550/month/unit which gave me a top line revenue of ~$2200/month. After operating expenses and mortgage payments my total cashflow was ~$350/month. Most investors would consider this a base-hit investment. A decent cash flow profile and debt pay down would grow my wealth over a long period of time, which is the goal of investing in real estate.
But now comes the FUN part…
In February 2019 because of the growth of the Phoenix market outlined above I was able to refinance the property at a $285,000.00 valuation & received $24,000.00 cash out at close. This gave me almost HALF of my initial investment back tax free within ONE YEAR!!
But wait there’s more…
Less than two year later in December 2020 I refinanced AGAIN at a $380,000.00 valuation & received $43,400.00 cash out at close. So if you add this amount to the previous cash-out refinance the total equity pulled out from the property is $67,400. This is a key because that amount is more that I originally put into the property which means after this second refinance I am receiving an IFINITE return on my investment!!
BUT WAIT THERE’S MORE…
Again, less than two years later in August 2022, I was able to refinance the property for the 3rd time at a $635,000.00 valuation & received $132,000.00 cash out at close! THIS turned what was a home run, infinite return deal into a GRAND SLAM!!
So let’s do the math: (Cash-Out through refinances: $199,400 ($132K + $43.4K + $24K) — Initial Investment: $57.5K) / Initial Investment: $57.5K = ~250% return (TAX FREE!)
Now, chances are I may never see returns of this magnitude in this short period of time again, but the lesson here is: If you choose your markets wisely and manage your properties such that you earn cash flow over time and retain the property long-term, the LOCATION, LOCATION, LOCATION surrounding your property can help grow its value and your wealth.