SFH Investment Analysis (Part 4)

July 3, 2008 · 0 comments

In yesterday’s post, I laid out a range of financial projections regarding the SFH Investment business I was considering funding and implementing. To recap, I developed two business and financial models, to help give an accurate range of financial expectations for this venture. At the low end, we assumed very conservative business growth, part-time efforts, and a conservative approach to house sales vs house rentals. At the higher end, we assumed faster business growth (though not so fast as to necessitate additional employee growth), two full-time employees, and a more aggressive approach towards capital gains generation vs rental cash flow.

As indicated by the projections, depending on the ability of the company to scale acquisition, rehab, and sales efforts, the company would likely show a profit of somewhere between $500,000 and $1.8M over 5 years, with total return on investment of between 34-140% per year. This does not include the salaries paid to the employees/partners.

Additionally, as can be seen from each of the Net Cash Flow projections, a $300,000 initial investment in the venture should fully support the annual cash flow expectations, for either scenario. Based on this pro-forma, at no time during the 5 year investment period should the company require additional capital or financial investment. It’s also worth noting that in both scenarios the business is net cash flow positive by the third year, with the more aggressive scenario showing decent income by Year 5 and beyond.

In addition to the returns indicated above, there is additional potential upside as well:

  • As mentioned previously, there is also an aggressive scenario that is not unrealistic. While this scenario was not modeled, I believe the financial returns could be even greater than either of the two scenarios defined, given the right circumstances
  • In the first five years, between $260,000 and $360,000 is spent on realtor commissions; by having one of the company’s employees earn their real estate license, 50% (or more!) of those fees can be returned to the company
  • The assumptions used to calculate both future cash flow increases and property value increases are very conservative. As the real estate market picks up again in the next 5 years, both rental rates and property values may increase much more quickly than what is projected in this model
  • Active participation in the real estate markets during this time of market recession would provide the operating team the necessary experience and networking to generate much larger investment returns on future real estate business investments

Given all that, this seems like a potentially lucrative venture, and I’m definitely considering funding it and seeing where it goes. Currently, I’m working with a potential partner to see if I can raise 50% of the investment capital (I don’t want to fund the entire venture myself), and most importantly, I still need a partner who can — along with me — qualify for the necessary loans. As I’ve mentioned in previous posts, my current lack of recurring income precludes me from getting traditional financing in these credit markets.

I’m going to continue to investigate for a bit longer, and hopefully will have more info in the coming weeks…


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