does this deal look good?

Question

I found a website that is local here, and it looks like they are offering property while doing the math for you. This property for instance, they say is worth $130k, but the asking price is $93,900 noting that there is equity of $36,100 already built in. (28.46%). They then proceed to do the numbers below:

deal, or scam??

Erion Shehaj · Answer

I know I'm super late to this party - but better late than never.

@MikeOH Care to explain your math -  What expenses did I leave out? Also, asking price was 93,000 - At the time you needed 10% down to purchase investment property with conventional financing so your loan amount is incorrect.

@Dwayne Please don't add insult to injury. YES - our tax rate is pretty close to 4% :-)

@Jason If you ever have a question about any deal we post on our site - don't hesitate to call and I can explain how we get to the numbers. We have paperwork on everything.

Will Barnard · Answer

Regardless, the higher rents to property values makes up for the spread and all comes out in the wash. :D

Erion Shehaj · Answer

Hi Mike

Thanks for the quick reply.

There's no doubt mortgage is debt - But the ultimate purpose of the breakdown I provide on the site is to give people an idea what the cashflow might be. Many of the factors you mentioned are valid, but it would be hard for me to estimate since the cost would vary significantly from investor to investor. For instance, many of the investors I have worked with in the past few years, have managed their own properties combined with purchasing a home warranty policy for the big stuff. I agree that a value has to be placed on the time spent by the investor managing the property - but there's no method for that to be estimated with reasonable accuracy - some people value their time more than others. We try to limit capital expenses by purchasing relatively newer construction homes.

So I guess what I'm saying in a nutshell is that the breakdown is supposed to be a starting point upon which investors can build their own figures and estimations for costs. But in our experience with multiple homes, our cashflow estimates have been accurate within 40 dollars or so.

Michael Rossi · Answer

Erion,

First of all, the mortgage isn't an expense - it's debt.

You left out a bunch of expenses, including but not limited to:  managment (even if you do it yourself), advertising, legal fees, entity maintenance, utilities (even if only during vacancies), damage done by tenants in excess of the security deposit, evictions, lawsuits, HOA special assessments, capital expenses (not technically an operating expense), etc, etc, etc.

I included the entire purchase price because you must account for all the money.  Putting money down doesn't change the character of the deal and there is a cost to the downpayment money (even if it's the opportunity cost of your own money).  Including the downpayment in the calculation puts the cost of that money at the same level as the borrowed money.

Mike

Michael Rossi · Answer

It won't even buy a bag of McDonaldland cookies!  Believe me, I tried!!!  LOL

Mike

Tom NA · Answer

I don't know of any car dealership that will accept "equity" as payment for a BMW...  Until you find a buyer at that retail price (and odds are it won't be an investor), that's just imaginary money.  And we all know that selling at so called "full price" is not an easy task these days so you would need to be prepared to hold this for some time.

Jeff Fairchild · Answer

Is it just me or is paying $18/mo not such a bad thing to get $36,100 equity.

Mike please send me your deals that you pass on, ill put that money on my bank and maybe cancel my netflix account while buying myself a nice new bmw.

Michael Rossi · Answer

Why lose money every month, when you could find a better deal and actually make money?

MIke

Dwayne Buckner · Answer

Mouschi, I am not here to analyze your deal--just have a curiosity question. Are those property taxes correct? Given your asking price, that would be over 4%!  :eyes:

Dwayne

Dane Whales · Answer

Nice analysis,,,, :idea:

does this deal look good?

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