Found a possible rental property. Have a few questions.

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Found a possible rental property. Have a few questions.

Cain Kiser
Real Estate Investor · Champaign, IL · Member since 2009 · 28 posts · 6 votes

I am looking at a property in the city that I live in. The ad states "Don't miss an excellent opportunity for immediate cash flow with no cash down option from owner!!! Completely Remodeled home offers a virtual maintenance free experience for its new investor/owner. Currently leased for $900/month through July 2009 with two excellent paying tenants, and $1150 security deposit." Its for sale for $99,900 and is around 1200 Sq. Ft., 4 bedroom and 1 bath. For Sorry had a link but realized I couldnt post it yet.

I have a meeting on monday to go walk through the house with the seller and I drove by it yesterday. Looks like a nice property.

The question that I have is that would a Lease option be the best way to go through with purchasing the property since he has a mortgage on the house? Is there any way we can make a contract sale on the property since he has a mortgage?

This would be my second property and just looking for a little advice if anyone has had any experience with a sale like this.

Thanks for your help in advance!

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  • Mark Yuschak
    Residential Real Estate Broker · Grand Blanc, MI · Member since 2008 · 885 posts · 316 votes
    17y

    That property does not cash flow! I'd save your efforts and keep on searching for one that does.

    However, if your heart is really set on this one, see if he'll do a land contract with you. That's what I'd do (if it cash flowed)...

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  • Cain Kiser
    OP
    Real Estate Investor · Champaign, IL · Member since 2009 · 28 posts · 6 votes
    17y

    The thing is that if I could get a contract, other 4 bedroom homes in the area are renting for $100 - $150 more per month. Im going to see what the seller has to say on monday about a contract sale. I only have 1 rental since I just got started and I did that on contract. I dont think you can go wrong with a contract with how smooth the transaction went.

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  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    17y

    Even assuming that you can raise the rent $150 next July, this is still a LOSER.

    Besides, it sounds to me like you're looking to buy from a more experienced investor. Why is an investor going to LEAVE MONEY ON THE TABLE FOR YOU. Not to put too crude a point on it, but I wouldn't walk 2 minutes to look at a (non) deal like this.

    I've sold a lot of houses that I've rehabbed. I always have a very attractive ad that I use. I always get a lot of calls from new investors because my ad sounds so good. As soon as I discern that they are investors I tell them that this is NOT a property for them. Invariably they tell me that they are real smart and that they may know some tricks that I don't. Once they take a serious look they NEVER buy my deals. If any of them ever did I would KNOW that I had underpriced my deal and raise the price on it.

    Keep looking.

    Frank

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  • Cain Kiser
    OP
    Real Estate Investor · Champaign, IL · Member since 2009 · 28 posts · 6 votes
    17y

    Thanks for the replys Mark and Frank!

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  • Owen DashnerPro Member
    Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
    17y
    Originally posted by Cain Kiser:
    I dont think you can go wrong with a contract with how smooth the transaction went.


    Cain,

    I would disagree with your statement above. You most certainly can go wrong with a contract. Do a forum search on "50% rule". There are many threads that discuss true operating expenses of owning rental properties. Rentals are NEVER maintenance free, will always need repairs, have vacancies, and tons of other expenses over the life of your ownership.

    The ad you saw may look enticing because it is a contract, but you can be certain that if you did buy the property at the price you described, you would be forking over money every month. If someone wrote an ad that says, "I will sign a contract with you that requires you to pay several hundred dollars a month out of pocket" would you do it? Not trying to be coy, but that is exactly what the ad is describing.

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  • Owen DashnerPro Member
    Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
    17y

    Keep looking and asking questions Cain, and you'll eventually find the right deal for you.

    Good luck!

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  • Cain Kiser
    OP
    Real Estate Investor · Champaign, IL · Member since 2009 · 28 posts · 6 votes
    17y

    I know I have a lot to learn and through this site I am learning more every day. Thanks for all the input on this guys!

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    17y

    Cain,

    Here is how I see the math on this deal:

    Gross rents: $900 per month
    Operating Expenses: $450 per month
    NOI: $450

    Mortgage ($99,900, 30 yr, 7% NOO): $665

    Cash flow: NEGATIVE $215 per month (OUCH)!

    You would need to get this property for about $52,600 to make it cash flow $100 per month.

    Good Luck,

    Mike

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