Newbie/first deal. Please help me run the numbers!

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Newbie/first deal. Please help me run the numbers!

Anne Herron
Los Angeles, CA · Member since 2017 · 5 posts · 0 votes

Hi all,

I'm new to BP but have been reading and listening to as much as I can in the last few months. My husband and I live in and love LA. I run my own business here, and in the short-term (10 years-ish), I don't see us leaving this city. I've got about 35K in cash that I had originally been stocking away towards a down payment, but since finding BP, I'm realizing I could be doing a lot more with that money and thinking far more creatively. I have no desire to create cash flow that will allow me to leave my current field- I love my work and my business is in great shape. But I do want to invest in real estate, and I'm eager to learn from those willing to offer advice.

The most attractive option we've got currently involves a family member. She owns a home in the Pacific Northwest and has been renting it successfully for 20+ years. It's in the best possible neighborhood in the city (according to friends, realtors, and the county assessor), and she wants to sell to us below market price. We're not interested in significant monthly cash flow- I envision holding the property for a few years, doing some light rehab along the way, then reselling and walking away having hopefully at least doubled our initial investment. Here's the sticky part. This is a family member I love and care deeply about. She needs the money, and though I am very excited to have a back door into a great rental property, I don't want to take advantage of her. She originally quoted us a price that, according to comps, is at least 25K below what she could get, if not more. So, we're looking at setting a purchase price in the coming months, and I'd really appreciate feedback on what numbers make sense and what numbers don't, given our goals. Here are the numbers I can count on:

Rent: Between 1100-1300K/month

Fixed Expenses (not including maintenance or capex): $230-350 (depending on whether we use a PM or not)

Down payment: 20%

End game goal: To sell after holding and double our initial investment

Price of home: She originally quoted us 125K. My nascent research on comps says it's worth at least 150K if not 175K. (I'm a newbie, remember. I'm not too confident in my ability to assess the home's market worth.) Homes in this area have been increasing at quite a clip, and according to the county assessor, it's a bulletproof neighborhood because of it's proximity to great schools, parks and low crime.

So....what's the magic number, all? If we get an appraisal and he comes back at 135K, I think it makes sense because we could subtract the realtor costs from our buying price since she won't have to list. But if it comes back at 170K, that's murkier. There are several comps within 0.5 that have sold for between 200-215K in the last 6 months (with some rehab), which we could also do and reap the benefit of after she sells to us. My relative has taken awesome care of the house, so it would need cosmetic touches most likely, nothing more substantial, and we'd have a complete and honest history of the capex over the past 30 years of ownership. 


What do you suggest? Are there options I'm missing? What numbers do you think shake out?


Thank you in advance for any education you can give me!

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Kuba F.Pro Member
Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
9y

@Anne Herron take a look at the comps of improved properties, vs properties similar to your subject and see how much of a budget you could have for improvements to come in ahead.  If she doesn't need all of the money right away, then you could partner with her to improve and sell it without having to sell it to you, and then to someone else and therefore avoiding one of the realtor costs.  That way you can both benefit, and you're not taking advantage of a relative.  That's the happy scenario.  The trick is, what happens to the relationship if it goes south?

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  • Kuba F.Pro Member
    Real Estate Investor · Los Angeles, CA · Member since 2013 · 2k+ posts · 694 votes
    9y

    @Anne Herron take a look at the comps of improved properties, vs properties similar to your subject and see how much of a budget you could have for improvements to come in ahead.  If she doesn't need all of the money right away, then you could partner with her to improve and sell it without having to sell it to you, and then to someone else and therefore avoiding one of the realtor costs.  That way you can both benefit, and you're not taking advantage of a relative.  That's the happy scenario.  The trick is, what happens to the relationship if it goes south?

    2Reply
  • Patrice Boenzi
    Real Estate Agent · Geneva, IL · Member since 2015 · 403 posts · 172 votes
    9y

    @Anne Herron family deals can be hard! Did you consider having your family member contact an Realtor and ask her to do a CMA? She can be honest with the agent and let them know that she is thinking about selling it by owner to a family member, but if that falls through they would be looking for an agent (if that is true - don't want to put words in their mouth).

    Once the CMA is done you will have a professional opinion on what the home is really worth. So my question is - if you are willing to pay your family member a "fair" price on the home and it is in pretty good shape then how do you plan on doubling your money in a few years? Have you considered all your costs i.e. insurance, property taxes, vacancy rate, repairs, capital expenditures, pm and in some places landlords have to pay water/sewer? It will be hard to update it while a tenant is living there so did you figure on your holding costs while you get it ready to sell?

    1Reply
  • Andrew McArthur
    Los Angeles, CA · Member since 2017 · 3 posts · 1 vote
    9y
    Originally posted by @Kuba F.:

    @Anne Herron take a look at the comps of improved properties, vs properties similar to your subject and see how much of a budget you could have for improvements to come in ahead.  If she doesn't need all of the money right away, then you could partner with her to improve and sell it without having to sell it to you, and then to someone else and therefore avoiding one of the realtor costs.  That way you can both benefit, and you're not taking advantage of a relative.  That's the happy scenario.  The trick is, what happens to the relationship if it goes south?

    Thanks, Kuba. We've talked about doing just that, and I think it's a great idea. We'll have to work out how to determine the pre-rehab value and how to split the margin, but it seems like a good way for a win win.  (posting on behalf of my wife)

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  • Arpan Patel
    Investor · Chicago, IL · Member since 2010 · 504 posts · 191 votes
    9y

    I also agree that you don't want to take advantage of family so maybe you guys can put up the rehab money and split the profits? Also, she probably needs cash now so you can see how much she needs, then do some type of equity split. You don't want to take advantage but maybe she just wants out so she knowingly is offering a deal to walk away. The perception of you taking advantage of her might just be your own. I'd just talk to her openly and figure out why she is willing to take a discount and if there is any other structure you can offer that would make both parties comfortable to walk forward. Good Luck and let us know how it goes!!

    1Reply
  • Anne Herron
    OP
    Los Angeles, CA · Member since 2017 · 5 posts · 0 votes
    9y
    Originally posted by @Patrice Boenzi:

    @Anne Herron family deals can be hard! Did you consider having your family member contact an Realtor and ask her to do a CMA? She can be honest with the agent and let them know that she is thinking about selling it by owner to a family member, but if that falls through they would be looking for an agent (if that is true - don't want to put words in their mouth).

    Once the CMA is done you will have a professional opinion on what the home is really worth. So my question is - if you are willing to pay your family member a "fair" price on the home and it is in pretty good shape then how do you plan on doubling your money in a few years? Have you considered all your costs i.e. insurance, property taxes, vacancy rate, repairs, capital expenditures, pm and in some places landlords have to pay water/sewer? It will be hard to update it while a tenant is living there so did you figure on your holding costs while you get it ready to sell?

    Thanks, Patrice. These are good questions. I need to readjust our goals. Given the original quote my aunt gave us, doubling our investment was a much likelier possibility in the short term. We could buy the home at 125K, do a cosmetic rehab of about 10K, and resell for closer to 190k (according to comps). Those numbers just don't add up if we buy the house for closer to what she could actually get for it, which is the only move we're willing to make. I guess I'm trying to figure out if holding onto it for a few years and then either refinancing or reselling would be a smart move that could still help us reap gains we could reinvest. I've run the numbers and though our cash flow would only be about $100/month, we don't "need" the cash. We're happy with our financials and our fields, but we're self-employed. What we're looking for is stability in retirement that won't come from a pension or employer-backed fund, so purchasing this home and holding it long term to create steady cash flow in 30 years, is appealing. But then we tie up all our investment funds in one property. So, I'm torn. Helping my aunt rehab and sell at the best price, then splitting some of the profit would allow us to build our capital and keep it liquid...but then we miss out on a great rental in an awesome neighborhood that will only continue to appreciate. It's a tough choice, and being new to this, I'm really torn on what path is best for us.  

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  • Anne Herron
    OP
    Los Angeles, CA · Member since 2017 · 5 posts · 0 votes
    9y
    Originally posted by @Arpan Patel:

    I also agree that you don't want to take advantage of family so maybe you guys can put up the rehab money and split the profits? Also, she probably needs cash now so you can see how much she needs, then do some type of equity split. You don't want to take advantage but maybe she just wants out so she knowingly is offering a deal to walk away. The perception of you taking advantage of her might just be your own. I'd just talk to her openly and figure out why she is willing to take a discount and if there is any other structure you can offer that would make both parties comfortable to walk forward. Good Luck and let us know how it goes!!

     Thanks, Arpan. We've talked about this option, and I think it's a good compromise. We'll need to have a down and dirty talk about the numbers. I appreciate the feedback!

    0Reply
  • Patrice Boenzi
    Real Estate Agent · Geneva, IL · Member since 2015 · 403 posts · 172 votes
    9y

    @Anne Herron that is a tough choice. As a new investor you should have a business/investing plan- a short-term plan and long-term plan and then let that guide you and always start with your end goal in mind. As you work through it you will know what "feels" right.

    1Reply
  • Anne Herron
    OP
    Los Angeles, CA · Member since 2017 · 5 posts · 0 votes
    9y
    Originally posted by @Patrice Boenzi:

    @Anne Herron that is a tough choice. As a new investor you should have a business/investing plan- a short-term plan and long-term plan and then let that guide you and always start with your end goal in mind. As you work through it you will know what "feels" right.

     Great feedback. We should make a clear decision on our goals, then pick the best-fitting plan, even if it means opportunity cost. Thanks, Patrice!

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