Is it worth it? Buying a rental property over market value?

Question

Hello Everyone! Need some advice. Looking to purchase my first duplex and came across one in a lower income area. Did some research and owner is asking $127K however based on tax assessment property is worth $80K. Home has been on the market for 156 days. Ran the numbers with a purchase price at $80K up to the $127K and rental income would be a home run at either purchase price. Does its make sense to purchase above the market value due to the rental income levels being so high?  Thanks!

Account Closed · Answer

@Jennifer Presley-Sanders

tax assessments do not reflect the actual market value of a property you should not rely on that and you shouldn't rely also on Zillow's Zestimate. I would recommend you check comparable - similar properties in the area that were recently sold.

Joe Villeneuve · Answer

First, I'll echo what was said above regarding your property valuation methods.

Second, to answer your question, "would you buy ...above property value", the answer is yes.  However, whether you are buying at, below or above PV, the each deal must be evaluated on its own merits.  I've gotten better deals buying over than under.  It comes down to understanding how money works, basic math, and how the two work together...and eliminating the reliance on %%% instead of $$$$ to analyze the quality of a deal.

Tim Herman · Answer

@Jennifer Presley-Sanders most tax assessment are lower than true value. Have you run comps on the area, Compare to SFH of similar sf and bed/bathroom if there is not enough sold duplexes in the area.

Jennifer Presley-Sanders · Answer

Thanks everyone great insight!!!

CJ M. · Answer

@Jennifer Presley-Sanders

I'm sure people will be on both sides of the spectrum here (I posted a similar question a couple weeks back). That said, I've paid over asking price on a number of fully rehabbed/rented buy and hold SFR's. Yes, it's unnerving a bit, but my goal is cash flow cash flow cash flow with little time invested. If I can pick up something that cash flows $200+/mo, I do it since I don't plan on selling...plus this model has helped me grow quicker.

Sam Horton · Answer

@Jennifer Presley-Sanders

If you're using an agent to purchase the property, you should be having them create a comparative market analysis for you to determine a better idea of value. If your not, for a small fee I bet you could get an agent to send you one.

As @David Tsedaka mentioned tax assessments are not necessarily a good indication of value. I do sometimes cross analyze assessment data versus recent sales though. For example if it's a 3 bedroom house, pull all 3 beds in that town within 6 months and a certain radius (based on population density). Then track whether these properties are selling above, at or below their assessed value. At least this can give you an idea on what's reasonable to pay over assessed value.

Patrick Menefee · Answer

I'll echo what was said above about how to estimate what the property is worth. That said, that may not be as important depending what your goals are. Are you looking to maximize cash flow in the long term? Are you looking to build equity over the next few years? Do you plan to hold forever?

If your goal is cash flow, and you can get a home run deal at full ask, then great. But I would also look at your numbers and learn more about the property...why has the home run deal been on the market for 6 months?

That's not to say it isn't worth it...I put in an offer just yesterday on the same type of property that has been on the market for almost 6 months and is a home run deal. But it also has some challenges that I'm comfortable with that likely prevented professional investors from picking it up. At the end of the day it fits what my goals are, you just have to take all of it into consideration.

Anthony Wick · Answer

@Jennifer Presley-Sanders

I would definitely find a good real estate agent to help you with comps in the area. At 156 days on market, it is over priced. But by how much, and what else is wrong with the property? And don’t forget about a professional inspection when you do make that purchase agreement.

Is it worth it? Buying a rental property over market value?

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