I’m in the process of buying my second property and I had always planned on buying properties under market value to increase the possible return on investment. I’ve come across a duplex for $140k that was fully renovated that I believe could be rented out for $1800 (900x2) on the low end possibly 2100 on the high end. There isn’t much room to fix up and increase the equity on this property but the price seems to be at a good place to get some cash flow. Is it okay to sometimes buy a property at market value and assume the only way it’ll be worth more is from possible appreciation? Thanks for any thoughts you have.
You don't say how much the taxes are but it looks to me like its a good deal on the surface. If you listen to the podcasts David Greene often talks about how he beat himself up over buying a property above market value at the time but fast forward x years and he made like 200,000 in appreciation and cash flow the whole time. If the numbers make sense buy it!
You don't say how much the taxes are but it looks to me like its a good deal on the surface. If you listen to the podcasts David Greene often talks about how he beat himself up over buying a property above market value at the time but fast forward x years and he made like 200,000 in appreciation and cash flow the whole time. If the numbers make sense buy it!
@Brody Newcomb, I think you are confusing "asking price" and "market value". People can ask for anything when they are listing a house for sale. It might be around the market value or it might be way way off.
On the surface it looks like that property should cash-flow fine assuming it is in good repair and doesn't need any big cap-ex expenditures like a roof.
When you plan to hold a property that cash-flows a long time, a modest difference in initial purchase price is a relatively small factor in the overall return over many years. On a property you will make $150k on over 10 years in tax advantaged cash-flow and equity build by appreciation and mortgage paydown paying something like $10k extra up front is a small thing.
Obviously we always want to pay less! However, if its a matter of getting a deal or sitting on our money and doing nothing, sometimes paying a little more is ok.
When you have a deal that will cash-flow. Do you ever think you will regret having an investment that is consistently making money?!?
At a high level, there are four ways to make money from rental properties:
1. Cashflow - rent, laundry quarters, etc.
2. Appreciation - the value of the property goes up, either by force (you fix it up and it becomes worth more) or naturally (the property increases in value over time)
3. Loan Paydown - obtaining a loan and having someone else (your tenants) pay down the loan
4. Tax savings - favorable tax advantages for property owners
So when thinking about your purchase, consider all of these, not just cash flow!
With that said though, t's generally considered a bad idea to "count" on natural appreciation. Natural appreciation will be uneven and can come and go (i.e. one year it's appreciated 1%, the next 2.8%, the next -2%, the next 1.4%) and it's not guaranteed, I would consider this but never count on it. It's a "nice to have" but it should work without this too.
Lastly I would recommend analyzing / running through a few exit strategies or in other words what's the worst possible situation and what would you do if it were to happen? You mentioned the high vs. low rents, so you're already thinking in the right direction, extend it a bit further. What if you had to sell in a year? What if you can't rent one side or both for an extended 6 or 12 months for some reason? Thinking through these worst case scenarios will help you plan and know if it's a good deal for you.