Seeking Advice About a Property That Will Have Minimal Cash Flow
I've got what I think should be a buy, but it doesn't fit into my normal "buy box" and I'm looking for some advice on how to proceed with this one.
I have a single family property in the Midland/Odessa market. It is a 3 BR 1 BA in a C neighborhood. The estate is trying to get rid of this property. It has been on the market for a while. There are 9 heirs so it is like trying to herd cats for their agent. It was on the market for $140,000. Agent asked if I would buy it at $110,000. After inspections, we went to $90,000 with $5,000 in closing costs paid by sellers.
My GC will fully renovate the home for $65,000 including moving utility room, putting in a hallway to reconfigure the bedrooms, adding a bathroom to bring it to a 3/2, and open up kitchen to make it an open concept kitchen/living area.
Local portfolio lender is offering to finance 80% of the total project cost of $155,000 at 7.625% fixed on a 15 year amortization. ARV value for the home will be conservatively 200 to 210 thousand. So for $31,000, I'll start with $76,000 plus in equity.
The concern is that the home will cash flow only $100 to $150 per month after expenses (mortgage, taxes, insurance, management, vacancy, repairs, capex). That puts the CoC return at a very anemic 3-5%.
Should I just ignore the fact the deal will barely cash flow and take the overall handsome return due to forced equity? For reference, I generally buy, rehab, rent, & hold very long term. Thus, the actual return to me is pretty anemic because all of the profit is in equity. I generally like to see 12-20% CoC return, but interest rates are making that tough to find now. In addition, the 15 year amortization means a depressed CoC return rate since more is being poured into equity each month.
Thanks in advance for the fresh eyes and perspective.
What's the cash on cash return as a flip? Have you considered that route? If you kept the investment, the ARV equity would allow you to tap into an equity HELOC at subprime rates. Ultimately, it depends what your goals are. I would flip it personally, then stack the profits for future investments with a higher cash on cash return.
Quote from @Steph Rush:
What's the cash on cash return as a flip? Have you considered that route? If you kept the investment, the ARV equity would allow you to tap into an equity HELOC at subprime rates. Ultimately, it depends what your goals are. I would flip it personally, then stack the profits for future investments with a higher cash on cash return.
Cash on Cash return if I flip it will be 143.5% before taxes and minus some minor holding costs.
Ideally you'd like all cashflow, equity etc. in one deal, but we are often not lucky. I would only hold a breakeven property if I could pull out my cost after rehab. In this case, the house can sit while tenants pay down the mortgage, as I have $0 into it. However, I would never tie up cash for little to no return. For that, I also don't get the 15 year loan. Why not a 30yr to ensure cashflow? I find, if the deal doesn't work with traditional financing, don't do it. I wouldn't take a 15 year to get a better rate to only breakeven if that's what the deal is. That said, if you can fix and flip, why not do that as long as the net is worth the time and effort. Ultimately, you always have to consider what else you could be doing with the money.
Quote from @Elliot Shoener:
Ideally you'd like all cashflow, equity etc. in one deal, but we are often not lucky. I would only hold a breakeven property if I could pull out my cost after rehab. In this case, the house can sit while tenants pay down the mortgage, as I have $0 into it. However, I would never tie up cash for little to no return. For that, I also don't get the 15 year loan. Why not a 30yr to ensure cashflow? I find, if the deal doesn't work with traditional financing, don't do it. I wouldn't take a 15 year to get a better rate to only breakeven if that's what the deal is. That said, if you can fix and flip, why not do that as long as the net is worth the time and effort. Ultimately, you always have to consider what else you could be doing with the money.
Traditional financing isn’t available as I have ten loans with Fannie/Freddie. At this point, hard money or portfolio lenders are the best things available. Two local banks lend to me. One does a 15 year amortization. The other does a 20 year amortization. They don’t offer a 30 year product. There are some lenders from brokers, but the fees and rate are exorbitant.
Quote from @Brad Gibson:
Quote from @Steph Rush:
What's the cash on cash return as a flip? Have you considered that route? If you kept the investment, the ARV equity would allow you to tap into an equity HELOC at subprime rates. Ultimately, it depends what your goals are. I would flip it personally, then stack the profits for future investments with a higher cash on cash return.
Cash on Cash return if I flip it will be 143.5% before taxes and minus some minor holding costs.
Sounds like a fantastic flip. Biggest bang for your buck on this one. Good luck in making your decision.
Quote from @Stephanie Rush:Thanks for the insight.
Quote from @Brad Gibson:
Quote from @Steph Rush:
What's the cash on cash return as a flip? Have you considered that route? If you kept the investment, the ARV equity would allow you to tap into an equity HELOC at subprime rates. Ultimately, it depends what your goals are. I would flip it personally, then stack the profits for future investments with a higher cash on cash return.
Cash on Cash return if I flip it will be 143.5% before taxes and minus some minor holding costs.
Sounds like a fantastic flip. Biggest bang for your buck on this one. Good luck in making your decision.
Flip this and use that cash for a property that will cash flow.
Your profit here is great, don't throw away a deal just because it's not perfect.
Cash and Debt are the only two ways to scale a portfolio quickly.
Not every deal has to be a home run, especially if you're able to move in and out of the deal relatively quickly... like a flip or wholesale.
Someone will make money here if you don't.