Help me understand why it costs this much?

Question

I love the Madison, WI market. I'm biased. I'm a realtor here and have a couple properties. I understand supply demand pretty well I think but I need help:

I run numbers for many properties and so many of them don't pencil. I know there are other factors and reasons to buy a deal based on specific situations, BUT, until people stop paying for investments that aren't good on paper there is no incentive for sellers to reduce price right?

Can you help me see what I'm missing.

Property Specific Example - Duplex$825,000

Tax = $13,000 / year

Rents = $5,600 / month

NO renovation potential, no rent increase potential, no alternate use potential

In what scenario does this deal look like one worth purchasing? Excluding the creative ideas (i.e. seller finance, owner occupy, mid term rental, major renovations etc...) just a normal buy and hold purchase how can these numbers work or be worth it? What am I missing?

What more information do you want to run the deal?

Ametria Chaney · Answer

Hi Spencer, good eye for catching this before you got attached to the deal. At $825,000 with $5,600 in rent, you're at about 0.68% of the price per month — well under the 1% rule — and that's before taxes, insurance, maintenance and vacancy, which is exactly why it doesn't pencil as a straight rental. Patrick's math is the same conclusion: the price would need to come down a lot for the rent to carry it. As a normal buy-and-hold, the honest answer is that it doesn't work at this price — the buyers who pay numbers like these are usually buying for a different reason, like parking cash, a 1031 exchange, or appreciation in a market they love. If none of those are you, passing is the right call. What's drawing you to Madison — the market, or this specific property?

Patrick Krawczykowski · Answer

It’s basically a 12x GRM. Thats not crazy for Chicago at least. Every property purchase makes sense at some specific deal. Given interest rates I assume LTV loans will pencil better these days. Maybe it’s just a lot of cash deals in Madison.

Ashish Acharya · Answer

Part of what you’re missing is who’s on the other side of these deals, because a lot of those buyers aren’t buying for cash flow. At this price point, a big share of buyers are in a 1031 exchange. They’re on a 45-day clock with a large deferred gain, so overpaying a bit to keep that gain deferred is still a win for them. That alone props up pricing on properties that don’t pencil for a normal buyer.

The other group is high earners buying for depreciation. On an $825K duplex where the building is roughly 75–80% of the value, that’s over $20K a year of straight-line depreciation. A cost seg study with 100% bonus can pull a big piece of that into year one. A buyer with passive income from other properties, or one who qualifies as a real estate professional, can use that loss right away, so the after-tax return looks much better than the cash-on-cash return.

That’s the interesting part for you. As a broker, your brokerage hours count toward real estate professional status. If real estate is your main work, you hit 750 hours, and you materially participate in your rentals, rental losses can offset your commission income. Commissions are active, ordinary income, and the right entity structure (LLC vs. S-corp) helps you save taxes on active, non-passive ordinary income. You might be one of the buyers this deal works best for. Just keep in mind it’s a deferral, not a free pass: the depreciation comes back as recapture when you sell, unless you keep exchanging.

Happy to connect!

Aaron Zimmerman · Answer

Probably makes sense for someone buying cash and for someone looking for lower returns.

Spencer Dixon · Answer

I'm located in the madison market. I'm a broker/real estate agent and manage a few properties. I am familiar with the market so I'm able to understand the numbers super well.

I don't fully understand the "parking cash" strategy. Is it as simple as they feel its the safest place to put money earn a little? Otherwise wouldn't you just put it in a high yields saving or CD?
1031 exchange I understand, I'd still hope to find a better deal than that but if circumstance forces you to make this decision I suppose.

The property itself doesn't have room for renovation, rent growth, and I can't see much appreciation.

I personally don't use the 1% rule and don't think it is that great of a tool for my investing strategy or for investors in my market.

The two extremes of this deal.

Pay CASH $825,000

Expenses: roughly $2400/mth

Income: $5600/mth

Net = $3200/mth

2% long term appreciation4.65% cap rate. (& cash on cash return)12.28 GRM

Financed Deal:

$165,000 down

30 year fixed, 7.5% interest rate

$55,000 annual debt service

4.65% cap rate

12.28 GRM

.69% DSCR

-10.31% Cash on Cash Return

You get some tax benefits from the amount of interest paid, you have an increasing amount of payments going towards principal paydown. Those two numbers bridge the negative gap towards break even. I don't think the appreciation upside is worth taking a negative cash flow month to month.

When you pay cash won't there be less tax benefits then purchasing with a loan? Excluding the bonus depreciation strategy.

Thanks for going on this journey with me

Spencer Dixon · Answer

Thanks for the response. That's what I'm seeing as well.

The really interesting part to me if that these properties keep selling above the values that seem to pencil so I wondered if I was missing something. In my market there are many multi-unit properties that are selling well above the number that makes sense. As long as that keeps happening the prices won't drop down to a breakeven number.

For that steady simple, investing in a hard asset, I suppose I see how the numbers could be easier to make work. With the financing side of things if you are putting more money down, using it as an owner occupy etc... I see more ways for deals to make sense even if not fully from the financial side.

Looks like you may be a realtor in Memphis? Do 2-4 unit properties hit the market that cash flow with a 20% down payment right now? It's less than 5% of listings here in Madison area that cash flow based on 20% down payment and the asking price.

All the best

Ametria Chaney · Answer

Spencer, thanks for working the numbers out loud — your own math answers a lot of it. On the cash deal, the buyer is accepting a modest return for safety: no debt service, no lender, and the property still pays them every month. That's the "parking cash" idea — not that it's the best return available, but that it's steady and simple, and the money is in a hard asset rather than sitting in a bank account. On taxes, you're right that paying cash generally means less interest to deduct, since there's no mortgage interest — but the full tax picture depends on the property, the buyer's situation, and depreciation, so that's a question for your CPA rather than a forum answer. Your financed version is the telling one: at a negative cash-on-cash return, the deal only works if something else changes — price, rent, or terms. Does that match how you're seeing it?

Help me understand why it costs this much?

Help me understand why it costs this much?

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