would you subject to this property

4 Replies

townhome, class A area built 1983

1 year lease signed in july at $1000

Balance on loan $72,000  Retail value $85,000 conservatively.

Seller willing to pay all closing costs if legal?

Price for acquisition $0

Annual numbers.

gross rents $12000

taxes  1800

insurance  800

hoa  2175

NET INCOME $7225

Debt servicing $503/m - $6036

6% interest about 140 P 360 I

Leaves 1189 cash flow to account for vacancy and mx

My opinion is that it should break even if not eek out a small cash profit but it will acrue $1800 of equity a year.  Considering it will cost me nothing except a mx inspection and time initially i'm thinking its worth the risk of vacancies and future mx.  It is in an appreciating area. 

Would you?

Vacancies are one of the largest expenses in rental real estate and you may be underestimating its impact.  Assume that the tenant decides to leave after their 1 year lease expires.  They have left the home in pretty good shape but the walls are a mess and you need to paint to attract the next tenant or the floors (carpet or wood) are in rough shape and need to be refinished or replaced.  How long would it take you to do this?  A week?, Two? Now you put it on the market and you find a tenant in a week.  By the time they move in you have lost a month of rent and you had to pay for the repairs.

What if they leave the place in worse shape and "forgot" to pay the last month's rent?  What if you had to evict them?  Budget for vacancies.  They will happen.

Also, budget for repairs.  A water heater wipes out 1/2 a month rent.  A roof, a lot more.

This looks very thin to me.  If you run into an extended vacancy with major repairs you may find yourself with an alligator--a property you have to feed before it eats you.

thanks @Jeff Rabinowitz   . What do you use for MX and vacancy allowance. I typically plan for 8% vac and 5% MX which would be 1460. Bringing the cash flow to - 371 annually. But equity would increase about $1800. For virtually zero invested.

The other option is the seller is willing to bring 7000 to closing for my purchase at 65k and I'll be putting down 20 to 30%. Getting better cash flow and interest rate but tying up some of my money.

Is it possible or legal for the buyer(me) to get cash at closing from the seller on a subject to transaction. I'm thinking I could get them to pay the closing costs and give me a couple of thousand to take their property? 

Originally posted by @Mike Landry :

thanks @Jeff Rabinowitz  . What do you use for MX and vacancy allowance. I typically plan for 8% vac and 5% MX which would be 1460. Bringing the cash flow to - 371 annually. But equity would increase about $1800. For virtually zero invested. 

The other option is the seller is willing to bring 7000 to closing for my purchase at 65k and I'll be putting down 20 to 30%. Getting better cash flow and interest rate but tying up some of my money.

Is it possible or legal for the buyer(me) to get cash at closing from the seller on a subject to transaction. I'm thinking I could get them to pay the closing costs and give me a couple of thousand to take their property? 

I invest in SE Michigan, I suspect what I use in my analyses has little bearing on the market in Texas.  I tend to use at least 10% for vacancy and another 10% for maintenance on my properties in strong neighborhoods.  I may use more of a cushion if I know the property has deferred maintenance or it is in a market where vacancies are more difficult to fill.  If you are new to the game I would suggest you are much better off over-estimating these expenses than under-estimating them.  Your best advice would come from local landlords who know how long a roof can be expected to last in Texas and how long it might take to place a good tenant.

I am not a lawyer but most terms that 2 parties agree to can be worked into a legal contract in most States except, perhaps, in Texas (and California, Louisiana and a couple others).  I understand Texas has some unique laws governing real estate, installment sales and, maybe, subject to deals.  Seek local legal advice as much of what is shared from those out of State may not apply to your situation.

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