lose money but get massive equity...

10 Replies

hey all.  so I have chance to get a steal on a property.   I could buy the house for 65k under the appraised value.  Problem is I will be losing about 200-300 per month in rental income.  The thought of all that equity that could be used on another property is driving me crazy.  What are your thoughts?  This home is in the nicest subdivsion in the towI.  Taxes are crazy high...like double what they would be if they were two streets over.  Is this a deal you would go for knowing you couldnt break even each month?  What would you do with all the equity?  Buy a couple duplexes at 20% down is my thought.

What kind of CASH required?

Hi DJ - this doesn't give enough information to truly give an opinion.  Can you give a total breakdown of the type of house, current rental income, and current expenses?

Sounds like it should be a flip and not a rental. Don't forget about FHA anti-flip rules.

Good luck

So you buy the house and are already losing $300 a month.   Then you tap the equity, increasing the debt service on this house more and losing more money every month.    I'll assume you'll take the equity and buy a few more properties using the money as a down payment, thereby generating more debt service.   Not even sure what you are going to buy yet.  Maybe the next one will generate cash flow, likely enough to cover itself, if you're really lucky, enough to cover the debt service on the original house that you are already losing money on.   When it's all said and done, you might break even if you're really lucky on all properties, hopefully enough to cover repairs, vacancy and other items which arise from having tenants .   I don't know about you, but I don't willingly walk into something knowing I'm going to lose money.  I think you're falling in love with the equity and not factoring in risk.    I personally wouldn't buy something losing money unless the house is rented under market value and you can raise it up in the next few months.  Do like Josh said and flip it. 

the house has been for sale for two years and hasnt sold.  The house is owned by a family member. Their father passed two years ago.  Id have to put about 20k down.  I could get it around 100k.  Valued in the 160's.  They have lowered the price four times in two years.  They are just giving it away right now.  I think I could rent it for 800-1000.00.  

NA Cummins 

My gut is asking why it hasn't sold and why they are giving it away? Have you been in it? Anything wrong with house or title?

1st thing to be very cautious of is that you mentioned its owned by a family member.

I would say if your set on getting this deal done. Ask if they would be willing to kick you a little money if you found a buyer(wholesale it). Yes, it would be nice if you could get a huge chunk of equity but it would also feel like your stealing from family. Just educate them and work something out in my opinion. 

What is wrong with the property if it is in the most desirable part of town and it is only 100k and hasn't moved yet? Does it need a bunch of rehab?

There are a ton of structures you can do but it will depend on your end goal here. 

You should be able to cashflow or break even with only a 80k loan and 1000 month in income. 

Appraised value is not the same as market value.  It depends on who is doing the appraisal.

If no one has been prepared to pay the asking $100k up until now, how on earth can it be a 'steal' for $100K?  I would query the assurances of "Valued in the 160's".  Who is doing the assuring?  Promised (fantasy) equity that fast disappears in REAL time doesn't sound like something to be encouraged. Regarding Aaron's comment: "You should be able to cashflow or break even with only a 80k loan and 1000 month in income", there are still a lot of 'ifs' to account for, not the least of which is the opportunity costs that you miss out on if the $20k deposit would be out of your current hard-earned savings (which is already YOUR $20k equity).  So because "The thought of all that equity that could be used on another property is driving (you) crazy", then why not put that same $20k deposit directly into THAT property?  Cheers...

@Brian Mathews  and @Josh C.  are correct.  Why would you buy a property to lose money.  The equity is useless unless you can tap into it, which means more negative cash flow.  THis is a flip...if anything.  This is not a hold in any way.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here