Buying a rental property should you ever pay close to ARV

11 Replies

Every deal is different and I think there are cases where this might make sense. The best example would be with great terms. Let's say it cash flows really well and the seller will offer great financing with nothing down and you still have a little equity in it. Yeah, that might make sense. Or to get ridiculous, if they offered you a principal only loan. Or maybe you own an apartment right next door and can take advantage of the economies of scale by owning both (i.e. hire someone on site to do the maintenance and leasing). But usually, of course, you want to get a sizeable equity margin. 

Originally posted by @Troy Kannegieter :

Would it ever be prudent to pay close to the ARV of a property that you plan on holding as a long term rental?

Thanks for any tips or experience with this matter.

Troy K

If you are financing the property it will determine the amount you are able to borrow. 

I've paid offered more.  In my case, based on my system, I may offer more than (not much more) the AP because when I refinance...I get it all back anyway.

Example:   AP = $54k
$100k ARV
$  17k           Rehab + Closing
$  71k           TOTAL COST
$  75k           75% ARV (REFI loan)
$    4k           Spread
$  56k           OFFER ($2k higher than AP)
$  73k           New TOTAL COST

My cash flow won't change since I'm going to REFI $75k (75% of ARV) anyway, and as long as my total cost stays uner that $75k...I will still get it all back.

NOI is the most important number when looking at rental property. As long as your NOI is higher than your finance costs, you are good to go (assuming your numbers are accurate). Like @Joe Villeneuve said, I have paid more for property than asking price. I offered a seller that was willing to do seller financing more than their asking price because the combination of price and terms made sense with the NOI. 

PRICE AND TERMS, together with NOI are all you need to know with rentals. If the numbers make sense, then you're good to go.

Let's be careful with Matt's paying more for terms, financing does not increase the value of any property. But, yes, I've paid a premium price or an asking price. If it doesn't eat any hay, it's a good deal. :)

Originally posted by @Bill Gulley :

Let's be careful with Matt's paying more for terms, financing does not increase the value of any property. But, yes, I've paid a premium price or an asking price. If it doesn't eat any hay, it's a good deal. :)

 I didn't say it added value! All I was getting at was that in buy and hold properties the price isn't the most important thing. If you're buying to make a profit when you're selling down the line, then you're not really in it for the long haul and then by all means, you need to look at price as part of your bottom line. 

My scenario and suggestion was based on the assumption that you're going to buy a rental and hold it until it's paid off. Based on that assumption, what you paid for it from the seller only really is important as it pertains to whether or not your NOI can cover the costs of the financing.

@Matt Motil

Your deal is to an intrinsic value based on the business opportunity, it doesn't make the property more valuable. You will never see an adjustment on any appraisal for the subject being seller financed, at least the thousands I've seen haven't nor would I make such an adjustment. 

The value as a buyer is no more valuable than alternative financing, that goes to the cost of acquisition, not the property so much.

Having the ability to refi is pretty important with seller financing, most sellers don't carry notes for 30 years. If you paid too much, you won't have the equity established to refi, unless you began with a good down payment to begin with. Most here try to get as much leverage as possible with seller, overpaying can mean disaster.

However, I agree, if all other factors fall in place, in the long run it won't matter so much, but you are letting the seller take your future equity from appreciation. :)

@Bill Gulley

I would agree with everything you stated. I'm not advocating for someone paying 40-50-60% more than a property is worth to get in the door; but I was simply answering the question of "would you pay close to ARV". I totally appreciate the discussion about leverage and equity position with refi potential and all of those things need to be taken into consideration.

In my scenario where I paid more than asking price, the seller didn't want to be a landlord anymore, wanted to retire, and appreciated the steady payments I would give. We agreed to a zero percent interest loan for 15 years. I was happy with the price and terms and the seller felt like they got a great deal. win-win 

Definitely. If paying the "ARV" of a property still leaves a nice margin for monthly cash flow and is in a growth market, meaning that "ARV" will later increase....why wouldn't it make sense to buy the property?

I want to thank everyone that responded Not sure how to figure out how to do it to each and everyone that has given me valuable input.

My plan for the property is to lease it to 2 of my children for the first 2-4 years while one is going to the university nursing program for 2 yrs and the other is wanting to be based in texas for another family business for the next 4 years. I would have a guaranteed Tennant for that period of time. The nursing program at the university has 80 students every 2 yrs. the house I am looking at is within walking distance from campus. It is a 3/2 with a 2 car garage that has 1/4 of it converted into an office.

Thanks again to all of those that have supplied input.

Much success to all of you.