Deal or No Deal? it cash flows, Right?????!!!!!!!!!!!

45 Replies

Owner is selling because she is up in age and wants to retire. 

Sale Price                   $25,000

Closing cost                $2,000

Total Acquisition        $27,000

It is currently occupied with tenant. Tenant exceeds rent requirements; and has no intentions on moving any time soon. Tenant makes over $100,000 a year (documentation to support) and likes the area because family is near. Tenant currently pays $950 a month ON TIME! Also pays own water as well as electric bill. I spoke to the tenant personally and she says she has no complaints. This property is in good condition and located in a C class neighborhood. 

  • Gross income                  $11,400
  •  Vacancy allowance         -$2,280
  • Gross operating income   $9,120
  • Taxes                                -$800
  • Insurance                         -$1,200
  • Maintenance                     -$700
  • PropertyManagement      -$1,140
  • Net operating income       $5,280 
  • Net without PM                 $6,420

Did I miss anything? Do the numbers make sense to you? Would you buy this opportunity if you could? Feedback is monumental.  

up the maintenance or add repairs/reserves in there. Does the owner pay any utilities: trash, sewer, etc? is landscaping already factored in? are you paying cash? a 25% return on your money is fantastic if everything else checks out. Why doesn't the tenant want to buy the house? it would only be equivalent to 2 years of rent payments...

A $25,000 house with a tenant who makes $100,000? It may be true but that just seems crazy. This property seems like a good deal to me but we don't have things like $25k houses around me and something about that makes me nervous so take my opinion with a grain of salt. 

I think your vacancy allowance per year is too high. That's assuming 2.4 months of vacancy a year.  I generally set one month of vacancy per year which would mean pretty high turnover (every year a new tenant).

On the flip side I think your Maintenance allowance per year is too low.  I would budget at least $1,700 per year, not $700.

Other than that it seems like a great deal.

@Troy Gravett  Everything is factored in the tenant pays all other expenses.  I asked the same question to the seller as far as the tenant buying it her self. She told me the tenant says she has bad credit and can't so she doesn't think she would qualify for a loan. thanks for the feed back. May I ask, how did you come up with 25% return?

@Troy Gravett  

Im looking to finance the deal through my bank. No out of pocket expense. Im looking to have the buyer refinance her loan continent on me assuming the the loan

@Carl C. Hey Carl thats for the feedback. This house is in a C-D neighborhood and the seller is really ready to unload it thats why the price is such. In comparison to New York it probably wouldn't seem feasible.  I believe thats why so many out of town investors invest in Baltimore; the returns are at least 15% or better if you structure the deal correctly. 

@Dawn Anastasi Thanks Dawn. Great insight.  I figured that since the house is in good condition and has been well maintained the expenses wouldn't be very high, but your point makes sense.  I also figured the vacancy was a little high, however the way you break it down gives me a better understanding.  I could possibly take 1k off of the vacancy allowance and apply it to repairs if I'm understanding you correctly, right!??!

I would be very careful in regards to the tenant. They can afford something way better and at some point may act on that. Sometimes the better tenant (c-d properties especially) is the tenant that is barely making it because then they can not save to move. The one who can afford to move can do just that. If they say credit is a problem then why not have them assume the owners mortgage and you just assign her the contract then you have no worries.

I was also considering working with the tenant (after i bought it) with a mortgage company to have her qualify for a loan in the next 3-5 years and then selling to her in an owner finance situation at a higher price than i purchased it for roughly 40-50k

This was one of your posts so that is why I thought there was a loan....

Im looking to finance the deal through my bank. No out of pocket expense. Im looking to have the buyer refinance her loan continent on me assuming the the loan

I didn't see the mortgage and interest payment????

$27,000 at 5% for 15 yrs is roughly $240 monthly or $2,880 annually.  Subtract this amount from your $5,280 operating income and you net about $2,400 a year.  What is your goal? Cash flow or capital appreciation? What is your exit strategy? Sorry about the extra comments, they are questions I ask myself.

Something fishy about someone who makes that much money and lives in a Class C neighborhood. The objective looks great but the subjective may be questionable. Good luck! 

I don't care how old you are as a landlord, your not selling a house for 27K that cashflow 950 a month with a tenant that makes 100K in Baltimore and pays unless there's something serious wrong with the house that you can't see which is the case alot of times in Baltimore.  Is it certified lead free, is there mold, etc.  Sounds to good to be true as I own a portfolio of properties in Baltimore, and you never see that scenario.

@Ron Gosling

Thanks Ron, I was figuring to get a 30yr loan vs 15yr for a higher cash flow, however, 15yr  looks just as promising as I am looking cash flow.   My exit strategy is to lease to own the home for  $40-$50k in about 3-5years. 

Have you seen the tenant's credit report?  As others have pointed out a tenant earning $100K usually doesn't live in a $25K house in a C neighborhood.  

Sounds way to good to be true... 

Originally posted by @Jamal L. :

@Troy Gravett  Everything is factored in the tenant pays all other expenses.  I asked the same question to the seller as far as the tenant buying it her self. She told me the tenant says she has bad credit and can't so she doesn't think she would qualify for a loan. thanks for the feed back. May I ask, how did you come up with 25% return?

Why would someone making 100k per year would have to get a loan to buy a 25k house?

If you are using PM, what about turnover expenses? Might be overly conservative on the vacancy estimate, but I don't see anything for lease-up commissions which can be 25-75% of one months rent, and potentially some commission for a renewal.

@Ian Barnes

@Steve R.  and all others concerned with the tenants situation. 

Thank you for your comments, however, in life a lot of people do things that don't make sense.  Especially when they are ignorant and unwilling to further their knowledge base in any particular area.  This scenario of someone making 100k and living in a C class area  may not make sense to those knowledgeable of Real Estate Investing. But It may make sense to someone who is content with where they are in life and have no goal of furthering their education or circumstance. Quite Frankly I wouldn't believe or want to believe it if i hadn't seen the tenants pay-stub myself!!! However, the objective was not to focus on the tenants income, but rather the deal. Regardless of how much the tenant makes; do the numbers make sense? I will make the deal contingent on a home & lead inspection. I was informed that the property may have lead paint, however the seller does have the lead safe paint inspection certificate.  Which is good for the life of tenants tenancy.  Only needing to be renewed once the property becomes vacant again.  

If you are looking to finance I  think you may need to consider the amount of the down payment.  Lower value loans may need to be kept in-house and not be sold by the bank so they may not go with no money down.  That makes your out of pocket not just 2k in closing.   Also most banks will not do a loan for an owner who is selling a property so assuming the current owner loan is unrealistic unless they already have it.  Otherwise numbers look ok. 

I am also skeptical that the reported tenant income is inaccurate, they can live where they want but at this income they should be able to easily buy this property.  Assuming this is the income it isn't credit score, there is another reason they aren't buying that you would want to know.  Could be they don't want to be bothered owning but it also could be a house issue so don't skip the inspection/due diligence.