Running Numbers Based on Purchase Price or After Repair Value?

Question

I'm looking at a duplex in the Ogden Area (about 50 minutes north of Salt Lake City, Utah). The owner has rejected several offers that have come in below asking price and is dead set on his price. That being said, I'm having a hard time getting the numbers to work at the asking price. The other challenge is that the current tenants have leases that don't expire until the spring of 2019. Each unit is currently 2 bed/1.25 bath renting at $950/month. There is plenty of space in each unit to make them each  4 bed/2 bath and bump rents to ~$1300.

That being said, when I run the numbers based on the current leases and asking price, I'm positive $50/door until spring (Cash on Cash of 6.5%). However, after the leases are up and I remodel each side and bump rents, I'm cash flowing at $325/door (Cash on Cash of 11%).

My question may have an "it depends" answer, but I want to know your thoughts. Would it be too risky to take this deal? If the numbers don't work very well right away, but they will work great in 6-8 months, can I justify the deal?

Tyler Gibson · Answer

Jaiden risk is relative to the person taking the risk. Some people are more risk averse than others so as you thought my answer is it depends. the seller is firm on his price have you asked if he would be willing to try and hand over the property vacant? You could present him an offer at his asking price with the contingency that the property be presented vacant. This would allow you to do the rehab you want and get your rent where you think it can go.

William Hochstedler · Answer

Generally, when my analysis includes seller is "dead set on his price" and "I'm having a hard time getting the numbers to work,"  I'm moving on.

The only way to make deals like this work is if you play with terms.  Your CoC goes up if you bring less money to the table.  Will he seller finance?  At a high LTV and low interest rate?  40 or 50 year amortization to keep payments low?

This sounds like a non-starter if the seller won't negotiate and the numbers aren't there.  This is the definition of unmotivated seller.  Keep in touch with him.  He might have a different story next year when the leases come up.

Thomas S. · Answer

I would say no unless you can confirm that the building department will provide a permit to add the rooms and your calculations are based on the ARV equity wise. Make sure all assumption are confirmed.

At $1300/month per side total ARV should not exceed $260K unless you can flip it at a profit.

Jaiden Olsen · Answer

Tyler, That is a great idea. Never hurts to ask!

Running Numbers Based on Purchase Price or After Repair Value?

Running Numbers Based on Purchase Price or After Repair Value?

Most Popular Reply

4 Replies