How Much Would You Pay for this Deal?

Question

I have a property under contract that I plan to hold as a rental, but have started thinking about wholesaling it to another investor.  I've never done that before so I'm curious to see what investors would pay based on the following information.

Type: single family, 3 bed, 2 bath
Condition: Not newly rehabbed, but more than sufficient for renting
Additional Repairs Needed: $0
Location: Suburb of Cleveland, OH - blue collar area, not a war zone.
Market Rent: $900
Property Taxes: $193/mo

I know that any savvy investor would have to confirm all this information, but lets just assume its all accurate.

How much would you pay for this house?

Would you prefer that it be vacant or already have a tenant and property manager in place?

David Beard · Answer

I agree with the posters who are indicating that a 30% grosss rent yield (ie.. "2.5% rule") for a SFR in Ohio that needs little or or no rehab, makes sense for most investors.

If you market it effectively and it's truly a decent area (must be to get $900 in rent), then you might be able to sell it as a 2% property (ie.. 12% cap).  But in that instance I'd want to see that there is some fair volume of retail O/O sales activity in the area supporting the valuation as another exit option. (Not just a rental area with nothing but foreclosure sales, in other words.).

Good luck with it.

Jon Klaus · Answer

And from what I read here from Cleveland investors, they often exceed 2% in rent, if fact sometimes I've seen 3% and 4% rents.  So that means pay less if this is purely a cash flow deal.

Mike Neyman · Answer

Thanks for the input everyone.  It sounds like I may be able to wholesale this one if I choose to go that route.

I think the point about having some SFRs in your rental portfolio may be lost on some people.  Granted that you may have to settle for lower returns, but it is a lot easier to unload in case of emergency.

I don't know what the statistics are, but I would bet that 2-4 unit properties take a significantly longer time to sell than SFRs.  Additionally, your potential buyers are limited to other investors who will not be paying retail prices.

Although we don't factor appreciation into our analysis anymore, it is worth noting that if/when the housing market does recover, I think SFRs will recover much faster because the value will be set by retail buyers and not investors.

Will Barnard · Answer

I agree with David's assessment, very good advice. Having the secondary exit strategy is crucial and you may use that to weigh in on your decision to purchase one property over another (ease of retail exit to owner occupant buyer)

Kyle Meyers · Answer

In Indianapolis I have been trying to stick with a 15% cap rate, so based on that and the 50% rule I would value this at $36,000 with no repairs. If I was going to make a cash offer it would be less.

Mike Neyman · Answer

Jon,
I've also seen 3% rents around here, but they tend to be in worse areas and usually only on multifamily properties with high maintenance and management costs.  SFR give you an easier exit if you need to unload the property.  I figured that may be an important factor for some investors.

Mike Neyman · Answer

I guess it wouldn't be a true wholesale because I would be making any repairs so that the buyer wouldn't have to worry about it.

In general, I agree with your point about $0 rehab being unlikely.  I was trying to convey that it is rent-ready and any expenses would be typical maintenance items.

Thanks for the input.

Matt T. · Answer

I don't currently buy anything out of my home area, so this is strictly hypothetical, but.....I think most people here would stick to the 2% guideline.  $900 a month rent would = $45,000 max purchase price.  My offer would be a little less since I've yet to see a property that was truly $0 in rehab required.

How Much Would You Pay for this Deal?

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