A good deal I suspect is becoming a lemon

Buying & Selling Real Estate
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A good deal I suspect is becoming a lemon

Account Closed
Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes

I bought a property in Lakeland recently (3/1 925 sqft) . Asking was $85k, after inspection we agreed to $64k.

The house was in rough condition but seemed manageable. The AC was working during the inspection but was old. After the purchase seems like my AC died and I'm in for another $3000-$4000 for a new AC.

The repairs are about to cost me aprox $17,000 including the new AC and my total is about to be roughly $81k for a rental property that will make around $850/m before management services, taxes and insurance.

My calculations put me in about 8-9% annual return on investment. Did I get a really bad deal or should I just learn from this and not eat myself so much and just be happy with my 8-9% ?

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
7y

Ya know, I talk about this a lot in the podcast I'm on (#244 - see below for link).

So many people beat themselves up because a deal is "only" 8% or whatever it is.  We do ourselves a disservice when we compare our deal to other people's deals.  Or to other deals we've done.  Here's how I approach it.

Where would I park my money if it were not this deal?  A T-bill?  An S&P Index Fund?  A CD?  What are the rates there?  2%, 5%, 1%?  (I honestly don't know - I'm actually guessing here).

If your deal is doing better than that, then who the heck cares if it's not 15%?  We get so wrapped around the axle about "maximizing our returns", that we forget that:

A.  Real estate is a VERY imperfect science.  It's probably closer to an art than a science.

B.  When you're just starting out, any profitable deal is a good deal.

C.  Comparing yourself to everybody else is just going to make you miserable.

Your deal sounds just fine.  It's a nice, solid base hit.  Maybe even a double.  They can't all be home runs.

Podcast Guest on Show #244
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    Eh  not great but not a disaster

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    2Reply
  • Account Closed
    OP
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y
    Originally posted by @Jay Hinrichs:

    Eh  not great but not a disaster

     Thanks Jay. I feel pretty bad about this deal but I'm trying to get over it. I mean 8-9% is not terrible, assuming I'm getting a new AC I'll be enjoying it for the next few years. I just have no idea how I could of done this better.

    Seller was pretty firm about his price, he wasn't willing to move lower than $64k. The repairs I feel like I got a pretty good deal on them and AC was a surprise. Without the AC I would have been around the 10% which sounds much better to me. 

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  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y
    @David Tsedaka what was your original target price and what do you expect the ARV to be when completed? Seems like you made out ok on the purchase, getting it under asking, after renovations. Personally, I dont love properties with such low rent. Theres just no cushion when the gross is so low.
    1Reply
  • Account Closed
    OP
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y

    I think my mis-calculations were marginal but in several place. I did not account for the AC, I missed out on my repair costs.

    0Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    ideally you will be able to raise rents over time. you will make a bit of money from this property each year for the next few years - nothing to write home about but nothing to laugh at. hopefully it appreciates in value over those same few years. someday you may find yourself in a position to sell it and make a nice profit.

    Getting at or close to the 1% rent to price ratio/rule often results in a cash on cash return of 8-12% (in my experience). Works for me.

    1Reply
  • Mike McKinzie
    Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
    7y

    While not a "home run", it is a solid "single" and a lot of "singles" make for many runs, in the LONG GAME! Also, after 3-5 years, if there are not large CapEx or other repairs, you keep it rented and the property value goes up, what little you may have lost in the beginning will eventually make for a good return.

    2Reply
  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    7y

    Ya know, I talk about this a lot in the podcast I'm on (#244 - see below for link).

    So many people beat themselves up because a deal is "only" 8% or whatever it is.  We do ourselves a disservice when we compare our deal to other people's deals.  Or to other deals we've done.  Here's how I approach it.

    Where would I park my money if it were not this deal?  A T-bill?  An S&P Index Fund?  A CD?  What are the rates there?  2%, 5%, 1%?  (I honestly don't know - I'm actually guessing here).

    If your deal is doing better than that, then who the heck cares if it's not 15%?  We get so wrapped around the axle about "maximizing our returns", that we forget that:

    A.  Real estate is a VERY imperfect science.  It's probably closer to an art than a science.

    B.  When you're just starting out, any profitable deal is a good deal.

    C.  Comparing yourself to everybody else is just going to make you miserable.

    Your deal sounds just fine.  It's a nice, solid base hit.  Maybe even a double.  They can't all be home runs.

    Podcast Guest on Show #244
    18Reply
  • Account Closed
    OP
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y

    Thank you so much guys. I've been beating myself about this for the last couple days and 8-9% is still better than a 3% 5 year CD.

    1Reply
  • Jorge Roman
    Member since 2019 · 74 posts · 12 votes
    7y

    Every mistake has a lesson in it if you're open to improvement. Sounds like you came out ahead this time but now you know you can do better. Good luck!

    0Reply
  • Tchaka Owen
    Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes
    7y

    @Account Closed - maybe there's a way to lower the $17k tag. For example, if the home is 925sf, you're probably getting a 2- or 2.5-ton AC. That will not cost $3-4k in Florida (in my home area of Northern Virginia, it's $5k+, not FL). We used to buy 3-ton Rheem for under $3k in S. Florida.  You should tap out at $2500 max. What are the other expenses you've listed? Or PM me.

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  • Account Closed
    OP
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y

    @Tchaka Owen I already called a few AC service providers. They are offering a range of $4000-6000 for the AC.

    I might have a guy do it for $3000 but he hasn't looked into the house yet to give me a final quote.

    0Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y
    @David Tsedaka Did you purchase this home from our mutual friend?
    0Reply
  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    7y

    @Account Closed

    We've all been there more than once trust me!!

    BUT

    "You will NEVER lose money just taking a SMALL profit."

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    @Pat L. Yep even a lousy or marginal deal can get good if you hold it long enough . One nice thing about RE ...850 rent on a 81k house is not what I’d would call great but it sure is better than a lot of the deals I see people talk about on here

    1Reply
  • Account Closed
    OP
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y
    Originally posted by @Mark Fries:
    @David Tsedaka

    Did you purchase this home from our mutual friend?

    Haha Mark! No I have not. Our mutual friend leaves his properties in pretty good condition. This one was pretty bad.

    0Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y
    @David Tsedaka Just checking lol
    0Reply
  • Account Closed
    OP
    Rental Property Investor · Odessa, FL · Member since 2017 · 145 posts · 113 votes
    7y

    @Mark Fries I did get one from him in the past, it was in good condition. I had small repairs on it and it's already rented out.

    Thanks for checking up on me. Appreciate it. 

    Also thanks for all of the responders to the thread. I don't feel as bad as I felt a few days ago :)

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Account Closed:

    I bought a property in Lakeland recently (3/1 925 sqft) . Asking was $85k, after inspection we agreed to $64k.

    The house was in rough condition but seemed manageable. The AC was working during the inspection but was old. After the purchase seems like my AC died and I'm in for another $3000-$4000 for a new AC.

    The repairs are about to cost me aprox $17,000 including the new AC and my total is about to be roughly $81k for a rental property that will make around $850/m before management services, taxes and insurance.

    My calculations put me in about 8-9% annual return on investment. Did I get a really bad deal or should I just learn from this and not eat myself so much and just be happy with my 8-9% ?

    As everyone here told you - it's not great but not a bad deal at all even with you underestimating the repairs.

    I've done this mistake so many times it's embarrassing. Here's an example of a deal that I've done that in fact but I made over $1 MILLION on:

    https://www.biggerpockets.com/forums/311/topics/64...

    One solution to your dillemma is sell the property on a Rent to Own basis (3 years, jack up the price 15% and also increase the rent 10% because you're selling it 3 years from now).

    By doing this, you get more cashflow, and a higher sales price and therefore more profit.

    Downside is: you sell a property making cash.

    If the area where this property is at is a good area and is a highly appreciating market, then just hold it. Otherwise, rent to own it.

    0Reply
  • Andrew B.
    Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
    7y

    I mainly agree with everyone above. One thing I didn't see mentioned though is, do you need to replace the A/C? Have you done an analysis of what it would rent for without it? Can you use a ductless system instead to save money? I think you mentioned you shopped around for prices, so that suggestion is out. I'm just spit-balling though.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Linda Weygant. Has many good points but you have to also make sure your return is risk adjusted and worth the return you’re getting for the risk. I agree don’t compare your deals to others.

    All that being said if you buy a house and get 7 percent and are using leverage, that’s not a good risk adjusted return. You can invest in high yield bonds and get 7 percent. You’ll be way more diversified with much less risk. And no tenants to deal with. Now obviously your house could appreciate and I’m not factoring that in to the return but it’s never guaranteed and we are definitely very late cycle.

    0Reply
  • Steve B.
    Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    @David Tsedaka its a reasonable deal assuming you don’t have any major unexpected repair or tenant issues. So you really won’t know if it was worthwhile for at least a year. As others have said it looks ok but not great on paper.

    0Reply
  • Tchaka Owen
    Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes
    7y
    Originally posted by @Account Closed:

    @Tchaka Owen I already called a few AC service providers. They are offering a range of $4000-6000 for the AC.

    I might have a guy do it for $3000 but he hasn't looked into the house yet to give me a final quote.

    Speak with local investors and get their AC contacts. Unless you prefer to pay retail...

    0Reply
  • James Canoy
    Kingston, NY · Member since 2017 · 252 posts · 138 votes
    7y

    @David Tsedaka

    Look. You’re beating yourself up over a non issue. It doesn’t matter how good the returns are as long as they are positive. A positive return is good money. The place pays for itself. So where’s the problem?

    You now have an asset that pays you. Now refinance if you like and do it again. I’ll take these “not worthy” deals all day rather than waiting around wasting time and money just to get something better.

    If this thing cash flows $1 a year and you get a million of them what will your life look like? What’ll you life look like in 20 years when you sell them?

    You made a minor calculation “error”. We all do.

    1Reply
  • Michael G.
    Member since 2018 · 52 posts · 31 votes
    7y

    I think i agree with a lot of the folks here. There are a multitude of reasons you should not compare yourself to other investors, but primarily because RE investments are relative.

    1. Location obviously plays a big role (if not the entire role). Good luck getting the numbers people here on BP talk about when you are investing in SF, NY, NJ.... Not all states/cities present the same level of opportunity.

    2. Available funds is another one.... Your capital may prevent you from getting involved in opportunities you otherwise cant afford - ones that can get you that +10%

    Having an idea of the "correct" numbers is good, however be sure to know they are not the end all be all.

    0Reply
  • Tyler RowlandBusiness Member
    Lender · Cedar City, UT · Member since 2017 · 88 posts · 64 votes
    7y

    Hey There David and anyone else on this thread.  Considering the height the current market (and assuming it stays high.)  Is this a deal you would do again.  Seems like deals with these types of margins are much more common in a seller's market.  If you came across this deal again with the AC to fix, same price, same everything; would you (or anyone else in this thread) jump on this deal?

    (I know there are a lot of variables like location, market, etc... but using what info we do have.)

    Thanks!

    [email protected]435-592-4002
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