Thoughts on Paying Market Value but Cash Flowing Well

Thoughts on Paying Market Value but Cash Flowing Well

Louisville, CO · Member since 2013 · 47 posts · 5 votes

Hi Everyone,

I'm under contract on a 4BR/2BA home. It's very clear that I'm under contract at market value price. 147,500. However, it will rent for $1,500/month and taxes are dirt cheap.

It is also entirely renovated and has many appealing features for higher end clientele in the area (exposed wood beams, gourmet kitchen, hardwood floors throughout). It is by far the nicest home in the subdivision and we are receiving an incredible amount of interest via Craigslist for the home at $1,500/month. I have no concerns about it achieving that rent.

My question is this: Clearly, we are paying market value. However, it flows cash... and should flow very nicely. It is the epitome of a turn-key rental, which is very important for my wife and I at this stage in our lives as I run an Internet Marketing business and we have a 9 week old son.

The home is located in an area that historically does not appreciate well.

What are your thoughts on this as a first investment? I know you make money when you buy, but the market is making this more and more challenging to do in my area. If you find a deal that cash flows, even if it's priced at market value, are you shooting yourself in the foot? I'm estimating a COC of about 21-23%.

My thoughts were, at these interest rates (we are locked in at 4.5% for 30 years), it is OK to buy at market value because you are essentially getting loaned money at below market value.

About me and my strategy:

I'm 28 years old. My strategy is to be acquiring 1 home every 1-1.5 years with 20% down until I hit 4 properties. Taking their cash flow, paying off one home at a time and once one home is paid off, acquiring a new one and continuing that process until I'm in a position to either pay cash for a home, or pay it off within 3-4 years. My plan is to execute that over the course of 20+ years to eventually own 10+ homes.

0Reply
160 views

Most Popular Reply

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y

I have to make a few guesses to complete my analysis. I'm assuming you're going to put 20% down when you buy this house. You say "It is the epitome of a turn-key rental", so I'm going to also assume you will use a property manager.

My analysis gives this a cash flow of $152 a month and a cash on cash return of 6.2%. Here my complete analysis:

Purchase price: $147,500
Rehab cost: $0
Rent: $1,500
Exp, vacancy, capital %: 50%
Loan rate: 4.50%
Loan term: 30
Down payment %: 20%

Down payment: $29,500
Loan amount: $118,000
P&I payment: $597.89
Expenses, vacancy, capital: $750
Net Operating Income: $750
monthly cash flow: $152.11
annual cash flow: $1,825.34
total investment: $29,500
Cash on cash return: 6.19%

I think you're making a couple of invalid assumptions. One is that because its new and nicely renovated you won't have much maintenance or capital expenses. Most of the small maintenance is caused by tenants. New or not so new, stuff gets broken and damaged. Even a brand new furnace will need replacement 20 years from now, so you have to budget 1/20th of the cost every year.

High end finishes will need more maintenance going forward. Lots of discussion about bullet proofing rentals and what flooring holds up best (hint: the IRS assumes flooring lasts five years, I've been told judges here in CO assume carpet lasts three, so if the place has carpet, plan on replacing it every few years.)

I think you're thinking that because its a nicer rental that you will have less issues with tenants. I'm not sure there's any strong correlation.

See this reply in the discussion

52 Replies

Jump to latestLatest
  • Investor · Hendersonville, NC · Member since 2013 · 757 posts · 282 votes
    12y

    Wow this was a very educational thread. I also came late to the party, and I liked the "Epilogue" aspect to it. I am happy it turned out well for you. I have two rentals and I probably wouldn't redo either of them, for two different reasons. But I hope to someday have ten, and I guess having cash flow, but not much flow, in my first two, well, it could be worse ;) I definitely went through a lot prepping a unit for the next tenant after it was trashed and I told the PM to kiss my ***, and then it sat vacant for 3 months because Section 8 is under a freeze here in Charleston. And then the other one is a condo complex that has some talk of mold and the possibility of construction defects. As well, I'm below my purchase price on both so I am kind of married to them. But, I definitely cut my teeth on them that's for sure. I don't feel that guilty about the condo because it was purchased as my first home. The duplex, well, that has lost a huge percentage of value on the market, and as I said, the Section 8 freeze. So it's not easy to manage either of them. I guess the end of the day, it's a living. I flow about $2,000 per month. It's all a learning process; I am going to use leverage to get into two this year and that should even things out because it will be two SFDs, and closer to my home, and in a higher rent category. Those will only flow at $200 a month, but I will be betting on appreciation as compared to a 4.5%, 30 year loan. It's kind of a fun and unique way to make a living, and I'm particularly looking forward to getting these two other properties since I'm a home inspector and will enjoy going through ten properties with a fine-toothed comb. You really look carefully when you are going to be stuck with the condition, it's a good education ;) Again, kudos on this thread everyone.

  • SFR Investor · Denver, CO · Member since 2009 · 184 posts · 55 votes
    11y

    You should re-check your market rent estimate.  A four bedroom 2bath within 15 miles of downtown Denver or Boulder can earn $2600/month.  It's been getting nuts out there.

    But your "market price" indicates it's in a less desirable area, like SW Denver, or ??

    If it's Montbello or GVR, the appreciation is coming soon.  I'd sell it in 4 years before the market there drops again.  

Join the conversationCreate a free account to reply, vote on answers and follow this thread.