Is this a good deal?

Question

Hello. I have the ability to buy a 3/1 SFH in a 3 star neighborhood. It is mostly safe, but a bit messy. The home itself is nice.The purchase price is $83,000. This is the same price that it was when the current owner bought it in 2017.The renter has been there since 2017. Rent is $1025 and the contract runs through June, 2022. The renter always makes payments on time.It sounds like a safe move to me...according to my math, I should earn my $83,000 back in about 3.6 years. When I run this scenario through various rental calulators, though, it comes up as being a poor investment. Ideally, I would like to buy it and then sell it at current pricing (Zillow has it at $120,000) to an investor looking for passive cash flow/tenant in place. But perhaps this just won't work as the numbers don't make sense? I just am not sure.Any thoughs are much appreciated!

Nathan Gesner · Answer

First, your math is faulty. It would take 6.75 years to earn $83,000 from the rent income.

Second, it will take even longer because you're not considering expenses. Even if you pay all cash and don't have a mortgage, you'll still have to pay taxes, insurance, maintenance, capital expenditures, vacancy, non-paying renters, etc. And your time to manage the property also has value, which most investors tend to forget. You can generally anticipate paying 30 - 50% for expenses. Even at a conservative 30%, it will take you over nine years to earn $83,000.

Third, Zillow is not your friend. They determine market values based on a computer algorithm. They have no idea the condition of the kitchen, what the lawn looks like, or the view off the front porch. You need to evaluate the home yourself.

If this property is such a slam-dunk, why's the seller willing to walk away from it for the same price he paid four years ago when he has a solid renter in place? Why is he selling it for $0 appreciation after four years? My Spidey senses would be tingling.