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Updated about 14 years ago on . Most recent reply

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Sunil Kumar
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1991 Built REO in Desirable Location - Buy or No Buy?

Sunil Kumar
Posted

friends, need your help!

saw a bank owned single fam home recently. 3bd 2bath 1500+ sq ft. in a highly desirable and developed area in Dallas. one of the best school districts. home is old, 1991 built, but everything was in solid shape, no foundation issues or otherwise. will get it inspected as well.

numbers as follows:

list price. 160k
taxes: 6k (500 a month)
insurance: 85 bucks/mo
HOA: $300 a year

rent: $1,500 based on comps

even at full price i should be breaking even (no cash flow) but equity buy down through monthly tenant payment of mortgage. i have offered 120k and hoping to get a counter from the bank.

what else to look out for? what am i missing?

go or no go? what are your thoughts? tips on negotiating with the bank on this one?

i have never bought from a bank - and can use any and all help i can get from you.

thanks

Most Popular Reply

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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
14,128
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22,059
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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorReplied

You have to make a lot of offers on appropriately priced properties. Over time, the banks will drop the price. You have to keep watching and bid when the price drops.

You have to be realistic. If houses in your farm area are priced at $160K, and rent for $1500, you need to find a different farm area! If you can find houses in that area for $120K, then its almost OK.

The 50% rule says NOI on a $1500 a month rental is $750. $160K @ 6% for 30 years is $959.28, leaving you with a $209.28 loss a month. $120K @ 6% for 30 years is $719.46 giving you $30.54 in cash flow. That's marginal, IMHO.

And, no, you don't get to take off the down payment because then your down payment is not generating any income. I want my money to generate a return. If you put in a $30K down payment on the $120K price, your payment is now $539.60 giving you $210.40 in cash flow a month. That's $2,524.85 a year for a 8.4% cash on cash return. Too low, IMHO for a pure rental. If your goal is to build long term wealth or if you think prices will increase in five years, it might be OK. Even the $160K price with $40K down, which is just about break even, might be OK, if that fits in with your long term plan. If your plan is for monthly cash flow, though, you're better putting that $40K into a 2% CD. That will give you $66.67 a month, which beats the $30.54 a month the house will generate and is WAAAY less hassle and much more secure. If you have to drop your rent from $1500 to $1450 it turns from slightly positive to slightly negative.

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