Buying investment property at retail?

Investor · Essex County · Member since 2015 · 73 posts · 10 votes

Hello Bigger Pockets,

I know the overall goal in real estate investing is to purchase below market value. But I came across an interesting situation where I can purchase a 3 family cashflow property with 100% financing. There is two catches, one is that I would have to purchase at market value, and two is that its not located in the nicest area. I ran the numbers and it seems that the property will cashflow at about 12k a year, Bad idea?

Any input would be GREATLY appreciated!

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William Hochstedler

Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes

10y

What is everybody talking about here?

@Neil J. is saying that, for no cash out of pocket, he can acquire a $300K property. The cash-on-cash return is therefore infinite. The tenants will pay the mortgage and in 30 years he will have a $300K asset free and clear with no appreciation. Meanwhile, he will be receiving the tax benefits of depreciation while pocketing $1000 a month.

Furthermore, if it's seller financing, he won't be tying up an institutional residential loan.

If the numbers truly work meaning maintenance and CAPEX won't cost a fortune and the value of the property won't tank, this looks like a great deal.

I have a lot of clients that don't care about market value and will pay well over it if they can get into it with little or no cash and it has true non-negative cash-flow.

All of @Anthony Dooley's comments assume you are putting cash into the deal. Show me how I can get 9% in the stock market by investing $0.

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Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
You tend to always cash flow much better in the rough areas. You just have to decide if it's the kind of headache you want to handle. Rough area with 3 tenants living in the same building, not for the faint of heart. Appreciation potential is probably not there.
I'd provide more details on the numbers if you have them, so others can give input on whether or not you're missing something in your calculation.
2 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
Cash flow $12,000 per year after expenses or are you Saying total rent minus the loan payment equals $12,000. If it's the latter, then it really isn't a good deal. Paying market value is not investing, it's just buying. Investing requires a calculated risk in order to get an expected return. Also, are the units being rented under market rent? If so, there may be room to improve your return.
4 Reply
Neil J.
OP
Investor · Essex County · Member since 2015 · 73 posts · 10 votes
10y
Originally posted by @Anthony Dooley:

Cash flow $12,000 per year after expenses or are you Saying total rent minus the loan payment equals $12,000. If it's the latter, then it really isn't a good deal. Paying market value is not investing, it's just buying. Investing requires a calculated risk in order to get an expected return. Also, are the units being rented under market rent? If so, there may be room to improve your return.
Hello Anthony,
Its just over 12k cashflow annually after mortgage payments and expenses. The property has already been fully renovated by an active investor. I have been offered to purchase the property without throwing in a dime at $300k. Recently sold comps within a block radius are 300k - 315k. But you are correct, a real investor never buys at market value.
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Neil J.
OP
Investor · Essex County · Member since 2015 · 73 posts · 10 votes
10y
Originally posted by @Chase Gochnauer:

You tend to always cash flow much better in the rough areas. You just have to decide if it's the kind of headache you want to handle. Rough area with 3 tenants living in the same building, not for the faint of heart. Appreciation potential is probably not there.
I'd provide more details on the numbers if you have them, so others can give input on whether or not you're missing something in your calculation.
I agree, dealing with the tenants are definitely one of my greatest concerns. Its a 300k house with a net cashflow of 12k after operating cost and loan.
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Brian Lacey
Rental Property Investor · Hailey, ID · Member since 2015 · 218 posts · 143 votes
10y
Keep in mind, you're not buying a property, you're buying a tenant. A bad tenant will run roughshod through your expenses and cap ex.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
Those numbers represemy a 4% rate of return. It means that the proprty would pay for itself in 25 years. You could get Those terms from any bank loan. You can earn 10% or more in a mutual fund over the same 25 year period without the hassle of a rough area of town. To me it's worth $60,000 based on the numbers your giving. If it's been on the market for a year, they are asking too much.
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Neil J.
OP
Investor · Essex County · Member since 2015 · 73 posts · 10 votes
10y
Originally posted by @Anthony Dooley:

Those numbers represemy a 4% rate of return. It means that the proprty would pay for itself in 25 years. You could get Those terms from any bank loan. You can earn 10% or more in a mutual fund over the same 25 year period without the hassle of a rough area of town. To me it's worth $60,000 based on the numbers your giving. If it's been on the market for a year, they are asking too much.
I'll leave this property alone, thank you so much for your input!
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Neil J.
OP
Investor · Essex County · Member since 2015 · 73 posts · 10 votes
10y
Originally posted by @Brian Lacey:

Keep in mind, you're not buying a property, you're buying a tenant. A bad tenant will run roughshod through your expenses and cap ex.
Couldn't agree more! I'm backing out, thanks Brian.
2 Reply
Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Originally posted by @Anthony Dooley:

Those numbers represemy a 4% rate of return. It means that the proprty would pay for itself in 25 years. You could get Those terms from any bank loan. You can earn 10% or more in a mutual fund over the same 25 year period without the hassle of a rough area of town. To me it's worth $60,000 based on the numbers your giving. If it's been on the market for a year, they are asking too much.
This doesn't sound like the case to me. This is a 4% ROR AFTER 100% financing of $300k. Assuming he has a 5% rate, that's $15k/yr in interest also being paid, that's a total of $27k return on $300k investment, or a 9% return.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
Then maybe you should buy it. For me it's a pass. I can make $12,000 on an SFR. with $80k or less in mm market. I can make 9% in the stock market and stay home.
1 Reply
Lesley Resnick
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
10y
If you can get 100% financing and the you don't mind dealing with a tougher area, I think it is worth a second look. Cash is king and if you can pick this property up with on money down and could still invest your cash somewhere else? That is a great deal.
It does not really matter if you pay market, oblivious it is better to pay less. If the numbers work, then it is a fit. The market is fickle and always changing compare 2003 and 2007. The market value is a moment in time. Cash flow is far less exciting more dependable. It is a different approach than wholesaling
If I were in Jersey I would be interested in the deal.
3 Reply
Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
10y
I would start with 50% and good comps. I would work from there. Retail is never the best idea when there are so many deals out there. Personally I would just move to the next one, but it is up to you.
1 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
If you proceed put an OPTION to purchase on the property.
This way you take it over and run it for a few months and see how much of a headache it is. If cash flow is real and you get in for nothing down then it might work.
If seller wants inflated price, no option, and personal guarantee then seller is look for a sucker. If the cash flow was great they would have already sold it or kept it themselves.
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3 Reply
William Hochstedler
Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
10y
What is everybody talking about here?
@Neil J. is saying that, for no cash out of pocket, he can acquire a $300K property. The cash-on-cash return is therefore infinite. The tenants will pay the mortgage and in 30 years he will have a $300K asset free and clear with no appreciation. Meanwhile, he will be receiving the tax benefits of depreciation while pocketing $1000 a month.
Furthermore, if it's seller financing, he won't be tying up an institutional residential loan.
If the numbers truly work meaning maintenance and CAPEX won't cost a fortune and the value of the property won't tank, this looks like a great deal.
I have a lot of clients that don't care about market value and will pay well over it if they can get into it with little or no cash and it has true non-negative cash-flow.
All of @Anthony Dooley's comments assume you are putting cash into the deal. Show me how I can get 9% in the stock market by investing $0.
8 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
I would love to sell you guys some property. The question you need to ask yourself in this scenario is; How hard am I willing to work and how much am I willing to invest (time and money) to make $12,000 per year? I can deliver pizza part time and make $12,000. No money down doesn't equal no risk. Good luck.
1 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
William even if no money down you are not factoring the debt component. A marginal property with no money down if you have cross collateral of other assets or a personal guarantee then you stand to lose a lot on the debt obligation.
Properties like that can needs ongoing repairs. Increased repairs and high debt service is a bad situation. You won't be able to refi out unless the property goes up substantially in value in the future years. Multifamily has already cycled out for the most part at the peak. If this was 5 years ago then even if little cash flow and equity play for growth might exist with cap compression.
If you get the seller to do a long term loan with non-recourse then you only have your time in and limited capital to lose if it doesn't work out. If the seller however sells you a dog on a recourse loan they will keep sticking it to you as they do not want the headache again of owning it.
In those cases you are buying yourself a job and it is not an investment. That is why an option works well. You go in and see how things really are for 3 months or more. If it's a nightmare you tell the seller you are not going to buy. If it works out then you have negotiated optimal terms. Even a 100% loan you need some money to close on the property and have reserves.
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3 Reply
Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
10y
Originally posted by @William Hochstedler:

What is everybody talking about here?
@Neil J. is saying that, for no cash out of pocket, he can acquire a $300K property. The cash-on-cash return is therefore infinite. The tenants will pay the mortgage and in 30 years he will have a $300K asset free and clear with no appreciation. Meanwhile, he will be receiving the tax benefits of depreciation while pocketing $1000 a month.
Furthermore, if it's seller financing, he won't be tying up an institutional residential loan.
If the numbers truly work meaning maintenance and CAPEX won't cost a fortune and the value of the property won't tank, this looks like a great deal.
I have a lot of clients that don't care about market value and will pay well over it if they can get into it with little or no cash and it has true non-negative cash-flow.
All of @Anthony Dooley's comments assume you are putting cash into the deal. Show me how I can get 9% in the stock market by investing $0.
Damn, William, you seem to be the most intelligent REI in UT! Well Done!
1 Reply
Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Originally posted by @Anthony Dooley:

Then maybe you should buy it. For me it's a pass. I can make $12,000 on an SFR. with $80k or less in mm market. I can make 9% in the stock market and stay home.
A 100% financed $80k property would have to rent for roughly $1850/mo to cash flow $12k/yr.
Sign me up.
0 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
Flip that around. 100% down $80k property cash flows $12k per year. I'm an investor, not a buyer.
0 Reply
Edwin Williams
Investor · Dallas, TX · Member since 2016 · 60 posts · 65 votes
10y
Here's the simple answer. Buy the property, get a good PM and move on to the next deal. You've got some deep pockets on this thread turning down a verified 12K every year. On a bad year say you spend 6K on repairs that's not the end of the world.
It's not hard work when you have a good PM running a property. This is easy money. Jump Jump Jump.
2 Reply
William Hochstedler
Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
10y
@Joel Owens
Good points. We don't know enough about the details of this deal to know how they factor in.
But to both you and @Anthony Dooleyhow does "no equity" factor into the amount of work it takes to own a rental property? Why is this deal more work than one I paid all cash for or bought at 60 cents on the dollar?
I think you're both assuming that if an investor is willing to sell a property in a marginal area with 100% financing, it must be a dog.
That may be the case.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
My point is that I would not suggest paying $300,000 cash, debt, or otherwise to make 4%. Even with a PM, you have to manage your business. As a matter of fact, send me $300,000 and I will gladly pay you $12,000 per year (4%). Because I wiIl invest it and make 15-20%.
2 Reply
Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Originally posted by @Anthony Dooley:

My point is that I would not suggest paying $300,000 cash, debt, or otherwise to make 4%. Even with a PM, you have to manage your business. As a matter of fact, send me $300,000 and I will gladly pay you $12,000 per year (4%). Because I wiIl invest it and make 15-20%.
I don't get where your 4% is coming from. 4% of what? You're not comparing apples to apples. If you 100% financed your $80k property, using the numbers you provided($12k annual cash flow = $1300/$1400/mo rent with expenses calculated in), you'd be at $5870/yr cash flow or 7% of purchase price. That would be a more apples to apples comparison of your scenario and his.
If he paid $300k cash he'd likely be getting $27k/yr, or a 9% return. Since he's putting none down you can't calculate a cash on cash return.
This would be more like me getting someone else to send you $300k, and you giving ME a check for $12k every year.
1 Reply
Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
10y
Again, there's not enough information here in my opinion to decide without knowing the area, but I don't see how it's worth discounting based on the numbers he's provided. For all we know it's cash flowing $12k/yr after 8% interest seller financing. If that's the case it could be a good deal if you could get the rate down.
0 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
10y
Read the thread. He didn't say $27,000. He said $12,000 net after all expenses. My $80k example is not theory, that is an actual property I own and it's not even the best one. You can invest however you want. Based on the original question I would pass. Good day.
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