When buying a house, should you follow the numbers exclusively?

28 Replies

I have been looking at a 3-family house but when I run the numbers, the cash flow is in the red something like $230. Are there times when the numbers aren't showing the true value of a house? I asked him if he'd be willing to negotiate the price and he said he already had a full-price offer. I find this hard to believe. If he really did, why would he bother with me? I'm trying to find comps but having a time of it. House is in Passiac, NJ

@William Pope there are fools born every day so don't be surprised if someone outbids you these days. 

Stick to your numbers and make sure you build enough reserves because life happens...

First, do enough study and practice to gain faith in your analysis.  Then, walk away from unjustifiable deals without looking back.  Second-guessing will eat you alive.

Having said that, be careful if you're only running analysis on the property in it's current state.  There are likely lots of things that can be done to improve the numbers (better management... or even self-management, better service providers, capital improvements to mitigate high-cost maintenance, adding amenities to justify raising rents or reducing vacancies and turnover, structuring your business to get lower property taxes, etc).  Be sure not to write off a property without seeing what value you might add to improve the numbers.

Awesome. Thanks for the advice. I probably should have asked the tenants, when I was out there, if they thought any improvements could be made. Looking at a property briefly, it's hard to know what can be done. I just met the agent and he said the roof was 7 years old (30-year roof). Some electrical work was done but not a complete rewiring--some outlets and a new box. The attic is unofficially being used by one tenant but if I just added a door and small wall I could charge more rent for it's use. New flooring was installed in at least one unit. Not sure about boiler and other stuff. Should I ask for receipts on work done?

Just next door two new houses were built. The neighborhood isn't a war zone, but it's urban. For my first property, id like the numbers to make sense. Eventually perhaps I'll see the hidden gems. But that, I suppose, comes with experience of owning and managing at least one property.

Investing is only about the numbers. Never deviate.

@William Pope math doesn't lie, people do. You probably have heard people say that they look at 100 properties to buy 1. This is especially true in today's market.  Make offers based on the numbers that work for you. If they say no, keep looking. I encourage you to make the offer in writing even if you don't think they will take it. Why? Talk is cheap. He may have gotten a full price offer verbally, but not in writing or the guy didn't have the money. BTW, a lender isn't going to over pay for this deal, even if you would.

When I remove 8% for property management (I'll do it myself) and make repairs 7% and CapEx 7%, I get these numbers (I put down 25%. Also, it didn't look like it needed any immediate repairs and was fully rented):

Purchase Price:$359,900.00

Purchase Closing Costs:$4,000.00

Estimated Repairs:$0.00

Total Project Cost:$363,900.00

After Repair Value:$359,900.00

Down Payment:$89,975.00

Loan Amount:$269,925.00

Loan Points:$0.00

Loan Fees:

Amortized Over:30 years

Loan Interest Rate:5.500%

Monthly P&I:$1,532.60

Total Cash Needed

By Borrower:$93,975.00

Monthly Income:

$3,775.00Monthly Expenses:

$3,505.27Monthly Cashflow:

$269.73Pro Forma Cap Rate:

6.01%

NOI:

$21,628.00Total Cash Needed:

$93,975.00Cash on Cash ROI:

3.44%Purchase Cap Rate:

6.01%

Expenses

Income

50% Rule

Monthly income:$3,775.00

c:$1,325.00b:$1,450.00

a:$1,000.00

Even $270 cash flow for a 3 unit is very slim. I walk away from that deal at that price. Let someone else buy it and it 2 years when they've been losing money every month, buy it from them for $50k less.
Originally posted by @Jason DiClemente :
Even $270 cash flow for a 3 unit is very slim. I walk away from that deal at that price. Let someone else buy it and it 2 years when they've been losing money every month, buy it from them for $50k less.

Yes, that sounds like good advice. I actually made an offer 300,900 and left room for negotiation.  I'll keep it on the radar. Perhaps, if he doesn't sell it after a while, he'll make a counter. Thanks

@William Pope , historically, buyers HAVE done better over time IF they could afford investment properties in A-B neighborhoods that do cash flow negatively (for several years at least). 

That's because they gambled on continued appreciation - and WON! 

[Question: Why did they win, and will they always continue to win? And the biggie: Can you afford to be wrong?]

And yes, as has has been mentioned, it's also about looking through value-adding-opportunity eyes.

In the example case you quoted, that full price offer may well be from an owner-occupier! [ie. Different motive].

As Grant Cardone would say, "you can get $270 by standing on the street corner with a sign." I would put the $90,000 into the S&P 500 index and get a better return without tenants, toilets, and termites.

Originally posted by @Brent Coombs :

@William Pope, historically, buyers HAVE done better over time IF they could afford investment properties in A-B neighborhoods that do cash flow negatively (for several years at least). 

That's because they gambled on continued appreciation - and WON! 

[Question: Why did they win, and will they always continue to win? And the biggie: Can you afford to be wrong?]

And yes, as has has been mentioned, it's also about looking through value-adding-opportunity eyes.

In the example case you quoted, that full price offer may well be from an owner-occupier! [ie. Different motive].

 While driving there, I could see how the neighborhood turned from more suburban to urban very quickly. And yes, it's a gamble to buy in hopes that the neighborhood gentrifies and begins to look more like the other half. The two new homes next door may or may not be an indicator of things to come. If he knocks 10k off the price, I might be willing to take that gamble.

Originally posted by @Anthony Dooley :

As Grant Cardone would say, "you can get $270 by standing on the street corner with a sign." I would put the $90,000 into the S&P 500 index and get a better return without tenants, toilets, and termites.

Yeah. Funny you should say that because it's that exact stock purchase I would be liquidating for the down payment. If I add options to my portfolio, I could easily get 10%. If I can't beat the market with a home purchase, what's the point?

@William Pope find a better investment. You may need to look outside NJ. Taxes there are some of the highest in the nation.  You could become a private lender and get 10% annually, and maybe even get a piece of equity on the right deal.

Originally posted by @Anthony Dooley :

@William Pope find a better investment. You may need to look outside NJ. Taxes there are some of the highest in the nation.  You could become a private lender and get 10% annually, and maybe even get a piece of equity on the right deal.

 Yes, my friend told me I may have to start looking outside the extremely over-priced Jersey area. He lives in Maine--Portland. But even that place is getting pricey. I'd love to be a lender--would take the pressure off having to know about housing stuff. I like the idea of a partnerships rather than being a hard-money lender, I think??

@William Pope You could lend on someone else's deal in a second lien holder position if you provide the down payment for a purchase. If you have enough, you could be the 1st Lien holder on the entire deal. Hard money would be a short term deal, but as a lender/partner you would let it ride for a longer term.

@William Pope , I intently dislike the idea of being a 2nd Lien Holder for investors who can't come up with their own 20-25% deposit! Therefore, I highly recommend that you DON'T go down that pathway. [Similarly, I don't gamble by putting all my hard earned into Futures, where you control 100% of a quantity of stock, by only paying (the top) 10%, so when the stock goes up 10% you've doubled your money, but if it goes down 10% - you're wiped out!] Seem risky to you too?

ie. In my book, Anthony Dooley's first suggestion is a REAL gamble! 

[Do good Lenders even allow their Investor/Borrowers to already have borrowed their deposit too?]...

Originally posted by @William Pope :

I have been looking at a 3-family house but when I run the numbers, the cash flow is in the red something like $230. Are there times when the numbers aren't showing the true value of a house? I asked him if he'd be willing to negotiate the price and he said he already had a full-price offer. I find this hard to believe. If he really did, why would he bother with me? I'm trying to find comps but having a time of it. House is in Passiac, NJ

 No, it's not all about the numbers. The numbers can be deceiving.  

In your instance, you are doing the right thing...the numbers don't make sense.  In other instances, some have found that properties in less desirable areas with very attractive cap rates will not cash flow based on the customer base.

The trick is to find what works for you, and in all honesty, the best person to determine what will work for you is you.  If it doesn't feel right, don't do it.  If it feels right, do it.  If it doesn't work out, then learn from it and move on.

@Brent Coombs it's just a suggestion. It beats the heck out of a 4% cash on cash real estate investment. Invest in what you know.

@William Pope are you planning on holding this property for the long term? If so, are you ever wanting to implement property management? 

It is fine to say that you will take on the PM, but if you want to hold for the long term and eventually implement PM you have effectively set yourself up to be unable to do so. If the property is already negatively cash flowing, it would be even further in the red if you were to bring in a PM company to take over. 

only way I could see putting money in Passaic or even Paterson is if it has good cash flow. I can't see the area gentrifying, unless you want to take a 30 year gamble on it. so don't bank on appreciation due to gentrification. seems like too much headache and risk
Originally posted by @Eric Burgh :
only way I could see putting money in Passaic or even Paterson is if it has good cash flow. I can't see the area gentrifying, unless you want to take a 30 year gamble on it. so don't bank on appreciation due to gentrification.

seems like too much headache and risk

 If i want to be a slum lord and never do anything or fix anything, it might make sense. It's an 87 year old house, it's going to have problems of one kind or another eventually. Given the new construction nextdoor, what if i ripped the whole thing down and built new? Crazy, right?

Pay a local realtor as a third party to pull the data.  It is not as easy for a buyer who has a finite means to come up with the market price. Sold comp, income approach both.

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