My brother is building a home and knows I'm starting out in the real estate world. Currently I have one single family rental. His real estate agent wants to list his home for 345,000(Not signed yet). He has offered to sell me the home for 300,000 if I want to use it as an investment. So, traditional 80/20 loan. I have plenty of funds for down payment. He just wants his equity out quickly and worried it will sit with current market in KY. He needs to pay land off to get construction loan. He agreed to pay me 2500 rent while they are building their house. That gives me about a 5% cash on cash return with a 7% rate if I can get that rate(Credit is great 740+). Thats using a $100 maintenance and 5% vacancy and paying taxes and insurance. How does the deal sound, considering rent is on the higher side for KY. My current 3/2 with 2 car garage and 4th bedroom in finished basement rents for 1950.
Strictly looking at it from a cash flow standpoint, this deal horrible. You're going to have your brother paying you above market rent and you'll still be getting a poor return on your money. Then when he moves out, the rent will drop 20% which will obliterate the little bit of cash flow that you had to begin with.
That being said, I've seen a lot of people buy deals that have little to no cash flow, but they make up for it in appreciation. If you forecast this sub market to see strong appreciation over the next several years, then this deal might still make sense for you.
@Shane Goodlett Sounds high risk with a poor return. I'd pass at that price. Welcome to BP!
Thanks. I'm eager to learn and invest! We discussed a subject to. The have a VA loan and are concerned about getting another for new house. They make about 250,000 and thats great income here.
Strictly looking at it from a cash flow standpoint, this deal horrible. You're going to have your brother paying you above market rent and you'll still be getting a poor return on your money. Then when he moves out, the rent will drop 20% which will obliterate the little bit of cash flow that you had to begin with.
That being said, I've seen a lot of people buy deals that have little to no cash flow, but they make up for it in appreciation. If you forecast this sub market to see strong appreciation over the next several years, then this deal might still make sense for you.
I feel like prices have risen so quickly around here I don't know how much it will appreciate. The enticing part is the potential of getting the 45,000 discount from what a realtor thinks they can sell it for. Which is more like a $20,000 discount becuase if I sold it later on I would use a realtor.
Strictly looking at it from a cash flow standpoint, this deal horrible. You're going to have your brother paying you above market rent and you'll still be getting a poor return on your money. Then when he moves out, the rent will drop 20% which will obliterate the little bit of cash flow that you had to begin with.
That being said, I've seen a lot of people buy deals that have little to no cash flow, but they make up for it in appreciation. If you forecast this sub market to see strong appreciation over the next several years, then this deal might still make sense for you.
I feel like prices have risen so quickly around here I don't know how much it will appreciate. The enticing part is the potential of getting the 45,000 discount from what a realtor thinks they can sell it for. Which is more like a $20,000 discount becuase if I sold it later on I would use a realtor.
Good point. That is an enticing part. But that is only 1 realtors opinion. So if you move forward with this based on that factor alone, get a few more opinions from other realtors (And maybe even an appraiser)
It doesn't matter that you saved $45,000 on the deal if it's a buy-and-hold that won't cashflow on the open market. Let him sell it and wait for the right deal.