Buy & Hold - Over pay?

8 Replies

Is it ever okay to pay full market or over for a Single Family Home, if you never intend to sell it? For instance, you can finish the basement and rent it out as a separate unit because it has a separate entrance already.

More info needed, what are the potential rents and what is sale price?



You can do your same plan but find a better deal

You can do whatever you want. Are you talking market value or pay over market value because you value the basement? And yes buy and hold can “overpay” and make it work in the long run...but sometimes it doesn’t work out, too.

After putting extra money in it to finish the basement, I'd be paying about 25k over market value, but it would cash flow me $400 per month. Would you do the deal? 

Still not enough information. We need details on the value of the home. Stating that you will have XXX cash flow is only relevant if we know you know how to calculate cash flow, which obviously we do not.

So when I use the BiggerPockets buy-and-hold calculator tool, it gives me a 25% cash on cash value. However would it doesn't take into consideration is that the monthly payment costs for 2-3 yrs for fixing up the place that I will have to put on a credit card and those monthly payments are not factored in to the calculator even though the lump sump of the rehab costs are. So when you don't calculate the credit card payments it has a positive cash flow of just under $400 per month. Now if you factor in that I'll probably spend 12 to 15000 finishing the basement, that's an $800 credit card payment until I can get a HELOC to pay off the credit cards.

FYI I should be able to get $1,200 a month rent for the 3 bedroom 1.25 bath upstairs and around $900 for the one-bedroom one-bathroom basement apartment when it is finished.

Bonus to the property is that the furnace, water heater and AC unit is only a year old.

So I guess my biggest question is...

Is it worth it if I have to wait a year or two before I'm cash flow positive?

@Dustin J Woods in general its a bad idea to overpay but and there is a but here...Consider this.  You dont want to hassle with complicated land lording and finding tenants and whatever but you like the idea of diversifying into real estate.  You save up some cash and wait.  Then one day your next door neighbor puts his or her house up for sale at a few bucks above market.  Say for 200 and its only worth 190 or whatever.  You buy it anyway because you figure correctly that its pretty easy for you to keep an eye on the house next door.  You get a renter in there and cash flow 0 dollars after expenses and cost of debt but you have a standard 30 year mortgage and as houses in decent areas are wont to do it appreciates (a little) over time.  Lets say when you buy you are 30 now 30 years later you are still living there and your rental is paid off.  At that point do you care what you paid for it?  Let assume it appreciated a really low 1% per annum.  In year thirty the house is worth $256K give or take not really a home run starting at 190K but you only put 20K down or so and you broke even all these years.  Maybe there's a better way to invest 20K so that you get 256K less sale costs back in 30 years but I dont know what it is that is as safe and easy.

After sales cost you will net about 240K or about 12 times your original investment. You over paid but did ok. Obviously if you had bought it for a lower price you could have done even better but sometimes there is only one property to choose from the metaphorical neighbor's house. By the way to turn 20K in to 240K in 30 years you would be pretty close to a 9% annual return and would have had favorable taxes from depreciation during the majority of those 30 years and if you did this in an LLC you might ahve even benefited from the new 20% tax break.

Would I do that?  No I wouldnt I dont over pay knowingly ever but for someone who wants to supplement their retirement with out having to deal with houses all over the place over paying for the house next door might just work for them.

Why would you want to pay over market value? Only reason I can see is that you are speculating that even right now the over market price you are paying will still be a great deal when it continues to rocket up in value...and that value will be way higher than the market now.....that's speculation....not investing....

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