Initial bad cash flow - to buy or not to buy?

Question

Hi all,

I have a verbal accepted offer on a house for $48k, with a long term tenant since 2008 paying $625 in rent (subsidized by County). The cash flow is bad at $75 on a 30 yr. But, it's a big 3/2 in a decent area with comps 80k and above. Market rent is around $1,200, and I plan to hold it long term.

With potential for buying at a good equity position and better rent in the future, thoughts on buying or not? What would you do?

Thanks guys and hope everyone is staying healthy.

Joseph Cacciapaglia · Answer

I think a lot of investors miss great opportunities like these, because they focus too much on day one cash flow. How hard is it to bring that up to market rent? Are you allowed to raise the rent at all, or do you have to wait for them to move out? If you're able to bring that up to market in any reasonable period of time, I would definitely buy a deal like that. All of this is assuming the place is in decent condition, because you didn't mention a rehab to get to the higher rent.

Bill B. · Answer

$48k 30 year mortgage at 4% with nothing down is $230/month. Add $75 cash flow and you’re at $305/mo. Where’s the other $320 per month going? It sure as heck shouldn’t be taxes and insurance On a $48k house.

I raised it to getting hosed 6% interest and that’s still only $290/mo.

Evan Polaski · Answer

@Ian Gilligan, could it be a good deal, yes. You have your answer above, but I would definitely assess where it is and the landlord-tenant laws. Are they on a month to month lease? Can you kick them out, if so how quickly? Can you raise rent? Most subsidized rents allow landlords to charge market, but chances are the current condition is not a $1200/mo unit. In general, for 600/mo increase, spending 20k to get it there is over a 30% return on investment. But it all comes down to if you can get access to the unit.

If you buying in CA or NY where the landlord laws are definitely tenant biased, it is a bad deal because you may never get the tenant out.

Jay Hinrichs · Answer

some areas of the country taxs on a 50k rental house can be 1200 to 2k a year.. in those states there are owner occ exemptions that lower it a lot but for non owner occ the rates are significantly higher. Assume by the purchase price its somewhere in the mid west or rust belt.

Joe Villeneuve · Answer

Not enough lipstick for this one

Ian Gilligan · Answer

Thanks everyone, appreciate the answers

Filipe Pereira · Answer

I would jump on a deal like this @Ian Gilligan as long as the due diligence pans out. As long as the place isn't trashed and it won't take another 40K to get you the $1200 / mo rent, why not? I think it really depends on the condition of the place. If the tenant has been there a while and the landlord never did a rent increase (and that's the reason the rent is so low) this sounds quite promising. If there's extenuating circumstances that would prevent an easy re-rent or rent increase I'd think harder about it.

Based on what you've said so far though, I'd say push forward on the inspection and see what's in there!

Kostas Vassalos · Answer

There is a lot of upside if you are thinking of holding it and forcing equity. Couple things to consider: How much do you estimate for rehab costs? How likely is to bring the rent to market value and how easy is to re-rent the house around your area?

Even if your CoC may not be there yet, equity is and i would take that

Joe Villeneuve · Answer

You're rationalizing a bad deal.

Ian Gilligan · Answer

@Joseph Cacciapaglia well that's a whole different side to this one in particular. The owners want me to inspect before I get under contract, which is fine by me but probably means there's some issues with it. I think it's worth the inspection to find out what's going on in there. Plus, looking at the #s longterm with a substantial chunk of cash going towards rehab, it's still a good deal. Thanks for your thoughts, Joseph.

Initial bad cash flow - to buy or not to buy?

Initial bad cash flow - to buy or not to buy?

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