Does this deal makes sense? HELP NEWBIE

Question

I identified a property to purchase for rental investment, the owner is a Savvy investor in his own right and running a hard bargain. I really want this property because of its potential and my familiarity of the area. He is asking 200k AS-IS, rehab cost estimate $50K, comps $260K, rental income average $2000/month, TH. I've crunch the numbers trying to deploy BRRR strategy using private money. (6%, 2pts, 65/35 bridge loan, 12 months) it's not adding up. am i missing something. I'm a newbie. please feel free to chime him. I appreciate your comments.

Joe Villeneuve · Answer

No way to answer this.  Missing too much info, and your post is cluttered with info that doesn't matter.

First the info that doesn't matter, or incomplete:

1 - Why do you say the owner is a savvy investor,...because he's running a hard bargain?  That doesn't make them savvy...just hard to negotiate with.

2 - If the reasons why you "really want this property" are only "its potential (which you haven't proven or even stated yet), and your familiarity with the area, then there's no reason to want this property.  Neither are good reasons.  Besides, you never want properties...you want deals, and you haven't described a deal yet...only a property.

3 - IF the total cost to buy is $250k, and the comps are at $260k, then move on.  There's nothing here to look at.

4 - A bridge loan is just that, a bridge between the time you buy and the time you have to get the loan you will carry...the mortgage.

5 - Average rents don't apply to individual properties.  Specific rents do.  Also, rents are not what decides a good rental...cash flow does.  Based on your potential mortgage payment (over $1000/month), that leaves you less than $1000/month to cover taxes, insurance, etc...and, oh, the most important thing, what you get to keep (the main reason to buy a rental),...the cash flow.

6 - I bet it does add up, but the answer is a negative number.  What you're missing the reason to buy it...the profit.

Kenny Dahill · Answer

@Abbey Giwa, first rule of pro-forma's:  Excel is a tool, not a projector.  Therefore, you can always make the numbers work in your favor, even if not realistic.

If the numbers don't work, they don't work.  Investors get in most trouble when they force a tight deal to work because they believe they can beat their own projections.  We desperately want the deal to work so we manipulate Excel until we can justify the returns.

Looking at your scenario, private money at 6% is going to significantly increase your cost basis.  However, if it's only a 12mo loan then look at the numbers for Year 2 & forward.  What happens once you get conventional loans for 30 years at 4%?

Since the Seller is a savvy investor, try to use that to your advantage!  Skip the private money lender and utilize the investor instead.  Ask them to carry the $200k home while you only get a loan for the $50k rehab cost.  It's a way for the Seller to net more money as well on the deal, in the long run.

Stephanie P. · Answer

@abbey

@Abbey Giwa

Your numbers are too tight and don't leave room for error or profit.

This is not a "deal".

You should be leveraged no more than 70% after all costs, acquisition, rehab and carrying or you don't have a deal.  You're at close to 100% before you've swung a hammer or paid a monthly payment.

Walk away, regardless of your familiarity of the area etc...

Start going to REIA's and Meet ups and get with investors, Realtors and lenders that can mentor you.  I'm sure there are some in your area.  You need to look at a bunch of properties before you should pull the trigger on one.  Don't fall in love with a property EVER and learn to walk away if the numbers don't work.

My two cents.

Best of luck

Stephanie

Abbey Giwa · Answer

I really appreciate everyone's input from different perspectives, All are very informative and educational (Still learning). my first time in this forum and I'm very glad I did. Thanks for taking the time to respond. Very grateful!

Don Gouge · Answer

Let me simplify this for you. This rule is simple and applies to all business. Buy from those that want to sell and sell to those that want to buy.

Bob S. · Answer

@Abbey Giwa I would not touch it, its seems to only about 6% net cap, if paying cash... But I am spoiled , Im at more then  20% nets  in my markets

Good Luck

Benjamin Aaker · Answer

Using private money is a problem here, but not the only one. That type of loan will only work if you are flipping the place or financing it in 12 months.

Consider finding a bank right now and cutting out the private money loan. If you are flipping, then the deal fails on the 70% rule (you have 250k in and only going to get 260k out, not counting holding and closing costs). If you are holding, then finding a bank is a good idea.

If the rehab is preventing you from using a bank, consider a bridge loan with them to get the repairs done. If the rental income is $2,000 a month then you have yourself a 0.8%-rule for a buy and hold. Even with a bank, this is break-even at best. Any way I look at it, this looks like a walk-away sort of deal.

Does this deal makes sense? HELP NEWBIE

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