I live in Nashville, Tennessee and currently have seven rental properties including two duplexes. They provide a nice monthly rental income, but I have never purchased using the 70% rule. My approach has been to focus more on the monthly expense and mortgage rather than the sale price. My Cap Rates have ranged from 12-20%, but I always look for a 2:1 income to expense ratio (including PITI). I do like to renovate my properties to bring them up to date. I feel this brings in a better tenant and higher rent. I do yearly leases and most of my tenants renew.
After becoming a member of BP, I have begun to question what I am doing. I enjoy using the calculators and reading about the many strategies other investors use. I am a "buy and hold" investor, but I do see the cash flow advantage of flipping.
So here is my question, I have an opportunity to purchase the other side of a zero lot line property of which I already own one side. The seller is motivated, but our market right now is insane. The seller knows what he can get. He hasn't hired an agent yet and is willing to discuss the sale with me. If he is intent on getting 80-90-100% of the market value, is that a bad thing? It doesn't need much work (if any) and I know what I can get for rent. I have the down payment for a loan if it goes that way. A cash purchase would just about break the bank. Am I not thinking like an investor? What am I missing with this line of thought? I appreciate any input.
Welcome to the site @Steve Bruza . I hear good things about the Lebanon rental market. If the seller knows what he can get then it sounds like you won't be able to get much lower unless you come up with a creative scenario that allows him to win. If he owns the property free and clear think about seller financing options.
Whenever I evaluate my buy and holds, I'm willing to flex on the 70% rule if it is in my farm area. For some specific neighborhoods I'm willing to go up to 85% of market value if the numbers work. This is because I'm willing to pay a premium to hold in areas I know are solid and where I have a good exit strategy should something happen.
Regarding down payments, I always prefer the least amount down possible. This way you can leverage your capital to increase your overall portfolio and number of deals going. I'd see if he would give you his bottom number first. Tell him you will make it easy on him and he doesn't have to go through the hassle of getting it listed, worrying about someones financing going through, being nit-picked on things that need to be fixed, ect. Then see if you can get a seller financed option lined up within his bottom price and your expected buying price. Good luck and let us know how it turns out!
My acquisition strategy is similar to @Josh Braun - I try to get into a deal with as little out of pocket as possible to increase your leveraged cash on cash return. But if you have the 20% down you may want to use it and lock up a 30 yr low interest mortgage if that helps you with peace of mind.
Another option would be to structure a seller carryback with the seller in second position. Bank funds 80% of the deal (seller gets 80% of purchase price) then carries a note for the remaining 20% (preferably interest only with a 10 year ballon). This way you acquire the deal for free and then refinance in 10 years when the rental appreciates high enough to transition into a 30 yr mortgage and pay the guy his 20% back - again for free.
As long as the deal cash flows at 100% financed terms, you're collecting money for free - you didn't invest anything in the deal.
Just ask the seller how much equity he needs out of his property and what he plans to do with the cash. Savvy investors who don't have plans to reinvest cash will understand the benefits of earning 5% returns when the banks are offering 0.1%.
Thanks guys, good information. The seller is looking to purchase another house and would like to use the proceeds from the sale of this one. Once I get some additional details and make a decision I will post the results. Thanks.
It sounds like what you have been ding is working and I would certainly have trust in your experience. The above ideas regarding getting the seller to finance as much of the deal is great, but based on your last comment, it does not sound like he is really going to be excited to do that. You may be able to structure a lower price based upon the time frame that you can close within and then allow him to rent the home back from you until he finds his new place and can move into it. That flexibility should be worth something to him if he does not already have a plan otherwise.
My only concern with paying that much for the home as an investment is, what do you see as who your end buyer will be? If the area that the unit is in is set up so that most likely your end buyer will be an investor, then you may need to question paying that high of a price, but only if you intend to sell in the next 10 years or so. Based upon what you said, you are looking to hold it longer, therefore, time can cure the over-paying of a property (if appreciation does not come through for you). If you are in an area that you can expect your end buyer to be an owner-occupied buyer, then you should be able to get your money plus whatever appreciation back out of it.
The only thing that I would ask is, do you have any other deals on the table? If you are only looking at 1 deal, then it will look good. Generate another 5-10 deals prior to deploying your money and this one may not look as good anymore.
Just some thoughts. Hope they help and good luck!
Thanks for the response, again great comments. I have spoken to him and we are meeting on Sunday to discuss. I am making a list of questions to ask to get a better idea of what will work. I have to admit, I am intrigued by the idea of owning both sides and property. If anyone has any suggestions for good questions, I am open.
As far as other deals go, I don't have anything else pending. This one has been kind of sitting on the back burner as I own the other side. As soon as I purchased my side and made his acquaintance, he was letting me know he is looking to sell and move. I am on the HOA board for a community of townhomes. I have sent communications out to those homeowners looking for deals, especially on those of the duplex variety.
I do plan to hold my properties as long as I can. My end goal is to establish as much retirement income as I can. I have had the same thought as you with regard to holding a property long term to ease or minimize risk of "over-investing".
The ARV rule is more aimed at rehab flippers, the idea is that 30% covers your profit on the flip and any unseen problems during the rehab.
@Steve Bruza I'm no expert but if you plan to hold it and in the long term it makes you a profit then what's the problem? I may sound elementary here and I apologize for that but that's how I see it. Best of luck!
The 70% rule really doesn't help much if you are using a buy and hold strategy, with the exception that you know you can have a second exit strategy by selling and still make a profit if you needed to sell. If you are conservatively cash flowing positive and acquiring a good property in a hot market it sounds great to me.
Thanks for all of the input everyone. I met will the seller and we have worked out a deal. I am in the process of looking for a lender as seller options were not available on this one. The numbers work compared to my other properties.
The unit is move in ready, might need to paint, so repairs or upgrades are not an issue on this one. I like the idea of owning both units in the building. Now I don't have to worry about dealing with another owner when it comes to repair or maintenance that affects both units.
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