Is this a good deal?

Question

I have a unique investment opportunity I would love someone to help me think through. Please give me feedback as this doesn't quite fit into typical calculators and I'm not confident with my current calculations.

I have signed an off-market Agreement of Sale (executory contract) on a property in the Phoenix suburbs. This single-family home sits on a 1.5-acre property and is 6,400 sf, six bedrooms, five bathrooms, a pool, a hot tub, and an expansive balcony. The property has documented annual rental revenue of $140,000.

DEAL BREAKDOWN

EMD: $50,000

Sub-To (with a 3-year balloon): Mortgage takeover is $5,900/month.

Purchase Price: Agreed upon variable price for 3 year period.

Year 1: $2.25m

Year 2: $2.35m

Year 3: $2.5mARV: $3.5m

Estimated Rehab Costs: $250,000-$300,000 (Rehab had already begun and I have all the contractor work orders)Exit Strategy:

1. Fix and Flip

2. Refinance and rent as STR (current market projections are $175,000-200,000)

David Ramirez · Answer

IMO, your offer should really be based on a flip as the main exit strategy. As a rental, if you can’t rent long-term and at least break even when you refinance, it’s not a good deal, too much risk there.

What are your holding costs looking like?

Are you financing the rehab?

What % of the $140k is going to operating expenses?35%?

How much could you rent it for long term if you had to?

How would a variable purchase price work if you’re transferring ownership at closing as a sub-to? Are you structuring this as a partnership with the seller?"

Zachary Yelder · Answer

Thomas, just looking at the deal you have. So, is the purchase price $2.25M with a $5,900 PITI? I feel like there's a few numbers missing to truly estimate the buy & hold strategy here over the flip exit. Feel free to message or call me to discuss details.

Thomas Austell · Answer

Thanks Jackson! Appreciate your thoughts. I will reach out to connect further.

Jackson Harris · Answer

Hey Thomas,

I'm an investor and agent here in Phoenix. My partner and I own a portfolio of STR's here as well as do flips and mainly work with fix and flip investors.

Right now in the market we're seeing 50% of sales coming from the $350k-$550k sales price point and another ~25% of sales coming from the $1.8M-$3.5M range. Knowing that you'll have a good amount of eyes on the property at your ARV of $3.5M, I think you would be able to get it sold in a decent amount of time and save some holding costs.

Rates are coming down, but in that price point most buyers will be coming with cash or don't care about the rates as much.

So yes I think this is a good deal, not sure how many partners you have on this deal but I think your decision depends on how much each of you need to make on the deal for it to make sense and how quickly you all want the return.

As an STR you can definitely cash flow but you'll just need to make sure you can make that balloon payment. After that, this seems like a really great return on your investmenrt for the long term as an STR. So again, I think that comes down to, are you all prepared to make that balloon payment, can you hold on and get to where you have "passive" income coming in from the STR, or do you want to get in and out quickly to make a good chunk of change.

Would love to connect sometime, feel free to reach out. I'll send you a connection!