Overpriced but cash flowing - opinions?

7 Replies

Hey All!

So I found a cash flowing duplex that I'm interested in purchasing as a BRRRR investment. Its a short sale and there's a minimum price they will let it go for, which is about $110k. The house needs between $50k and $70k to make it decent. (Could get away with about $40k doing the minimum). So all-in is at a minimum >$160k with all costs included. 

The problem is that the home would still only appraise for about $125k (give or take $10k), putting my equity way under the amount of cash I would leave in the house. Regardless, it would still somehow cash flow a good amount and CoC return would be close to 20% (depending on final repair costs & ARV/cash out allowance) bringing me $300-$500/mo.

Is the cash on cash return worth the 'loss' in equity? Every good deal is made in the purchase, which this would not be, but the monthly numbers and cash on cash return still seem to be worth it, especially for a long term hold.

Opinions?

If it would only appraise for $125k that would imply that there are other similar properties in the area that could be acquired for $125k why would you overpay by $35k, because it cash flows?

@Rob Cucugliello

What market class are you looking at? If it is a C-/D market, you are not accounting for the additional costs from headaches, turnover and non payment of rent. Also, finding a good PM will be very difficult if you decide you do not want to self manage.

If it is a C+/B market class you may be on to something. Evaluate it carefully and detach any emotions you may have.

I know your intention is to BRRR it, but what if you submit an offer with an appraisal contingency? If it doesn't appraise, then you can attempt to renegotiate the price. The cost of the appraisal may be worth it.

Originally posted by @Mike Dymski :

$35k loss to get $300-500 a month cash flow.  That's seven years before breaking even (excluding a little principal pay down).  That's a negative Ghost Rider.

And that's best case scenario assuming it only needs the $50k in rehab.

If it ends up needing the $70k (or more) it gets even worse.

 

@Mike Dymski

If you bought a building outright with cash and got all your money back in 7 years, that would be about a 14.3% cap rate. 

Assuming the $300-$500 is pure profit and repairs and vacancies are accounted for, that's not bad. 

Updated 3 months ago

After rereading the initial post, I realized that there would be very little equity in the deal, if any after 7 years. Disregard my post.

This is not a BRRRR investment. The whole point of BRRRR is to pull your cash out. You are going to ge probably 80% of appraised value on a loan. So you buy it for $110,000 and put $70,000 into the deal. Now you are in for $180,000. Bank loans you $85,000 so you have $95,000 cash left in the deal. Of course it cash flows! Pay all cash and it will cash flow even more. This is not a BRRRR and it is not a deal. You should be offering $50,000 at most, because that is all it is worth in current condition. You would be better off paying full price for a property on the MLS. Your all in cost would only be $125,000 AND you are not stuck having to rehab.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here