Is this a good deal?

Question

I recently come across a rental property that is being sold for 146,500. The ARV is 197,000 with comps in the area going as high as 220,000. It also already has tenants living there paying monthly $1,020. It is being sold as is and can be bought and flipped or continue to be rented out the way it is right now. Is this a potential deal or not?

Marcin Ferenc · Answer

@Gabrielle Woodard, try putting this property through the 50% rule if you are thinking of renting it.

Take the monthly income x 50%. From that subtract your mortgage (at 20% downpayment your looking at financing about $117k which comes out to just under $600 a month for principal and interest on a 30 year 4.5% loan ). Based on this, it does not seem like a good rental because it comes out to a negative number. Rule of thumb is that you at least want $100 per door.

$1,020 x 50* = $510

Loan Payment = ~$600

Cash Flow = -$90

Also please remember, this is just a rule and not a hard fact. Hopefully I didn't miss any calculation in there.

Wish you all the best,

Marcin

Gabrielle Woodard · Answer

Thank you Johnathan. It didn't sound like a real deal to me I just wanted someone else opinion as well. I tried to negotiate the price down but the seller wouldn't budge.

Jonathan K. · Answer

@Gabrielle Woodard Based upon the limited info you've provided above, I don't think it's a "good deal".

From a flipping perspective, using the 70% rule on the ARV of $197K gets you to $137.9K minus your rehab costs (which you haven't disclosed above) to get you to some unknown maximum price that you'd pay. For example, with $30K of repair costs, you shouldn't pay more than $107.9K, which is well below the $146.5K price.

From a rental perspective, using the 2% rule and the existing monthly rent of $1,020, this property's rent only represents 0.7% of the proposed price of $146.5K. Seems well below what you'd like to see.

These rules, as people with far greater experience than I can attest, are merely guidelines. Certain markets (don't know where this property is based) may require some adjustments to these rules. Hope this helps.