I had a seller contact me about their property and not wanting it to go to foreclosure. They owe about 183K plus a few months of back payments, which is about 10K. Taxes are up to date, but we will see with the next installment.
It is a 4/2/1
ARV is about 230K (I need to get better comps, this is just a quick overview)
Property doesn't seem to need much work. (Have only seen pictures)
Mortgage payments are about 1600/month.
I found average rents from rentometer $2200. I think this is a bit high, found a similar house close by asking 1750/mo.
I am not sure what information I need to get or what the next steps should be, if this is even something I should look more into? Any advice is appreciated.
I would not pay $193,000 for a property with an ARV of $230,000. You are paying about 84% of ARV where the recommended % is closer to 70%. You also haven't determined the repairs needed.
At rent of $1,750 and using a 50% expense ratio you have about a 5.4% cap. I like to have a cap rate about 3 percentage points above my cost of money. Since my cost of money is about 4% I need about a 7 cap minimum.
Thanks for the reply. I was thinking that one could use a different guide line for the rent, since it would be a rent to own?
There are a lot of moving parts in a lease/option or rent to own. I look at the overall return that I need. The cash flows include the rent for the length of the contract + the negotiated buy price. I will arrange the numbers to suit the renter/buyer. The rent may be lower or higher than normal and it effects the ultimate sell price. I just make sure that if the sell does not go through that I can sell on the market at a price that assures my required rate of return.
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