Newbie Buying First Property SubjectTo

7 Replies

I need help seeing if this deal is profitable.  I can obtain the property for approximately $13474.   That figure bring takes it out of foreclosure status.The repairs are around $5-7K.  The property has n nearly 50000 in equity and about 63000 remaining on the mortgage.   The market value of the property according to Zillow is 100,000.  The county tax appraised value of the home decline $17,000 from 2013 to 2014.  The mortgage monthly note is about $895 and 7.0 interest rate.  Rental rates in the area range from $1000-1200. This property is a rental that can generate about $150-$200 cash.  There are numerous home in the area that are section 8 rental properties.  Let me know if I should take the deal, wholesale flip (assigning it to another buyer) or take and flip sale it for full market value?  Thanks in advance for your advice and willingness to help.

Hi @Wesley W.  ,

Just crunching the quick math here, only generating $100-$300 above the mortgage payment on a one door rental is not a good recipe for buy and hold. I would talk to a local broker and get an accurate value for the property, Zillow's zestimate is notoriously inaccurate. If your ARV is $120,000 (~$14000 purchase price +$7000 repairs + $63000 repairs= $84000, $84,000 with the 70% rule applied gives you $120,000) or above, I would feel confident about buying and flipping for full value. If those numbers don't pan out and you think you can wholesale, go for it.

Thanks @Brad,

I appreciate your advice.  I'm not sure how you get the $84k. By purchasing do you mean buying it at the $14k reinstatement cost? Its a better deal to assign and wholesale flip this property?   I will send this deal to my buyers list if that's the case.

I completely agree with Brad..  Based and what you have mentioned I don't see much of a downside for you. I will reiterate What Brad said, Zillow is a horrible place to get your comps and even the appraisal districts website is usually not accurate. I would find a better way to asses your future ARVs.   

Based on your numbers of what it would cost to obtain and rehab the property I would want to be able to sell it at $123,237.  To buy at that price using the 50% rule I would want to be able to rent at $1,643 per month.  My formula tells me that I would not be interested.

Good Luck.

Bill

What are the terms of the note (fixed, ARM, etc)? 7% is pretty high for today's market. You might be better off paying off the note and refi.

Zillow is usually high on appraisal value. I would look at recent neighborhood comps to assess current value. Section 8 housing is usually a negative. Proximity to low income housing generally hurts rental values (not trying to be a snob, but it's true).

Given questionable neighborhood and thin margin on top of loan costs I would probably pass, but it would be case-by-case depending on future potential of the neighborhood, etc.

Thanks for candid feedback on this property!  I'm thinking, this is not a property to sell but for low income housing (rental).  I've just found a potential renter for this home.  Realistically the property is in a community of renters.  For that $14K reinstatement fee and its repairs, with potential rent rate of $1400, this deal is not worth it? The rental rates are climbing in this area of Houston/Humble.  I'm seeing $signs (at 500/month).  If you have time and can see my contact information, please call me.    

@Wesley W.  That $84000 is what you would have in expected expenses (not including any holding costs) if you were to buy and flip the property on your own dime. You would have to pay the ~$14000 to bring the property current on the mortgage, then pay ~$7000 in repairs, then, after sale, pay off the remaining $63000 on the loan, for a total of $84000 in base costs for the flip. For a goal profit margin of 30% on the final sale, you would need it to sell for about $120,000.

As for a buy and hold, a rent rate of $1400/mo is different than your original rent range for the neighborhood of $1000-$1200. Assuming $1400/mo is reasonable to expect, then that leaves you with $500/mo after mortgage, or about $6000/yr. This doesn't include any utilities you need to pay, any property taxes, any vacancy, or any repairs/upkeep needed on the property. Depending on those costs, you may or may not have a good investment on your hands. A good rule is to be able to conservatively expect $100/mo/door in positive cashflow minimum, or on a better investment, $200/mo/door. I suspect that your costs in holding the property would eat most, if not all, of that planned $500/mo profit. 

@Hal Thompson  brings up a good point, you might be able to refi the remaining loan and assume it at a much more attractive rate, which could make your margin more acceptable for a buy and hold.