Was I nuts to walk away?

Question

I'm a relatively new buy-and-hold investor from the Seattle area and wanted a second opinion on a deal I recently passed on (either so I can sleep better at night knowing I made the right decision or re-open the conversation if appropriate).

The property is on Camano Island, WA and sits on a large lot with sweeping views of the Puget Sound.  The main house is a mid-60's 2 bed / 1 bath, and there is a large detached garage + studio apartment.

This property was not on the market when I contacted the seller, but he was absentee and in the process of preparing it for sale.  He lived in the house for ~10 years and rented it out the past year and a half.  His job was recently transferred out of the area, so reasonably motivated to sell.

Price: $240,000

Rent: $1,300/mo**

Utilities: Paid by tenant

Taxes: $250/mo

Cash in: $65,000 (25% down, closing costs, and $5-10k repair/make ready (conservative)

**The previous tenant paid $1,300 total for both units as their mother lived in the studio.  I figure I could rent the main house for $1,150, studio for $350, and detached garage as a storage unit for $100.  This would total $1,600/mo.

Other considerations:

- Older septic system

- Great set up for a shared laundry

- Main house is in pretty nice condition as the owner had it as their primary residence and made several updates (gas forced air, cat5 cabling, hardwoods, etc.)

- Requires property manager as I live ~1 hr away

- Multiple income possibilities, but could mean more turnover

I was offering in the $220k range, or a higher price but with closing costs paid by seller to help minimize cash out of pocket.  Appreciate any guidance/points of view!

Adam

J Scott · Answer

Everyone has their own criteria for deals and their own goals, but as far as my criteria/goals, this would be considered a HORRIBLE deal...

Patrick L. · Answer

Let's say you put down 25% and borrowed the rest at 5%, your mortgage payment would be $966.   Let's say you hit your highest possible rent at $1,600.  Budget 50% of that for taxes, insurance, vacancy, management, repairs, and cap ex and you have $800.  Subtract the mortgage payment and you'll lose $166 per month and that's with putting $65k of your money into the deal.

Patrick L. · Answer

Those numbers are TERRIBLE for a rental but did you look at the numbers as a fix and flip?   If it's off market with a motivated seller you might be able to fix and flip it if you figure out the ARV and repairs.

Michele Fischer · Answer

Another thing to consider is vacation rental.  Places are hot on Camano Island since it is a tourist destination.  The studio might be a great way to differentiate, people traveling together but not always wanting to be together.

Adam Pearson · Answer

@Brian Ortins

Thanks Brian.  You're absolutely right, it's hard to pass on opportunities when you're green and eager to get involved, but I felt like I was starting to get cute with the numbers to make them work and would end up making an irrational decision if I didn't simply walk away.  Better to pass than to wish I had!

Brian Ortins · Answer

@Adam Pearson

I agree with the other buy and hold investors regarding this making a terrible rental.  Great job taking a pass. Walking away is hard, but it is harder (both emotionally and financially) to have to carry a negative cash flowing property.  Keep looking!

Adam Pearson · Answer

Thanks all.  I'm so glad I didn't have to start off the thread with, "So I bought this property, what do you think?"

@Patrick L. I was analyzing using a lower interest rate and it "squeezed" (never a good thing) into the 50% rule, but even then it's nowhere near the 1% rule so I didn't feel comfortable, especially since I'd have to be able to squeeze every last dollar of rental income potential out of it.  There just wasn't much cushion (in fact no cushion using a 5% interest rate, which is probably more realistic).

As far as a flip is concerned, I didn't run the numbers from that perspective.  However, it didn't seem like there was enough opportunity for improvement in the property without drastically changing what it is (e.g., pop the top and add a second story to maximize view), and since I don't live nearby it seemed like a risky move.

Andrew S. · Answer

Unless you are speculating on massive appreciation potential (which may be reasonable for a red-hot Seattle market?), those numbers would not work as a buy and hold.  At least not for me - and not even close.

Mat Farmer · Answer

I'm going to have to agree with @jasonscott on this one.

Was I nuts to walk away?

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