Deal - Need Advice

4 Replies

I'm in the process of negotiating a deal and come here for advice.  I'm having trouble getting my thoughts together as I have opposing point of views.

Location: "B-" area / development in a "A" town with "A" schools.  The development that I am looking in is the least affluent area in the town.  However the rental I'm looking at is in the good section of the bad area.  It is known to be a lesser section of the town and has occasional drug bust etc and I'm not so sure which way the development is trending.

Property: 

3 bedroom , 1.5 bathroom townhouse

List Price: 115k

ARV: 120k

Rehab Costs: 20k (bathroom remodel, carpet, painting)

Rent: $1350 (this is a fairly conservative number)

I currently have an offer in at 90k that was countered to 110k and I am trying to find my best offer on this deal.

Cash flow:

Numbers considering 100k purchase price and seller paying all closing costs.  Also, 30 year fixed rate at 5.25%.  I have private money lending at 6% that will fund the rehab and I want to ensure that I am calculating this correctly.

Rent - Mortgage - Insurance - Tax - Vacancy(10%) - Maintenance(10%)

1350 - 440 - 50 - 210 - 135 - 135 = + 380

Cash on Cash return (initial):

380x12 = 4,560 / 40,000 (down-payment + rehab) = 11.4%

Cash on Cash return (after rehab and appraised at 120k) 

New Cash Flow using refinancing with 80/20 conventional:

1350 - 530 - 50 - 210 - 135 - 135 = +290

290x12 = 3480 (per year)

Total Cash invested:

Down Payment + Interest to Private Lender + Cost to refinance (4% of remaining principal)   24,000+1,200+ 3850 = 29,050

New Cash on Cash: 3480 / 29050 = 11.9%

Major concerns are not knowing which way the area is trending and not getting any sort of discount on the rehab.

Any input would be greatly appreciated.

@Joe Conklin

the ARV represents the value of the home after repairs based on comparables, not purchase price plus rehab costs. If you feel that comparables would only return a value of 120 for this property, then you need to be buying for much less than 100k. You are leaving your self with almost no options for a worst case exit.

Your expense items need to also account for CapEx and property mgmt, even if you will be self managing.

Originally posted by @Logan Hassinger :

@Joe Conklin

the ARV represents the value of the home after repairs based on comparables, not purchase price plus rehab costs. If you feel that comparables would only return a value of 120 for this property, then you need to be buying for much less than 100k. You are leaving your self with almost no options for a worst case exit.

Your expense items need to also account for CapEx and property mgmt, even if you will be self managing.

yes the ARV is 120K, so 100K would be too high in that respect. How much to factor in for CapEx?

Since this is a townhome, are there any association/community fees (e.g. HOA, etc.)? Also, as the owner, would you be responsible for any utilities such as water, sewer, trash, etc. or would the tenant be responsible for ALL utilities? If so, you would need to account for these items in your numbers.

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