Income vs Equity

7 Replies

I got a call from a seller. Here are the numbers.
  • ARV: $270k
  • Repairs: Paint & carpet. Year built is 1999 and has new roof and fence.
  • Rental income: $1900 monthly (is average for market)
  • Monthly Expenses: $496 for property taxes & $300 for insurance

Using BP calculator for an all cash deal I get:

  • Purchase Price: 100k
  • Cash on Cash ROI: 7.56%
  • Monthly cash flow: $629.83 (assuming 4% vacancy, 5% repairs, 6% cap expend, 10% managment)

So from this I see that an all cash deal would yield great monthly cash flow with an OK cash on cash ROI. However, in order to get that number the purchase price is $170k less than if the owner puts a sign in the yard.

When I look at doing this deal with conventional financing I get:

  • PP: $115k
  • Cash needed: $30k
  • Cash on Cash ROI: 6.76%
  • Monthly cash flow: $166.82(same assumptions)

I can tweak this down to get a higher purchase price and keep cash flow over $100/month but then my Cash on Cash ROI goes to CD levels.

So my question is, is there a deal to be had for a buy & hold investor when the rents do not justify the market price? What would you offer this Seller?

Originally posted by @Tony Hernandez :

I got a call from a seller. Here are the numbers.

  • ARV: $270k
  • Repairs: Paint & carpet. Year built is 1999 and has new roof and fence.
  • Rental income: $1900 monthly (is average for market)
  • Monthly Expenses: $496 for property taxes & $300 for insurance

Using BP calculator for an all cash deal I get:

  • Purchase Price: 100k
  • Cash on Cash ROI: 7.56%
  • Monthly cash flow: $629.83 (assuming 4% vacancy, 5% repairs, 6% cap expend, 10% managment)

So from this I see that an all cash deal would yield great monthly cash flow with an OK cash on cash ROI. However, in order to get that number the purchase price is $170k less than if the owner puts a sign in the yard.

When I look at doing this deal with conventional financing I get:

  • PP: $115k
  • Cash needed: $30k
  • Cash on Cash ROI: 6.76%
  • Monthly cash flow: $166.82(same assumptions)

I can tweak this down to get a higher purchase price and keep cash flow over $100/month but then my Cash on Cash ROI goes to CD levels.

So my question is, is there a deal to be had for a buy & hold investor when the rents do not justify the market price? What would you offer this Seller?

 Am I reading it correctly that your annual taxes are $5,952 and insurance is $3600? I'm not from Texas but those numbers seem very high given the home value. Those definitely impact cash flows, negatively

Also I'm surprised your cash on cash is lower with lending. Rarely is that the case.

I guess most importantly will the seller accept a 100k offer, given its apparent market value is much greater? 

If that's the case, offer 100k in cash, close  and then do a refi either after closing or in 13 months depending on how much cash you want to take out of the property. Or just turn around and sell it for its market value. 

Sounds like a fun one! Cheers!

Stuart

Maybe I'm not reading this right but if you get it for ARV of $270k after paint and carpet it seems like a winner to me.

Just my opinion, but if you pick up this house for $115k and it's worth $270k arv, I personally would do a flip for that profit margin.

I know I can't get it for $115k. I was just hoping to do a sanity check on my numbers. Property taxes in Texas are high.

The seller wants $270 which is market value. From a buy and hold perspective, I don't see a way to make that number work. Does anyone else?

Originally posted by @Tony Hernandez :

I know I can't get it for $115k. I was just hoping to do a sanity check on my numbers. Property taxes in Texas are high.

The seller wants $270 which is market value. From a buy and hold perspective, I don't see a way to make that number work. Does anyone else?

No, no one sees a way to make those numbers work as an income only play.  If you haven't already, read up on the 1% rule, 2% rule, etc.  You're at .7%.  

Now, if you could break even on the house while it soars in value, that's another story.  A lot of people have done that successfully.  A lot have lost their asses trying to do that as well.

2% is non-existent where I am. 1% is even hard unless you're buying old run down properties. But yea, not much left over at <1% unless you're paying cash or putting a large amount down. 

Thanks everyone. I believe this guy is sitting on a lot of equity and wants to cash out. Rental income doesn't make sense at his price but he will make some money (depending on how he bought) if he puts a sign in the yard.

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