Since she has little equity, she must have a mortgage on it. If she has a mortgage, she can't do a CFD, because it will kick in the acceleration clause.
I would not buy that deal if it was me. Return is not good enough.
As far as risk goes. It could be low risk if you put all cash into the deal. It will cashflow well with no morgtage. Or if you do 100% leverage you could end up forking money over each mothe just to keep it.
You might need to look at getting some fixer upper properties. They can cashflow much better when all is said and done. BRRRR is the best.
Cashflow keeps you alive in this game. Equity buildup is NOT gaurunteed!
Please forgive me if I have my facts messed up.
1) You believe this property will rent for around $900-950
2) If you purchase this property you believe it will cost you around $700 in mortgage fees.
3) there's 10% vacancy rate in this area.
I would run from this deal! There's only $200 difference between your mortgage and the rent, and you still will have to pay for insurance, land taxes and wear and tear on the property between tenants.
You won't make ANY money! This won't be a positive cash flow it's a negative cash flow. And what if the property doesn't rent for 3-6 months? Will you be breaking a sweat paying off that mortgage without a tenant? Or will you settle for a tenant that you may not typically want. (This is the start to every bad tenant eviction story BTW!!)
From the sounds of it you're trying to justify this decision by saying the property will appreciate over time. I live just a little north of you across the border and I would say our housing markets are relatively the same. Sure the markets won't "slump" but they don't surge either. Think of property appreciation as the cherry on top. The "long term holiday bonus" you get for the years you put in managing the property or finding and working such a good deal.
Even with 3-4% appreciation you will be putting money into this property hand and foot I assure you, and at the end of 5 years you will realize that the total net gain, you probably will be far better off putting the money you did have into either (a) a better deal or (b) some sort of ETF that averages between 6&7% a year.
This first place you make your money in real estate is on the BUY! The numbers have to be right. Now if I told you, that you could buy this property for 80K it would be a no brainer for you and you'd pick up this property in a heartbeat b/c you KNOW you could make money right off the hop.
Seems like in this deal you're trying to "justify" poor cashflow by "utilizing" appreciate values. That's very VERY VERY VERY bad business practices. You can only count on the money that's in your hand, not on what MIGHT happen in a 5-10 year window.
Run don't walk from this deal... go home and start crunching the numbers to figure out how after ALL expenses and you should always include cap ex! (even if the house is brand new!!!) that you can generate positive cash flow.
hint: I look for a cash flow between $150 and $300 as acceptable, with an ROI of around 11%. All "appreciation" is just a bonus and should NEVER be considered as a reason to invest into a deal.
Thank you all for the responses!
For clarification sake the PITI would run around $700/month. Really I am aware that this would be a negative cash flow property in the long run but in the short run, I thought it had a possibility of working.
Was I speculating? Absolutely.
Is there a risk of bad tenants, vacancy, repairs, etc? Absolutely.
But 3-4% of $125,000 is way more than 8% of $10,000 over a 5 year span with all intentions of selling. I was hoping to avoid any CAP Ex by selling “soon”. Maybe it would have been the flipping version of a buy and hold?
Either way, I agree that it makes more sense to search for another deal instead.
@David Whartnaby That ideology of focusing on appreciation to justify your purchase is going to get you screwed like many investors did in 2008. Focus on cash flow they talk about it all the time on the podcast, cash flow is king!!! Appreciation is a maybe at best there in no guarantee. No offense but ND isn't like California or Florida that appreciate like crazy so I would really focus on cash flow not appreciation.
What the current owner paid is not relevant. Remember the old saying "you make your money when you buy". Purchasing under market also gives you some cushion when the market moves. Pass on this deal.
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