Good deal or not? Infinite Return but violates the rules of thumb

9 Replies

Hey Investors, 

    I have been looking for deals all year and in my area, rents don't typically EVER cover the 1% rule because houses are too expensive compared to rents.  However, this deal is owner financed up to 80% (I figured I would use only 20% owner financing and 80% bank financing to get the best blended interest rate) and I can purchase the property with zero of my own cash.  So, my question is, is this a good deal even if it barely cash flows due to the fact that it is infinite return and I will still have the upside of equity, appreciation, and tax advantage.  It violates the 1% rule and the 50% rule and it barely cash flows.  

Is this a good deal or not?

Would you take the deal or not?  

Thanks!

Luke


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*This link comes directly from our calculators, based on information input by the member who posted.

What are the details on the owner finance piece of it? Eventually that would be paid off and add additional cashflow. But your expenses are way too low. This is a break even property the way it looks.

It's only infinite CF if and when it CF's.  If your cash flow is tight, it means two things:

1 - At some point, it won't CF, and when it does(n't)...

2 - there wouldn't be enough accumulated CF to cover the negative CF.

How much money do you have on hand if something financially devastating happens in the first few years?  Say, new roof, main water line needs replacing, tenant decides to not pay rent and you have a months long eviction process and a returned damaged house?

Without a decent cash flow, you really need extra cash on hand for issues.  That would be my deciding factor in if you should buy the property.


Is the 45,000 the downpayment + renos?

Ask the owner for better terms, 3%?

You have not projected future rents increasing only expenses? Is your market low or high right now?

Is that cap exp at 5% accurate? vacancy in your area? Can you self manage for sweat equity?😊😊

Is the house in a killer area? 

If your goal and strategy is investing for cash flow, then this is not a deal to start with. If your goal is appreciation and tax advantages, then you should be damn sure this area will support solid appreciation and you can support periods of negative cash flow. You are also over leveraged with 100% financing which is also not a safe play no matter what your strategy is.

Thanks everyone for your responses.  Let me clarify that I could buy this house with all my own cash if I wanted.  Cash on hand is not the problem.  The issue is more that I am intrigued with the idea of putting no money down, and using that leverage and appreciation with the tenant paying down the mortgage to grow long term net worth.  Then I can put my cash to work elsewhere.  

If cash was not an issue, would that change your opinion?  

Thanks,


Luke

Luke, generally speaking, if I am looking at a deal for buy and hold and it has negative cash flow unless I put all cash down, it is typically not a deal for me. Having the cash is good, but that does not make it a deal. It has to support debt too, otherwise, when you sell, you will likely have a difficult time as only all cash buyers could afford it.