Springville, UT · Member since 2016 · 13 posts · 0 votes
Hi Everyone, my sister would like to sell her rental property for $300,000 to my wife and I. The property currently has tenants who signed a two year contract for $1,600 in rent.
Purchase price will be $300,000 and our down payment will be $75,000 (25%)
Our monthly Pmt will be $1,368 (Includes P&I, tax, insurance, vacancy (4%), CapEx (4%))
The monthly cash flow will $232 and ROI is 3.712%
I know that the ROI is horrible but the property value is $375,000.
Should we still purchase this property even though the ROI is 3.712% because of the $75,000 equity on the rental property? (I will not sell the property if I purchase because I think it'll ruin our relation, but I'll feel comfortable selling it 5-7years down the road)
@David Latu you should get the house appraise first don’t believe the numbers on Zillow or Redfin they are usually wrong. And I hope you are not getting your number from Zillow or Redfin either. If you are you might want to do more research. 
@David Latu at a glimpse, I say go for it! Cash flow is great but i love equity as well. Based on your numbers, you will have a loan of 225,000 and the property will be worth 375,000. This is 40% in equity which is enough to obtain a Home Equity Line of Credit and give you the opportunity to deploy cash when another good investment comes across your desk. Before going this route, check with local banks to determine their specific criteria on a heloc. With the pandemic, many banks will be tightening their restrictions.
@Jack Luzechy Let's pretend that the local bank is strict with the HELOC requirements and we cannot pull equity yet from this property. Do you think this would still be a good choice to purchase anyways? Hoping that in 1-5 years we can use the equity.
@David Latu The purchase price is $300,000, the value is $375,000 and it only rents for $1,600? Obviously I don’t know your area but those numbers seem way off. If you are sure of the $375,000 value I would consider it, but if it only rents for $1,600 I have a hard time believing it would sell for $375,000.
Don’t get me wrong, I’m not saying don’t do it. I’m just saying verify those numbers. This could work out well for you if the $1,600 number is the issue. If it could really rent for more you could come out ahead.
@Corey Hawkinson Thank you. Please expand a little bit on why you think the numbers seem way off. Do you think the property value should be higher then $375,000 or less? Any thoughts and advise is appreciated.
I got the value of the property from Zillow and Redfin. I tried to compare this property with similar properties around the neighborhood that have been sold but couldn't find anything.
Here's some more info. That might also help. My sister bought it for $240,000 in October 2018 and she spent $40,000 for a new kitchen, new bathrooms and new flooring.
Any advise and thoughts will be appreciated. Thank you.
@David Latu you should get the house appraise first don’t believe the numbers on Zillow or Redfin they are usually wrong. And I hope you are not getting your number from Zillow or Redfin either. If you are you might want to do more research. 
That's a convoluted way to have your sister give you $75k. Just have her sell to a 3rd party and then give you cash instead. Waiting 5-7 years and holding a $375k property that only rents for $1600 does not benefit you and your sister in total. Unless, we don't have the full story.
@David Latu you should get the house appraise first don’t believe the numbers on Zillow or Redfin they are usually wrong. And I hope you are not getting your number from Zillow or Redfin either. If you are you might want to do more research. 
@Michael Veal. Thank you for the advise. I will contact an appraiser.
@David Latu no. Investors usually withhold 20-25 percent of rent for expenses(repair, management, etc) when this expense is taken into consideration, with current rent, you are negative cash flow.
That's a convoluted way to have your sister give you $75k. Just have her sell to a 3rd party and then give you cash instead. Waiting 5-7 years and holding a $375k property that only rents for $1600 does not benefit you and your sister in total. Unless, we don't have the full story.
@Mike Dymski. Thank you for your respond.
My sister's tax accountant ran some numbers and said that if she sells it for $375,000 that she would make less then $50,000 from this property because of taxes and real estate commission.
My wife and I have been managing her properties for free without asking for any sort of compensation. My sister just felt generous and asked if we would like to purchase this from her. So that's why I am here seeking opinions from experienced investors before committing since this will probably be my first.
I personally do not want to sell the property until after 5 years. I just feel that it'll be disrespectful selling a gift immediately after it was given to you by a sibling. Maybe, I am just weird about.
@David Latu no. Investors usually withhold 20-25 percent of rent for expenses(repair, management, etc) when this expense is taken into consideration, with current rent, you are negative cash flow.
@Alex Kreeger. Great point. We have been managing this property and feel comfortable managing this property so that's why I didn't add management. But of course we will eventually use a property management company and hopefully we can increase the rent by then.
So Alex, would you purchase this property knowing that you would have immediate equity with a negative cash flow? Thank you!
@David Latu I respect everyone’s opinion above. I would not purchase this property unless I knew it was not at market rent, and I could get it to market rent quickly where numbers worked.
When analyzed as a property that an investor has no ties to(which we should analyze this way, even though we have ties sometimes) the numbers don’t work.
I would look around and see what else you can purchase for $300k in your market. Might find a better deal and be less headache in the long run.
Also, have you spoken with a lender and know what you qualify for? You might be able to buy multi-family and get your own house plus a rental that has better numbers.
You need to do more research. Don't be blinded by your sister's kindness. Caveat emptor
@David Latu As a very simple guide, I start with the 1% rule. This rule says that a property should rent for 1% of the purchase price. There are many flaws to this rule, but I use it as a starting point. This rule would say that a property will provide appropriate cash flow if it is purchased at $160,000 and rents for $1,600 per month. That is obviously much different than the numbers for this property. That’s where I see the issue.
If you’re buying at $300,000 and only renting at $1,600 I don’t see how this provides you strong enough cash flow to support the property.
If it really was worth $375,000 that might be something to consider for overall gain after 5 years. However, if that is the case your sister should just sell for $375k now and you should try to find something better to purchase. That way both you and your sister win. In this case you might win but it sounds like your sister is obviously losing if she is giving the property to you at such a discount.
@David Latu Why don't you ask your sister if she's comfortable with you selling the property at any point? I wouldn't assume you need to hold onto it for 5-7 years or else "it'll ruin your relationship." Better yet, buy it from her now, then sell it within 6 months and split the $75k in profit with her. Win-win?
Seems like a decent deal, but consider two questions:
-Why is she selling?
-What are the quality of the tenants in the property?
If the tenants looks like trouble, it does not matter what cash flow out get out. Eviction, lost rent, and damages can easily wipe out even the best of cash flow. I would ask to see all the info on the tenant screening before you buy the property, or buy it on the condition that the property be delivered vacant if the tenants don't meet your screening criteria.
I would look around and see what else you can purchase for $300k in your market. Might find a better deal and be less headache in the long run.
Also, have you spoken with a lender and know what you qualify for? You might be able to buy multi-family and get your own house plus a rental that has better numbers.
You need to do more research. Don't be blinded by your sister's kindness. Caveat emptor
@Loren Clive. Thank you. I have been hunting and cannot find a property with at least a 7% ROI. So I am considering on purchasing this property due to the equity.
I do qualify for multi-family properties but like I said, I just can't find properties exceeding a 7% ROI.
You are right, I need to do more research and be more creative in finding properties. Thank you.
Seems like a decent deal, but consider two questions:
-Why is she selling?
-What are the quality of the tenants in the property?
If the tenants looks like trouble, it does not matter what cash flow out get out. Eviction, lost rent, and damages can easily wipe out even the best of cash flow. I would ask to see all the info on the tenant screening before you buy the property, or buy it on the condition that the property be delivered vacant if the tenants don't meet your screening criteria.
@Ryan Denman. So here are your answers for your questions.
Question 1: I did ask her why she wants to sell it. She is selling because her last tenants were a nightmare (She screened the tenants and fell for their sad story). We eventually evicted them. Once we evicted them, my sister put more money into a new kitchen, remodelling the bathrooms and installing new flooring (and obviously we increased the rent for the new tenants). The old tenants and the remodelling was a headache for her.
Question 2: Her new tenants now are awesome. I screened them and made sure that there income is 3 times the rent. They are on time with rent and they keep the property nice and clean.
I tried convincing my sister to hold on to the property by showing her the ROI. With the new rent amount she is now at 11.5% ROI. She still doesn't care. Maybe I need to ask her again why she wants to sell and see if her answers change or if she adds more info of why.
So let me know what your thoughts are with this information. Thank you!
I would suggest you buy the property considering the amount of equity you stand to gain and existing knowledge of the property and tenants. Not to mention your sister just remodeled the place. The negative cash flow may be a deterrent or red flag for some, but equity is where the money is made. No one ever got rich from cash flow.
Simplified case you are putting in 75k now and getting 150k out in 5 years. That’s about a 20% gain a year. That’s without factoring any additional appreciation too. As long as the small negative cash flow isn’t going to sink your finances, this is a great buy.
I would caution you on Zillow and Redfin. They could be totally right, but don’t solely rely upon them. Either hire an appraiser or try to run your own comps.
Also, if the reason your sister doesn’t want to sell is because her accountant says she won’t make much after commissions and fees, how do you plan to avoid that transacting between you and her? Are one of you a real estate agent or are you planning to not use one?
@David Latu. Without running any numbers at all, I would be wary of that unspoken rule of not selling for the equity. Seems like a goofy deal footnote that is a disadvantage for you. What if it’s not worth $375k in five to seven years when you want to sell?
With $75k in cash, you could buy another place that cash flows $200+/mo and not even have to worry about what happens with your equity.
I suppose it all comes down to your motivation. Are you a prospector or do you want cashflow?
If those numbers for the ARV are accurate then I would purchase. As others have said make sure you are verifying that ARV thoroughly though since it is the main reason to purchase.
I can’t believe people are saying this is a good deal. 300k purchase price and rent or $1600????
Rent minus mortgage payment does not equal cash flow.....You're going to be losing money on this every month you have it with the hope that the market values the property at 375 in 5-7 years. Your ROI is negative until you sell it. May still be negative though
If you bought this property for 300 and sold it within a year for 375 then reasonable.