Metro Detroit Investors: What Makes a Property a Deal Instead of Just a Cheap House?

Question

Post:

A low purchase price doesn’t automatically make a property a good investment.

When I’m looking at a property with an investor, I’m paying attention to more than just the asking price. The real question is whether the property works for the investor’s strategy.

Some of the things I look at are:

realistic resale or rental value

neighborhood and immediate area

condition of the property

taxes and insurance

renovation costs

financing and holding costs

expected rent or resale margin

exit strategy if the original plan changes

Metro Detroit has plenty of properties that look attractive because of the price. But a cheap house can become an expensive lesson if the numbers, location, or condition don’t support the strategy.

I’d rather pass on a property that doesn’t make sense than try to force a deal just because the purchase price looks good.

For the investors here: what’s the first thing that makes you say, “This is actually a deal”?

Leon Timmon Sr. · Answer

Good point, Ashish.

The after-tax side can absolutely change how attractive a deal really is, especially once financing, depreciation, holding strategy, and exit strategy are factored in.

That’s one of the reasons I like looking at the whole picture instead of just purchase price and projected cash flow. A property can look good on the surface and still not make sense once all the real costs and tax implications are considered.

I appreciate you adding that layer to the conversation. That’s definitely something investors should be reviewing with the right tax professional as part of their overall analysis.

James Jones · Answer

Cheap is a price. A deal is a set of numbers. In Memphis I buy single-family under $100K, and that price alone means nothing. First thing I check is rent: does it clear the 1% rule? A 3BR+ Section 8 house here rents $1,395 to $1,950. Second is ARV: I need $180K to $265K after rehab, or the DSCR refinance at 70 to 80% LTV does not give me my capital back. Third is bedroom count I can create — a 2/1 to 3/1 or 3/1 to 4/2 conversion changes rent and value. If all three line up, it is a deal. If only the price is low, it is just a cheap house.

Joe Villeneuve · Answer

I like this statement. Can I borrow (steal) it from you?

"Cheap is a price, a deal is a set of numbers"

Drew Sygit · Answer

It's not what the property taxes are currently, it's what they will be after the purchase.

• Uncapping and loss of homestead exemption can double, even triple the taxes!

Uncapping and loss of homestead exemption can double, even triple the taxes!

You may want to add profiling the tenant pool.

• You can buy an owner-occupied property in great condition, but buy in the wrong neighborhood that has a bad tenant profile and tenants will ruin the property and investment.

You can buy an owner-occupied property in great condition, but buy in the wrong neighborhood that has a bad tenant profile and tenants will ruin the property and investment.

There's also, "Maintaining to the Market" instead of encouraging investors to renovate everything.

• they can waste a lot of money

they can waste a lot of money

Ashish Acharya · Answer

Leon, I agree with this. A low purchase price can be tempting, but it doesn’t mean much if the property doesn’t work once you put the full numbers around it.

I’d add one more thing to your list: the after-tax return. Two properties can have similar cash flow on paper but very different tax outcomes depending on the depreciation, financing, entity structure, and whether the eventual plan is to hold, refinance, or sell.

For a rental, I’d want to look at the actual cash flow after realistic vacancy, repairs, CapEx, taxes, insurance, and financing, then look at how depreciation affects the taxable income.

For a flip, I’d make sure the projected profit still looks attractive after the full project costs and the tax treatment of the activity. And if someone is doing flips consistently with meaningful profit, I’d at least evaluate whether an S-Corp makes sense for the active flipping business rather than assuming the same structure works for everything.

For me, a deal becomes a real deal when the investment numbers and the after-tax numbers both make sense without relying on overly optimistic assumptions.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

Joe Villeneuve · Answer

I've seen way too many investors (and homeowners buying) over the years that don't appreciate the after-purchase impact of the homestead tax removal...actually reset might be a better description. The longer the seller owned the house, the greater the new tax will be when the homestead is reset,...or removed in the case of a REI. It's a really big...ouch!

Stacy Raskin · Answer

A good deal means different things to different investors. In my own experience and working from investors buying investment properties, an investor being able to reach whatever the intended real estate goals such as cash flow are important.

Also, with a rental, it's important to consider what kind of tenants are realistic for an area. Being in an area where a tenant will reliably pay rent, who will not bother other tenants and who will not damage the property is important. Proper screening of a tenant is important during the rental process but some areas make it more difficult to find tenants who will not cause problems and pay the rent. I have seen and heard some really negative tenant stories over the years so that's really important to consider. A "good deal" isn't a good deal when it causes long term cost and hassle with having tenant issues and evictions.

Metro Detroit Investors: What Makes a Property a Deal Instead of Just a Cheap House?

Metro Detroit Investors: What Makes a Property a Deal Instead of Just a Cheap House?

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