Nice SFH. Currently listed at $169,000. Seller wants to get out of it. Unit rents for $890 per month plus all expenses. Lawn, garbage, electric, heat, cable, etc.
Property was bought 5 years ago for $155,000. Property market value is $205,000.
I expect the area to improve greatly over the next 5-7 years since it’s across the road from a lake and it has a pond in it’s back yard. (Neighboring an environmental park).
By straight cashflow rules, this doesn’t work. Can money be made on this by buying and holding with occassional rent increases for 5-7 years?
That’s more speculation than investing. If you want to risk holding it with negative cash flow for a few years, that’s up to you - if you think the payoff will be worth it.
At least a breakeven cashflow would be where I would draw the line. I don’t mind not making money if I am getting equity buildup and possible appreciation but no way would I ever come out of pocket on an investment, that just makes it forced savings not investing.
As an investment, this is HORRIBLE. By my calculation, the negative cash flow is about $700 per month, which is $8,400 per year. Just because someone is willing to sell you a house at retail doesn’t make it a deal. I would run far and fast.
if its been listed for more than 1 or 2 weeks then I am skeptical of your $205k valuation. Even in very small markets, I’ve seen excellent deals that get to the MLS disappear in a flash. As an example, I bought a property off the MLS as I put my offer in on Day #2 at 8am of the listing (listing came out the previosu afternoon). By 12noon, there were 11 other offers… I got it becuase I was first in line.
if you really, really think it can pull $205k, then this is a potential flip. I’ll be the real story is this house has something funky about it (bad layout, needs lots of rehab, etc) or the current owners live like slobs and thus it shows terrible.
I’m becoming completely convinced by the feedback in this forum that everyone who is currently investing in Mpls/St.Paul is going broke because from any past sales records I’ve seen, there are absolutely zero houses that cashflow by the rules on here. So if I just sit back for two years, everyone else will be broke soon and I’ll be the only one bidding.
OR
People are actually making money on the appreciation
or the expenses are a little less since renters might be paying a larger share here
or people are willing to leverage small profits for increases in rental rates down the road
or they are more creative with their financing
or they have larger cash reserves
I’m not sure which.
Back to the property… it’s non-MLS. Tax-assessed value was $205,000 from a year ago. It’s got lake views of one of the better lakes in the metro area. (Just across the street from it). It also has a nature preserve in the back yard. The property is located in the fastest growing county in the state, (15th fastest growing in the nation). County has been fastest growing over the course of the last 5-10 years due to it’s location to Mpls and new highways that made it accessible from across the river.
If you’re saying that the house is worth $250K - $275k and you can buy it for $169K, then you would be absolutely crazy not to buy it. Buy it tomorrow for $169K and sell it the next day for $250K and make a BIG PILE OF MONEY! I don’t know why you haven’t ALREADY bought it!!! What’s the mystery?
Buying a house based on prospective appreciation is called speculation. You’re not doing any improvements to increase the value. You’re guessing that the property will appreciate.
The only comps that matter are the last 6 months. The market in most areas has changed dramatically over the last year, so basing you purchase on any comps older than that is faulty logic.
Never use the tax assessment as an indicator of price, it’s just not accurate.
I can’t comment on the cash flow part because we don’t do rental properties.
The market has changed, and to me this property is somewhere between a possible rental income property and/or a possible turnaround property since I believe it’s undervalued.
So, what you’re saying is that this property has a big negative cash flow, but you’re buying it for appreciation even though your market is rapidly depreciating. Does that make sense to you?
Ok I am acting as the devil’s advocate. What if they did a full doc 80-10-10 interest only loan. Not including taxes and insurance the payment would be $953.00 give or take some change. I estimated 225 a month for taxes and insurance which gives it a negative cashflow of say 4K. That is not taking into account upkeep on the property or if the property goes empty for a month or two. If the property appreciates at 3% per year that equals 5k in appreciation (I used the 169K as value) per year plus the write off for depreciation which could be another 2-3k then would this not be at least a decent property to take a chance on? Especially if the value is really around 200K? Also, depending on when the renter’s lease is up the rent could be increased by a small amount. What do y’all say to that?? :anon
I say that you must have taken that fuzzy math in school. It’s one thing to say that the negative cash flow is only $4K (without little details like upkeep, vacancies, management, advertising, legal expenses, entity maintenance, evictions, damage done by the tenants, office supplies, lawsuits, etc, etc, etc). Unfortunately, in the real world you DO have these expenses and simply ignoring them won’t help.
I am also concerned that we have no real idea of the value of this property. Comps from a year ago show a value of $275K, dd says market value is only $205K. Something isn’t quite right here. That’s a huge drop in only one year! If the property dropped $70K in only one year, I certainly wouldn’t pay $169K for it now. Maybe it will drop another $70K this year. In my opinion, we’re almost a year from the bottom in the real estate market.
Average rent over 6 years = $1006.66. Profit per month after expenses = $553.66 (45% of rent = expense).
Say the guy buying pays cash for the property at $140,000 cash.
That would be an average annual return of 4.74% just on rental income. (Similar to CD rates).
From here the guy can either bet on appreciation before selling, or keep collecting rents that escalate each year with occassional vacancies and a possible opportunity to drive my expenses to 30% of rent. If the property appreciates over this period of time on a current market value of $170,000, house sells in 2012 for $227,816.
Take the rent profit after expenses for the 6 years. $553 after expenses, X 72 months= $39816 X 0.90 for vacancies = $35834 rental profit.
Add that to the appreciation of $57,816 … $57816 + $35,834 = $93,650.
$93,650 / $140,000 (purchase price) = 11% return at 45% expenses which I feel is high for this area. Return on investment goes to 12% over 6 years if expenses can be managed around 30%.
Areas of risk are:
-Rents don’t continue to rise in a highly desirable and growing county.
-Property values don’t increase in the fastest growing county in the state over a 6 year (or longer) time frame.
-Expenses exceed 45%
-Vacancies exceed 10%
If property values rise at 10% for 6 years. (Highly likely in this county) after 6 years, the appreciation and rent = $197,000. Over 6 years, that’s an annual return of 23% when it’s sold for $331281.
It sounds to me like you’re trying to rationalize buying this property. You certainly don’t need anyone’s permission on an internet forum to buy anything. If you want it, go for it.
You asked for opinions and you got several. The biggest problem I have is that you’re contradicting yourself and making very optimistic assumptions. First and foremost, you are saying that the property was worth $275K last year and is only worth $205K this year (buge depreciation) and then you’re assuming rapid appreciation in “the fastest growing county in the state”. That doesn’t add up. You are also assuming that rents will go up, up, up (maybe the will and maybe they won’t). I didn’t hear you say that expenses are also going up, up, up (which they are).
I’m just trying to point out that your assumptions are a little iffy (approaching voodoo) . I always go with a sure thing, no “hoping”, speculating, or voodoo involved.
Furthermore, why would you tie up cash for a 4.74% return when you can put your money into an ING account at 4.5% with NO risk, NO work and complete liquidity. If you don’t mind giving up a little bit of liquidity, you can easily beat 5% with some CD’s and still have no risk and no hassles.
ROI over time increases to 11%-12%? Even IF your assumptions are correct, I wouldn’t want to tie up my money and take on that much risk for those returns.
I’m not buying this property, I’m just trying to figure out the creative ways others are doing it in this area. Because you don’t find properties here that sell for $40,000 that yield monthly rents of $800 per month. This is not “no-brainer” real estate investment land. I believe a good part of that is because the county I live in property has increased in value at rates of 15% annualized over the last 6 years. That rate stopped this last year which brought the average down to 15% over 6 years from around 18% annually from 2001-2005.
Anyway… the question I’ll ask again that no one will answer is at what price would you buy this property?