Looking at a double near a college campus here in my area that will appraise according to comps, etc. for between $190,000 and $220,000. Owner is asking a little over $120k. Have not done a full inspection, but it sounds like the property will need minimal work, at worst case around $10,000. The proximity to campus makes it easy to rent, but the current rents are too low, around $450 per side. What I would like to do is offer about $110, accept the counter if reasonable, and then refi to pull as much cash out as possible to jump start my investing. Is this common and wise, or should I avoid the initial negative cash flow until rents can be raised? Also, the reason the owner is selling, according to him, is that he is “getting to old to be a landlord”. He claims the property has been a solid rental for him.
Also, is $110 a good offer point based on what I’ve said here?
Any help from an experienced investor would be greatly appreciated!
(1) If it will apparaise for $190-220K and you can get it for $110K and it needs minimal work, yes, that is a good deal.
(2) Working against that is the fact that the out-going landlors is probably lazy…too lazy to keep it in great condition and keep the rents up where they belong.
(3) This property will, in most likelihood, be an aligator at $110K and bringing in only $900 at full occupancy.
(4) Of course it’s been a “solid rental” for him…if he doesn’t get market rent, it is probably really easy to rent!
(5) Have you broached the subject of owner financing with him?
I would:
(1) Take a hard look at all of the numbers - rent, expenses, taxes, etc. Get copies of the leases, his Schedule E, etc…
(2) Make an offer based on the numbers…if you think that the rents could definitely be pushed higher and this will break even or postive a little, I woould buy it.
(3) I would then fix up, raise the rents to where they should be (if the leases allow), and refi AFTER I get the rents up.
Thanks a lot Keith, those are all very important points to consider. I think I will go ahead and make the offer with a contengency for thorough inspection of the property and review of the financial docs, leases, etc.
You’re welcome…make sure that you have some sort of financing contingency!
I would ask him about owner financing…a lot of folks that say that they are “getting too old to be a landlord” like the monthly income and it allows them to spread any capital gains over the term of the loan contract.
“You’ll never get stuff that you don’t ask for!” Great point!
One question: What’s the multiple that you use on rental property offers? i.e. if the net income (market rent-all expense/tax) is $1000/month, what’s your max offer?
<<One question: What’s the multiple that you use on rental property offers? i.e. if the net income (market rent-all expense/tax) is $1000/month, what’s your max offer?>>
I don’t do “cookie-cutter” assessments based on “if the NI = X, then offer Y”…I do a full-blown assessment on each individual property based on size, location, price, repairs needed, etc. Then, I make an offer based on what I can pay based on all of the factors. I usually get a counter but it is more realistic than the asking price. I don’t haggle a lot over a few dollars – it’s better to get a concession. The last house I bought, we got within about $400 and I said that if ou throw in all of the appliances and the lawnmower, you’ve got a deal. The refigerator alone was almost new and about $800 new. They took it. Now I don’t have to buy a mower ($100-150) or a fridge ($300-400) and the tenants will get a washer and a dryer (I don’t usually furnish them but if they’re there, I leave them.
We have pretty specific criteria before we even go look at a property based on our goals and objectives and out investment strategy. So far, so good.
Indeed. As part of my analysis of buy/don’t buy, I get a good indication of the rent that I can draw. I have a pretty good appreciation for the rental and the sales market here (it’s not that big of a city/region). Rent here is relatively strong in comparison to price paid, leaving me with a good, strong positive cashflow on each of my properties. As a “SWAG” I use “the 1% rule”…if a property can generate an income of 1% of the sales price per month, the property will cashflow. In this area, this SWAG works well, paying all of the bills (including maintenance, vacancy, and management) and leaving me AT LEAST $125 per month positive ($1,500 per year).
Great thread for a newb like myself to read. Thank you both for the questions and answers.
If I may interject a question here…
Keith: What exactly is SWAG standing for here?
Also, do you just ask around for rental costs on other homes in the neighborhood to see if the asking rental cost is on par with where you are looking? Or do you use some other method?
Again I thank you for your patience with us newbies to the business…
LOL! It’s a very specialized, technical Real Estate term.
SWAG = Scientific Wild Assed Guess. In generaly terms, it means just a ballpark figure.
I have a pretty good appreciation for the rental rates in the areas that I invest in. YOU GOTTA KNOW YOUR MARKET!!! I read a lot of information on-line, in the papers, etc. Additionally, my realtor is a huge asset. She is really “plugged in” to the rental/property management world in this area. She has been ‘right on the money’ in all her estimates as far as what I can get for rent.
As usual – don’t feel bad about asking newbie questions. the only bad question is the one that you have that you don’t ask and it winds up getting you in trouble!
Thanks Keith, this is interesting. Have a question though.
I see a lot of references to RE agents (as you referenced your good relationship in your post.) Do you always use an agent in your purchases? I would assume that acting as your own agent would reduce the costs at both ends of the transaction. I know the debate rages on re: becoming a licensed agent ; but is it the long range savings of time, etc. that makes it worthwhile to pay commissions? My plan is to submit the offer myself to the sellers agent and negotiate reduced fees, with the goal of getting a better deal on the house. Am I off target there? Finally, do you do that on the selling end also and when you are just getting started and only have a deal or two going on would acting as your own agent be worth it then. Thanks for any responses.
If the property is listed with an agent, I use an agent. The seller is paying the fee (that’s right – I said the cuss words! The SELLER PAYS THE REALTOR FEES!), so it doesn’t cost me anything. Usually, for my agent, it is like finding money. She gets her share and I’ve done a lion’s share of the work. She writes the deal, takes care of the counter (if there is one), schedules the only inspector that I will use, shows up for closing, etc. but I do all of my own due dilligence.
I pay cash and can close in a week, so there is additional leverage there.
Contrary to what folks may or may not say here, the seller has a contract with a Realtor to pay a certain percent of the sales price as a commission (usually 6%). Generally, this amount has to be paid if the seller accepts a contract during the listing period. If I bring in my agent, the listing agent splits the commission with my agent. If I don’t use an agent, the listing Realtor still gets the 6% but instead of splitting, gets it all. My realtor gladly does what I need to get done for the $800 - 1,000 or so that she gets out of it…
If the owner wants out it would be a great option for him to carry the loan. We once offered more than the asking price on a couple units for the owner to carry. We offered at a very low rate with 5 % down. We offered more becuause in doing so it would give us a greater cash flow. They went for all but the 5% down. They wanted 10% so we didn’t go for it.
Anyway, you have to at least ask. Know what rate would be best for you and try it.