More than appraised value but good cashflow

Guys,
I came across a deal - single family, getting it for 60k and monthly rent is $800. Based on my numbers it still cashflows. But on the county website its appraised for 55k. The seller is not ready to go below 60k saying that she has done lots of repairs. What would you guys do ? Would you buy it for 60k since it has a decent cashflow.

I am considering following numbers per year
800 * 12 = 9600 Gross Income

$960 Vacancy (10%)
-$1000 tax
-$450 Insurance
-$864 Management (9%)
-$960 Maintenance (10%)

$4,234 Expenses
+$3,832 Debt Service ( @ 7%)

$8,066 total expenses

Cashflow 9,600- 8,066 = $1,534 per year

Any insight would be really helpful.

Thanks

You missed a bunch of the expenses - advertising, legal fees, evictions, utilities during vacancies, capital expenses, etc, etc, etc.

It doesn’t look like a terrible deal, but you really should get it cheaper.

Mike

No good.

It isn’t a deal unless you buy below market value.

You need to have more than 1 exit strategy. If the cashflow thing doesn’t work or you no longer want to hold on to it for one reason or another, you must be able to sell the sucker and collect some profit.

I changed my mind and agree with Tien. Any property can be bought at retail - you can do better than that!

Mike

You don’t really know what the market value is, yet. Ask your favorite real estate agent to run comps and to print out the active listings for similar properties in the same neighborhood. Once you have these lists in your hand, you will have a better idea of the probable value of this property.

The county website does not show “appraised” value, it shows “tax assessed” value. The difference between them could be tens of thousands of dollars. The property might be a diamond or a lump of coal, but you won’t know which until you get good comps.

I agree with Mike’s first assessment – this could be a decent deal if you nail down the operating expenses a little better – but you also need to know whether there is enough of a discount to market value to pursue the property.

Don’t you read your own books!?!??!!??

You know that’s where I got that answer!

Thanks for all your input guys. I understand that this is not a good deal if I buy it at retail. I will contact my Agent and ask for some comps on this.
Also Mike pointed out to consider the expenses for advertising, legal fees, evictions, utilities during vacancies, capital expenses. How much do you typically set aside for them ?

Thanks.

Do a search on this site for the 50% rule. It’s often discussed and you’ll find the answer to your question there.

No one meant to say that this is not a good deal at the asking price. Your intent is to hold indefinitely for the production of income, so you are buying the cash flow the property will generate. Mike and others are simply saying that you may not need to pay quite so much to get it.

If you can buy at a lower price, you make a good deal even better.

I am saying that you don’t really know the true market value of this property. If you get the active listings for the neighborhood and see that similar properties are selling for $10K less, then you know that $60K is overpaying for this property. If the comps show that the average sale price for a similar property is $80K and that active listings for similar properties in the neighborhood are all asking even higher prices, then you may get a sense that $60K is a good price.

Also Mike pointed out to consider the expenses for advertising, legal fees, evictions, utilities during vacancies, capital expenses. How much do you typically set aside for them ?

In the preliminary stages, you allocate 50% of your expected rental income to all your costs of ownership and rental operation. Start by pretending that you own the property free and clear. If you are projecting $800 monthly rent, then allocate $400 to taxes, insurance, advertising, legal fees, vacancy, leasing fees, management fees, and anything else you will still have to spend for maintenance and upkeep whether or not you have a tenant in place.

This leaves you $400 per month to pay the debt service and to pay yourself whatever monthly cash flow you need. Since you are already allowing $319 per month for debt service, your preliminary estimated monthly cash flow is $81. Not quite the $100 minimum monthly cash flow that Mike advocates, but close enough to proceed to a more detailed cash flow analysis and to nail down more specific cost numbers.

The first place I would start is your cost of financing. Is 7% the best you can do? Last month, Countrywide offered me 6.5% investment financing. Can you do better in your area with a local bank? Also, can you lower your cost of financing by buying at a lower price?

Next, get accurate numbers for property taxes and hazard insurance. These will be your biggest ticket operating costs. Property taxes are public record. Get a quote from a couple of insurance companies for a landlord policy. Plug all your known numbers into your cash flow estimate. Once you know property tax and insurance costs, do you still have money left over from your $400 operating cost allowance to cover the unknowns?

Do you have a marketing plan? A lot of advertising can be done for free or nearly free, such as internet advertising (e.g. Craigslist), computer generated flyers, bulletin board postings, registering at college/military/section 8 housing offices.

You can plan to contain your overhead costs by self-managing until you see whether you have the cash flow and the need to outsource management.

Dave,
Thanks for a great explanation, it gave me a good insight in buying rentals. I am working with the agent to get some details and doing the other due diligence. Even if this deal don’t work, it gave me a good lesson on what to look for.

Thanks again
RK

All I can say is experience is a great teacher.

You want to have options in a property.

Once you get a property under contract such as this one for $60k, you have to be able to do as many things possible with it if your situation changes. There are endless variables that can affect your exit strategy, I will list one after each option to get your mind thinking in the right direction.

Those items include.

  1. Assigning it to someone else.

What if you cannot get the loan you were looking for?

  1. Rehab (spruce up) and sell retail

What if you have to move…wife’s mother is diagnosed with xyz, cancer for instance.

  1. Hold as a rental with significant monthly cash flow.

You lose your cash flow for three years if you have to replace a roof at $4,500.

I have personally been in a position where my only option was to hold the property for cash flow. Problem was, it was in a horrible area of town that I hated going to.

With the market the way it is currently, wait for the deals that are just too good to pass up.

Do a little marketing, Realtors usually are going to push you into doing one of the first ten deals they show you. You may need to look at upwards of 100 deals to find your first bargain.

Hope this helps,

Matt Gerchow

I have seen tax assessed values that were way out of line with the value of the property. Way lower, and some higher.

I have purchased property before at higher even than the appraised value because it made sense to me.

A couple of years ago we got an accepted offer on 2 nice units, a re-furbished bungalow and a garage unit. We had an agreement for $48,000. Unfortunately the bank appraised it for $42,000. My Realtor and the banker both called me up all gloomy and depressed: “Sorry about the deal, we can’t lend at $48,000.” “I’ll send in your cancellation and get your deposit back, the seller won’t budge an inch.” Nobody even asked me if I wanted to go ahead with it or not.

“Wait just a minute,” I said. “It may be higher than appraisal, but what do I care? I already have it rented out, and we’ll just pay the $6,000 above appraisal.”

So the bungalow got furnished and rented out at $1200, the garage unit at $300. I figured the house would continue its slow upward creep towards the appraisal value and it has. Because of its location (across from a college) it has rented easily at a great price. Always made a profit. It was the perfect summer school rental for out-of-town parents and students. Students who HAD to have housing. Parents who were grateful for furnished housing.

Sometimes you have to go against conventional wisdom because it makes sense for that property.

Furnishedowner