High price but would cash flow

[Sara Bentley]

I found an off market property with the help of my agent. The owners are asking 230K for the duplex, 2BR, 1BA each level. I would be able to cashflow somewhere around $800 a month from it, but my realtor is saying no deal since it is over priced. It is quite a bit higher than comps in the area, and the kitchens and bathrooms could use some updating in both units. I offered 215K and they said no deal, they would look into high 220s to sell. This is in an extremely competitive area and houses don’t come up for sale often. Rents are high and tenants are high quality. Should I walk?

[Joe Villeneuve]

The goal isn't to get the property...it's to get the deal.  The deal is based on the return on your investment.  The return on your investment comes from a  couple of places...cash flow and equity build up.

Profit  is based on the recovery of what you pay for the property and what you get from cash flow.  When you have gained enough CF to equal the amount of money you paid for the property, you then start making a profit.

Here's the biggy...what you paid for the property...your actual cost.  Your cost is ONLY what comes out of your pocket.  As long as you have positive CF, the only thing that comes out of your pocket should be the down payment.

Paying higher than a property is worth, as long as it has positive CF, isn't a problem....maybe.  The problem comes when you have to pay back the loan, and the property can't be sold for at least what you still owe.

Example #1: ARV = $90k; Sold for $100k; CF = $4k/year; DP = $20k; Appreciation = 5%/yr

1 - Cost payback (start of profit) - 5 years
2 - Hold property - 7 years (sold)
3 - Appreciated Value at end of hold = $127
4 - Tenant Principle payoff/balance owed = $69k (+/-)
5 - CF Profit (2 years) - $8k
6 - Sale Profit = $58k
7 - Total profit - $66k (minus fees, cc, etc...)

Example #2: ARV = $90k; Sold for $100k; CF = $4k/year; DP = $20k; Appreciation = 5%/yr

1 - Cost payback (start of profit) - 5 years
2 - Hold property - 4 years (sold)
3 - Appreciated Value at end of hold = $109
4 - Tenant Principle payoff/balance owed = $74k (+/-)
5 - CF Profit (loss 1 year) - ($4k)
6 - Sale Profit = $26k
7 - Total profit - $22k (minus fees, cc, etc...)

Although it appears as though Example #2 works, it doesn't.  What's not factored into the analysis is the loss from future gains by using the CF to invest with.

Also, in both cases, you are relying (hoping) the property appreciates as analyzed.  Remember, you have no control of this appreciation.  What happens if when you decide to pull the trigger and sell the property, the bottom falls out?...or, the property doesn't appreciate as predicted?