Seeking Advice About a Property That Will Have Minimal Cash Flow

[Brad Gibson]

I've got what I think should be a buy, but it doesn't fit into my normal "buy box" and I'm looking for some advice on how to proceed with this one.

I have a single family property in the Midland/Odessa market.  It is a 3 BR 1 BA in a C neighborhood.  The estate is trying to get rid of this property.  It has been on the market for a while.  There are 9 heirs so it is like trying to herd cats for their agent.  It was on the market for $140,000.  Agent asked if I would buy it at $110,000.  After inspections, we went to $90,000 with $5,000 in closing costs paid by sellers.

My GC will fully renovate the home for $65,000 including moving utility room, putting in a hallway to reconfigure the bedrooms, adding a bathroom to bring it to a 3/2, and open up kitchen to make it an open concept kitchen/living area.

Local portfolio lender is offering to finance 80% of the total project cost of $155,000 at 7.625% fixed on a 15 year amortization. ARV value for the home will be conservatively 200 to 210 thousand. So for $31,000, I'll start with $76,000 plus in equity.

The concern is that the home will cash flow only $100 to $150 per month after expenses (mortgage, taxes, insurance, management, vacancy, repairs, capex). That puts the CoC return at a very anemic 3-5%.

Should I just ignore the fact the deal will barely cash flow and take the overall handsome return due to forced equity? For reference, I generally buy, rehab, rent, & hold very long term. Thus, the actual return to me is pretty anemic because all of the profit is in equity. I generally like to see 12-20% CoC return, but interest rates are making that tough to find now. In addition, the 15 year amortization means a depressed CoC return rate since more is being poured into equity each month.

Thanks in advance for the fresh eyes and perspective.