sounds like a good deal to me, what am i missing?

Question

I live in Greenville, SC and work as a real estate agent.  I live in a neighborhood that has boomed in the last 5 years.  There is a 2 bed 1 bath home on my street that should be listed at minimum $215k.  Its being sold FSBO at $196k "as is"

The only way I could make this purchase is if I pulled the downpayment of 20% from my HELOC.  My home was purchased in 2007 for $128k.  I owe $55k on it.  It was recently appraised for $315k two years ago and today its market value is somewhere around $350k-$385k.  (just trying to give as much background as possible)

Rent for a 2 bed 1 bath in this area is about $1300/month.  I have used up all my free calculator uses on here and cant spitball any numbers to you but, I know the cash on cash return is at 3% or something like that and the ROI isnt all that great, but where I see a counter for that is the neighborhood and the fact that our property management division at the firm I work for has a waiting list literally, to get into this neighborhood.  And also, this home is surrounded by 3200-4000 square foot homes.  This house could be added onto one day and brought up to par with everything else.  The lot beside it, just the land, sold for $112k.  The buyers built a 3800 sqft home on it.

The unknown factors are what all needs to be done to the house.  The photos (take them for what its worth) show a typical home built in the 50s around here in good shape.  I would have to go through an inspection to see what the major factors are, but to shed some light on my personal situation, this would be a out of the box purchase being my first deal and I would need to rely on renters to cover my mortgage until I could put enough in the bank to build up a little safety net just in case of some major capital expense or if for some reason there is a long vacancy period.  And it goes without saying, that everyone in my family thinks I crazy but we all know its the ones that love us the most that usually hold us back.

Thanks for taking the time to help out in anyway possible.  Im sure I have left some things out so please dont hesitate to inquire about anything.

To wrap up, I suppose I have many questions about the whole process but just give me whatever feedback you can, would love to see how others would go about this.  I know this would not be a "money maker" per se, but my main objective would be to simply acquire a discounted home in this hot market, and let someone else "buy" it for me.  Possibly down the road I could add on to it and increase its retail value, or continue to rent it out and pay the mortgage down.

many thanks!

Ward Mcdaniel · Answer

Hi Blair,

I also live in the Greenville Area and am an investor and agent (our office is downtown Gvil).  It is great to see you around the site.

First, know what your exit strategy is for this property...2nd know your purpose for this property.....once you figure those things out, You should consider a few things regarding the purchase of this property:  determine your minimum amount of COC - at 3% you can make double that in stocks....In addition, $1300 for a 2/1 is an interesting fee for rent for that size of a house....also, the vacancy rate may get you into a situation where you would have to pay the mortgage for a few months - can you cover that and then how many months? you get the idea and then you would need to factor in the CapEx and any PM fees and closing cost all of those fees involved with the purchase.  Excitement to get into the game is great, but be cautious so that you can remain in the game and score time after time....

If you want to meet sometime for lunch one day, send me a PM or text...hope this helps.

Ward

Allen Mock · Answer

Wow, No disrespect but looking at the numbers I flinched hard. I am new to this stuff but have been doing a lot of reading and exploring other sources of information. I have family that have been in this game for awhile so I have that to draw information from.  A little friendly advise, look for cashflow, not capital gains. Capital gains is what caused the housing bubble to burst.

Brian Walsh · Answer

I personally don't like the numbers on this deal. We own a property management company in Greenville and buy and sell rentals all the time. I would never try to sell a property with such a small ROI. There are much better deals around here. We typically sell investment properties with a 8-10% ROI and never factor in appreciation....that's always just a bonus if it happens.

Dottie Bee · Answer

Hi!

I am a newbie who made myself a promise to get more involved in the forums.  In other words, I am not the seasoned investor you were likely wanting feedback from.  So, take this with a grain of salt.

First:  I have a PRO account and can run a calculation for this deal for you and ship you the .pdf if you like.  I think that you are missing numbers pertaining to vacancy rates in your area, capital repair costs and current repairs needed to bring the property to market.  At any rate, 3% cash on cash is not very enticing in my opinion.

And not having the ability to pay my mortgage would be my biggest concern.  That is a huge gamble.

Hattie Dizmond · Answer

I may not be the right person to talk to here, because I don't like appreciation plays.  Appreciation is exactly what you would be banking on in this deal, as you've described it.

At $196k, assuning 20% down and just under 4% interest rate, 10% OpEx & 10% CapEx (older home), 10% PM, and insurance...and assuming your rent estimate of $1300/mo is accurate...you're probably going to be cash flowing at around $200/mo.  That may work for you.  But, you need to make sure you're prepared to live with it as a rental, because appreciation is never guaranteed.

Jacob Sampson · Answer

If this is a buy and hold play, there is no cash flow there.  Purchase price is too high vs the rent.  I don't personally care about equity plays.  It may be there it may not, you won't know until you sell.  And you will likely give up 8-10% of the equity to transaction costs.

Chad Carson · Answer

Hey @Blair Boan

I'm in Clemson and have invested in Greenville, so I'm pretty familiar with the market. If nothing else, this exercise is worthwhile to do so that you can figure out the pieces of what really makes a good deal.

The bottom line question you need to ask yourself is "How do I plan to profit on this deal?"

For me, it should fall into one of 2 categories:

1. Current income from the rent

2. Future equity from resale.

It's best to have the deal work just from #1. Your deal doesn't have great income numbers. In fact, I'm willing to bet it'll be very negative.

$1,300 x 50% (likely expenses) = $650/month net operating income.

If you bought the property for $190,000 and put $38,000 down (20%) and borrowed $152,000 at 4%, your payment would be $725/month.

$650 - $725 = $-75/month or $-900/year.  Ouch. And that's before paying interest on your HELOC for the down payment.

So we know #1 - current income won't work unless you get it a lot cheaper.  But what about #2 - future equity?

Lots are selling for $112,000. So we can't tear down your house and make any money at $190,000.

What about adding on? If your house is 1,200 sqft, can you add on 1,000 sqft wing?  At $100/sqft cost, you'd add $100,000 to your $190,000 purchase, plus carrying and closing cost + remodel cost of the existing house. So you'd be well over $300,000 cost, maybe $350,000 or so, with a 2,200 sqft remodeled house.  If you can resell for 200/sqft that could work ($440,000 value), but is that possible? I'd be a little nervous.

That's about all the possibilities I can think of.  It doesn't seem like a great deal, and unless you have the capital to do a big add-on remodel and unless the market will support it, I'd pass.

The good news is that there are always more deals. keep hunting! Best of luck.

Brent Coombs · Answer

@Blair Boan, seems to me that maybe a year ago, that price would NOT have been a discount, and you would therefore not have been tempted, right?

My take on it is that it is no better as an investment for you today than it would have been a year ago. You wrote: "my main objective would be to simply acquire a discounted home in this hot market". Are you sure you're not getting sucked in by your Town's own marketing success? I agree with @Hattie Dizmond on this one, (as usual).

sounds like a good deal to me, what am i missing?

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