Determining what to offer

[Jared Miller]

I prepare taxes for a living and anytime I prepare a return with rental properties I always pick their brain with questions about their rental properties. This older gentleman with multiple rentals has given me a lot of great information and he said, "My wife said I should sell you one of my rentals." I kinda laughed it off and then he said, "no, make me an offer." ...I don't know how to even determine what to offer!! The home is kinda in a rough part of town, but he has long term tenants and I know EXACTLY what he rents it for and all the expenses he has each year from preparing his taxes. We've built a pretty good rapport, so I don't want to offer something too terribly low and offend him.

Some numbers:

Rent Rec'd: $11,407 in 2015.  Rec'd $15,333 in 2016

Insurance: 735. Taxes: 979. Utilities: 1550. Other expenses throughout the year: 2,000

I know he replaced the roof in 2015 and I know he paid $45,000 in 2001. Not sure if any of that info helps, but any idea what I could offer the guy to make it profitable?

[Pearce G.]

I assume you want to keep him as a client, so maximizing your return on this transaction may not be the most important factor.  He may be more valuable to you as a mentor on your first investment property, so even a very modest return could be worthwhile if it helps you get your feet wet.  If your long-term objective is to build a passive income portfolio, breaking even while learning the business from someone with lots of experience may turn out to be a great deal.  Maybe he is starting to wind down his business and you could be in position to buy multiple properties over the next few years.

That said, I would aim for a 10% cash-on-cash return and make your calculation to arrive at that number.  Then I would check it against comps to make sure you're not way over or way under the market.  Explain your calculations to the seller.  Ask for his critique.  If he doesn't like your numbers, ask for a counter-offer.  You're his accountant for crying out loud.  He's not trying to trick you. 

And if he is starting to downsize his portfolio, this could actually turn out very very good for you even if the first one is not a slam dunk home run.