Can't understand why a Property Will Not Sell!

[Alex Craig]

In the past month, I have sold properties for $15,000k and under that sat in so-so areas (ROI potential though is over 25%), properties that needed tons of renovation, but for some reason I can't sell a property that already has a tenant, offered a property is a solid area at .67 on the dollar, rented for $900 a month by a great family, that returns 13% ROI. What gives? Am I missing something?

[Jon Holdman]

I would not claim a property that rents for $1000 must be purchased below $50K to make it a good deal. I would say a property that rents for $500 would need to be purchased around $25K, but as the rent increases, the rent/price ratio can go down.

Even after appling the 50% rule (which is NOT the same as the 2% rule), and assuming 30% down payment, a property like this would return $215 a month in true cash flow for a 17% ROI.

The duplex for $52K with $1050 in rent is a good deal, too.

Equity matters because you need to be able to take a down turn and cover your sales costs. If there are numerous similar duplexes selling for $50-55K, I'd have to think twice, even though the cash flow is good. If you had to sell shortly after you bought it (hey, life happens), you'd take a 10% hit between the buying and selling costs. If there's any more decline in prices (entirely possible, IMHO, as the government starts backing away from supporting home prices), then you take a bigger hit. Having some equity cushion gives you some protection.

IMHO, you need three factors for a rental property to be a good deal:
1) cash flow, per the evaluation we all discuss and debate
2) equity, at least enough to cover your costs and to protect against some downward movement.
3) demand, if you can't fill the units, its not a deal at any price.

Two out of three is not good enough.