Would you over pay for a great cash flow prop ?

[Brandon Rodriguez]

Hey BP! I don’t how how rare this situation is but I need some input. Looking to purchase a 4 unit and the units rent very well. $1100-1200/month. Problem is that the appraisal came in way less than offer and seller will only budge to about 40k above appraisal. After all expenses I would net about $700/mo. Here’s the other wrench. The property needs a lot of work, from full electrical to plumbing to new windows/frames, and wood stairs that lead to second story, just to name a few. Would you, or have you overpaid for a distressed property if the cash flow was this good in its current state? Any input is always appreciated. Thanks!!

[Jim S.]

If the appraisal is that far off it would be throwing huge red flags for me, even your own calculation puts it as a negative equity investment after rehabbing it. If the property needs all this work is it actually up to code, does it have current certificates of occupancy? Are the tenants in any way related to the owner, i.e. how sure are you that the property would continue to get those rents if you had to turnover the tenant base?

Personally I would never buy a property that far off from appraisal for the simple reason that I'm not going to get that money back. Based on your report even after you put into repairs in you won't be seeing that $40k again. I'd prefer to use that as a downpayment to buy another whole investment property out of state.

Based on those numbers (which also don't appear to include maintenance, vacancy, capex, property management) you'll be doing all of the work to flip a multi-unit property, and then keep it running with 4 tenants for <7% COCR? That just seems like a lot of work/risk to get a lower return than you'd get putting that cash in a REIT ETF and calling it a day.

I would run away and never look back if I were in the situation you posted. I honestly believe you'll end up with a ton of work just to get negative equity vs. your investment and a breakeven cashflow at best as you're not accounting for a number of major expenses in your pro forma.