Need help with decision on single family rental home

[Dave Halsey]

I am now working on my 4th rental property and would like your advice. It was brought to me by my realtor who also owns a home investment company (he has been my primary source of mentoring/partnering along with my BP community). This is a "turn-key" investment, meaning the home is in beautiful condition, no immediate repairs/upgrades needed, and it has a solid quality renter in it. The current owner is a Canada resident and shedding off some of his Michigan investments to focus more on business he has in Canada. He's an older man that is "cashing out". The home is also in an exclusive and appreciating area south of Detroit called Grosse Isle. The median sale price is $260k and this 820 sq ft, 2 bedroom home, is being offered to me for $74.9k. My realtor believe it will be appraised at $80-$85k. Here are the numbers. I don't have 20% available to me right now but I can get it out of another rental home that has appreciated. Closing costs are $4.5k which I can pay out of pocket. The renter will be paying a new rate of $875/month starting in March. If I finance the entire $74.9k at 5.25%, and use the typical % in the tool, I come up with cash flow of $115/month and a Cash-on-Cash ROI of 30.5%. If I was to fund the 20% down up front I can get to $200/month cash flow and a 12.2% Cash-on-Cash ROI.

I can also see if he can find a couple thousand in savings on the home/closing costs to sweeten the pot.  This seems like a marginal deal to me and I would like to see more cash flow, but the fact that it is turn-key, very little maintenance, great renter, in a high value appreciating neighborhood makes this more attractive to me.

Appreciate anyone jumping in to help me with this decision.

[Clayton Mobley]

@Dave Halsey My advice is always to go for cash flow over appreciation - one you can manage, the other you can only hope for. I'm not super familiar with the Detroit market, other than the obvious zeitgeist knowledge that it was essentially abandoned for a while, so there is some opportunity in getting in 'at the bottom' and riding a new wave up. While I get the appeal of that, I'm a more conservative investor so I don't like making that kind of bet, personally.

The cash flow numbers you're showing aren't amazing, although, yes if you financed only 80% it looks better. But since it sounds like you'd need to pull that downpayment equity out of another property (via HELOC, refi? what are the expenses you'd be looking at to access that cash?), I'm guessing the real net number will be closer to the $115 than it is to the $200.

Also, I'd be a little concerned about where this prop sits on the value range in this area. Again, this is not my market, so take this with a grain of salt. However, you report the median price is $260k. Now, I don't really like medians so much, means/averages are a much better statistic, I find (but everyone uses medians, so here we are). If the median is $260k and this prop is below $80k but in an 'exclusive and appreciating area', then my guess is there's something about it that's making it less appealing compared to the other props in the area. It's fairly small for one thing, but I would maybe make the trip out to see this area with your own eyes, go see the property. 

If the median is $260k and this prop is going for less than 1/3 of that, and is 'turnkey', that makes me curious about why...is it just the size? Is the average price for props that small closer to the $80k mark? I get that the owner is trying to cash out to move his capital up north, but if it looks like this property is going to appreciate more, why not just let his PM handle it for a few more years and cash-in then? It's not like he needs to be hands-on. Point being, anytime you have investors looking to unload properties at (maybe) suspiciously low prices, you need to ask why. Things might look great on the outside, but what's the story on capex items? How old is the roof, the HVAC, the flooring, the water heater? It's possible this house 'needs no immediate repairs' but will be costing you a pretty penny in a couple years when you have to foot the bill for all those capex repairs/replacements. This is something of a strategy amongst some rental investors - buy all new and shiny and then sell before the big expenses kick in, pass them along to someone else. 

Of course, this could all be perfectly above board and a great deal. My point is just that you need a bit more information in order to know which way the wind is blowing.