Investing into negative equity but below replacement cost

[Ryan F.]

I'm looking to buy a cash flow SFH in the Atlanta area with 8% CAP rate and 10% CoC return. However, the appraised value is only 80% of purchase price ($100K) so I'll have to kick in $15K extra cash to close with a traditional loan. The price is ~ $20K below replacement cost, but does this make it a good investment?

[Jon Holdman]

Why would you EVER buy for more than market price? I want to buy below market price, not above. If I have to sell, 10% would get eaten by the transaction costs, so I want to buy at least 10% below market price.

Paying $100K for $1100 in rent isn't a great deal. Combine that with the house being worth only $80K and I'm asking why you're even considering this.

Replacement cost is an irrelevant metric. Its useful for insurance. Even then, folks will argue you're over-insuring if you're insuring for replacement cost. Insure for what its worth. If it burns, take the settlement and sell the lot and buy a different house.

If you're working with someone who's trying to convince you this is a good deal based on the replacement costs, you need to find different people to work with.