Good cash flow, but after repairs, upside down.

[Sarah McCluskey]

Currently under contract for a 3 bed upper/lower duplex. It was a FSBO listed around market rate, but I know if it went on MLS it would've gone for more. 3 bed duplexes are hard to find in my area to purchase and to rent, so demand is there.

During inspection the crack we were a little worried about in the foundation turned out to be a much bigger problem than anticipated. Entire basement leaks. Estimate to rebuild bowed wall, install interior drain tiles and sump pump, is $20k. It will also need a new driveway which is currently sloping towards the house, which is the reason for the bowed wall. 1950s home with original windows, but they work. Air conditioning units 30 years old, will need to be replaced soon. Roof will need to be replaced in the next couple years. Bathrooms are in rough condition, was planning on giving them a facelift.

All in, I’m estimating $30k right away, and probably another $20k in the coming years.

Here are the numbers.

- purchase price $151k

- rent: $2200 total

- property taxes $4500

- insurance $800

- initial repairs $30k

- additional repairs $20k

- will be hiring property management company for 10% of rents

- setting aside 10% for repairs

- setting aside 20% for capex (future roof)

- cash flow $530/month

- cash on cash return with initial $30k in renovations is 9%

To me, the numbers work from a cash flow perspective. Where I’m getting caught up is that the property will not be worth the $200k I will have put into it total. I’m planning on buying and holding, not selling, but I still don’t know if it’s a bad move.

This would be our first rental property. But I don’t know if I should back out because of the unexpected $20k that came up from the inspection....

Thoughts? Is it a bad deal to put in more to the property than it’ll be worth, even though the cash flow is good?

[Jay Hinrichs]

sounds like a money pit.. if its not worth 200k once you dump 50k into it  why do it.. ?

just B/C of the greater fool theory is no reason to reach for a deal.. cash flow is only one component of IRR
if value is less than what you have into it.. you have zero exit strategy when you tire of being a landlord.