How did this deal work?

Question

I've been thinking about investing lately.  Looking hard at BRRRR.  After doing some reading and watching podcast I got to thinking about a house my mom sold a couple years back.  She sold at the top of the market for $250k.  It was in a good neighborhood and really didn't need much work beyond a new coat of paint and maybe replacing the carpet.  The buyer was an out of town investor and bought it sight unseen cash offer.  I don't understand how they made money on this deal.  The house sat empty for a few months until what I presume are renters moved in.  No way the 1% rule works in this case.   At best it would rent for $1800.  The house hasn't been resold as its still listed in the LLC's name.  What am I missing or did the buyer lose in this deal?

Dylan Thomas · Answer

@John Gentry

Hey John, it seems like you may be overthinking it a little bit. It looks like you might have the answer to your question inadvertently.

Your original post said that they bought the house for cash. This means that they wouldn’t have a mortgage payment every month. Their only absolute expenses would be taxes and insurance.

The 1% rule is a good way to evaluate rental properties quickly because most rentals that meet this rule will have at least some level of positive cash flow. However, this is usually used when people are putting an up and average down payment such as 20%, and they are financing the rest.

Using your rental estimate of 1800 and let’s say 100 for taxes/insurance for easy math. They would cash flow 1700 per month. They would be wise to put away some of that for repairs and capital expenditures such as a new roof down the line. But overall, they are pocketing a lot of cash every month because they have virtually no expenses.

Another factor to consider is the market. You said that 250k is the top when they bought it. That is probably a correct statement. But if their plan is to keep the property for 10, 15, maybe 20 years, then more than likely the value then will be higher than 250k and they will profit from appreciation when they sell as well.

The real debate, one we can’t know the answer to, is whether this was an average, good, or great investment. It won’t be bad because they aren’t losing money. But we have no way of knowing their other options.

Those are my thoughts anyway! Hopefully I read your post correctly and didn’t miss something. But these are my thoughts from my understanding anyway!

Michael S. · Answer

@John Gentry - was the house located in Huntsville?  If so, what part?  If it was Jones Valley or Blossomwood, I'd do that deal in a second if the house and lot was decent.

1% rule does NOT work on A/B neighborhoods in Huntsville and Madison right now.  Best case scenario is 0.6 to 0.8% in most deals.  1% rule will work for C/D neighborhoods here.

My bet is the investor was doing an appreciation play and may be planning for a high end flip in the future;  maybe their GC is tied up with other projects right now.  We bought a property in five points two years ago that sat for 3 months untouched because our GC was busy finishing other properties.  But the price was too good to not buy it - even though we had to sit on it for 3 months.  Now it's an MTR and doing well.

Nicholas L. · Answer

@John Gentry

buying a random deal and immediately losing money = way worse than waiting.  BP has convinced anyone that isn't buying that they are paralyzed.  not true.

so... can you house hack?  are you looking at properties with an agent?  have you talked to a lender?  are you going to meetups?  there are lots of actions you can take...

Caleb Bryant · Answer

@John Gentry I literally had someone ask me for these exact numbers. 250 and below, 1800 in rent or better. The guy is in a 1031 with low debt involved. Doesn’t want to rehab, just wants to put renters in essentially. Lots of buyers for what you described but they have different goals, mostly avoiding taxes.

Chris Mignone · Answer

@John Gentry I think it’s easier to get a flip right now, than it is to get a good rental. Figure out if you have something to offer an experienced investor and maybe you can help them and they can help you in return. Just a thought.

John Gentry · Answer

@Chris Mignone I don't want to be one of those people buying investment properties and losing money. Deals here in HSV look to be few and far between.  I suffer from Paralysis by Analysis so that will make it even harder to get the ball rolling.

Chris Mignone · Answer

@John Gentry I haven’t bought anything in Florence, but I’ve bought a bunch of doors in Gadsden and I can tell you that sometimes, buying cheap 100 year old houses doesn’t work out the way you’d hope. And yes, it’s very tough to cash flow in and around Huntsville right now, and there are definitely a lot of people buying “investment” properties, who are losing money every month.

John Gentry · Answer

Good point about Florence.  The appreciation in the Florence area looks a little stagnant.  Around the Campus is really hit or miss with the types of houses you can find.

Michael S. · Answer

@John Gentry - yeah, that is interesting.  @Bonnie Low listed several reasons the investor may have done this that are absolutely valid.  I'll add one to it - the OOS investor assumed Monrovia was the same as anywhere else in Huntsville.  That may sound ridiculous - but the number of folks on BP who have talked about investing in Decatur or Hazel Green as being the same as investing in Huntsville/Madison shows that some OOS folks just don't take the time to learn the different areas around North Alabama before taking the plunge.

Florence would be a cash flow play only (appreciation will be more limited) - as long as your cash flow numbers looks good, it might be worthwhile.

Bonnie Low · Answer

There's just no way to know what the buyer was trying to get out of the deal. Maybe they were in a 1031 exchange and time was running out so they had to identify a property and pull the trigger? Or maybe they needed a place to park their funds even just temporarily. Maybe they were betting on appreciation or intended to flip but then ran out of money so it sat vacant for a while. Maybe they just bought poorly and didn't know it, but most newbies are not paying all cash so this seems less likely. Regardless, it doesn't matter other than out of sheer curiosity. People make all kinds of decisions that make you scratch your head.

How did this deal work?

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