Creative mathematics for deal analysis

[Ron Averill]

I live in a college town, where both rents and property values on rental properties are stable and relatively attractive. It seems like it should be a great place to own rental property. But when I run the numbers on duplexes in my area, the COC is in the 4-7% range and the total ROI is also rather low. The ratio of rent to purchase price is pretty good, so the poor return is largely due to the very high property taxes.

I could easily conclude that this area is not a good one for buying rental properties (at least not for me), but I thought I would first try some creative approaches to making the deals more appealing.

For the sake of this discussion, assume that the purchase price has already been reduced as much as possible based on all other factors, and that the numbers used for rental income, maintenance, etc. are conservative. In other words, remove all other issues from the equation.

Here is the proposed concept:

1.Calculate the amount of additional monthly rental income that would be needed to achieve the desired COC return and total ROI.

2.Multiply this monthly amount by a suitable number of years (say 5?).

3.Reduce the purchase price by this amount.

4.For the sake of assessing the deal only, count this price reduction as additional income that makes the COC and total ROI attractive. In other words, amortize the price reduction over the assumed number of years.

5.Then, this argument could be used in the final negotiation of the purchase price.

If this works in the negotiation, would the deal now be a good one?

For every good idea I come up with, I have at least three bad ones. As a newbie in the real estate investing business, I’m not sure which category to put this one.

Any thoughts or suggestions?

Thanks,

Ron