Is it a good deal for an all-cash offer?

Question

I recently found an on-market move-in ready townhouse in Phoenix AZ which doesn't have a super high cashflow (my target is 8%+) but it's close to it:

- Cash to invest: 177k (175k purchase price + 2k closing costs)

- RTP: 0.89%

- CoC: 6.43%

- Rent: 1550 (LTR)

- Expenses: $604 (Taxes, Insurance, HOA, CapEx, Vacancy, Maintenance, and PM)

- Cashflow: $946

Mortgage rates would make it to be a non-deal, but with all-cash, it can be a deal. Also, with all cash, I want to come up with a lower offer of around 160k, which will hit my target of 8% CoC.

With that, I could freeze a lot of capital and same time lose equity build-up and some of the tax benefits while getting maximum and decent cash flow from the deal. My goal is not cash flow now but with higher rates I cannot properly leverage it I think... Should I take it? Or is it better just to keep everything in an index fund and wait/make another deal?

Joe Villeneuve · Answer

Terrible deal.  By paying all cash, all you're doing is paying all your negative CF upfront.  The actual cost to the REI for a property is the cash they put into it.  You will be paying full price for it this way.  When you leverage (mortgage),  your cost is only the DP.

Profit is made after you recover your cost (cash in).  the larger the cash in, the more you have to recover before you make a profit,...which also means the longer it takes.

Bob Okenwa · Answer

I'm with @Joe Villeneuve. Spending all that cash and to have it tied into one deal presents a poor ROI.

That property is in the Sunnyslope area and I'd rather take that 160k and buy a single family in North Peoria, Gilbert or Chandler, Scottsdale, or Tempe. Much better area with much better tenants and a higher median income.

Doug Smith · Answer

I hope this doesn't come off wrong as I can't get voice inflection into a post, but if you're having to ask and agonize over this question, you might want to rethink the deal. Getting a Cash on Cash return of 6.43% to jump on an out-of-state deal wouldn't be something we could jump on. Heck...I would pay you more than that just to use that capital for some of our projects! We pay investors anywhere from a flat 8%-10% to lend the money back out on real estate deals at 12% and we're paying up to 12% to finance construction and renovation projects to investors and lenders. (I wasn't soliciting there...just stating that you can do better.) I think a 6.43% CoC is pretty low in this field considering that the average Conventional Loan in the country right now (pulling up Mortgage News Daily right now) is 6.92% for a 30-year-fixed rate mortgage to an owner occupant. If you're having to agonize this much over a deal, I'm not sure that I wouldn't look for something else that will hit your target ROI. Good luck to you in investing.

Eliott Elias · Answer

Cash is king, especially in this market. I want to have as much cash on me as possible to pounce on the opportunity. Having all or most of it in one deal, does not make sense if you want to scale.

Account Closed · Answer

$180k is a lot of money to freeze yourself out of. You won't build any equity either, which is a huge benefit of REI. It's a big burden to bear in my opinion, especially for 6.5% cash on cash. The cashflow is solid, but what is the long-term play on this particular investment? Appreciation?

Dave Skow · Answer

@Alex S.- correct....  :) ....I  sent  you a message as well

Dave Skow · Answer

@Alex S.- thanks  -   1) if you have  ample assets / Cash  leftover  after the plan you outline  - this  looks OK ....2) if this plan will  take up the  majority  of your  working capital - then  this isnt a  good idea    3)  most any deal will  cashflow if you use  cash to pay for it   4) if  adverse to gettting a large loan for it  - consider taking a smaller  loan  ( eg  50% ltv )  in order to  save  some cash for  future needs  5)  make sure to  review the  resale certificate / HOA ccrs / binder / reserve study  carefully  and  make sure it  complex  will allow  LTR and STRs   6) good luck

Bob Okenwa · Answer

Yeah. Using your savings as a down payment to buy something that may appreciate more in the future and attract higher-quality tenants.

I wouldn't buy anything with the speculation it'll appreciate, but there should be something better available than a 2/2 in Sunnyslope. Might have to look to the outskirts like Maricopa or Buckeye or Surprise for better pricing. But the homes will be newer and require a lot less maintenance than an unimproved late 70s north Phoenix condo.

Nicholas L. · Answer

@Alex S.

are you in WA state?  do you own any other rentals?  have you ever invested out of state before?  do you really have 180K you could put in a property and just have it sit?

Is it a good deal for an all-cash offer?

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