Paying a premium on a cash flowing CFD, is it OK?

Question

Hello, I appreciate any advice I can get on a CFD deal that I was offered on a Duplex. It is a turnkey place in a University Neighborhood, in fairly good condition with appliances about a decade old and a good structure, newer roof and windows. The owner is only asking 50K down for the property and it should cash flow a bit over a $1100 a month. However, his asking price is $445K, and after some market analysis and reverse cap rate analysis, I'm inclined to think it's worth around $390K/$400K.

I'm curious, if anyone thinks this is a potentially bad deal off the bat? My fear is that it will tie me up because I will not have enough equity to refi or get out of the deal for about 5 or 6 years assuming a little bit of appreciation.

Any thoughts or pieces of advice are appreciated.

I'm curious,  if anyone thinks this is a potentially bad deal off the bat?   My fear is that it will tie me up because I will not have enough equity to refi or get out of the deal for about 5 or 6 years assuming a little bit of appreciation.

Any thoughts or pieces of advice are appreciated.

Wayne Brooks · Answer

Jeff Beard

CFD=Contract For Deed, aka land contract.

Jeff B. · Answer

AHH; the problems with undefined acronyms :)

Jeff B. · Answer

Had to chase the definition to understand this one:

http://www.investopedia.com/terms/c/contractfordifferences.as

:- DEFINITION of 'Contract For Differences - CFD'

An arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.

Kent Hranicka · Answer

Thanks Bill,

I appreciate your walking me through the logic in the numbers.   I tend to agree, and it's really nice just to get input from more experienced investors.

Bill Jacobsen · Answer

If you plan to buy and hold then I would stick to my valuation based on cap rates.  Duplexes are valued on comps but it has to make sense to you as an investment.

You stated monthly cash flow as $1,100 per month.  At a cost of money of 5% I would estimate a monthly payment of $1,194.    Using a 50% expense ratio that would put your rent at $4,588 per month and about a 6.2% cap rate.

I see a minimum cap rate and an overvalued property.  I would pass.

Good Luck.

Bill