When is it Acceptable to Purchase a Property For Market Price?

[Qusay F.]

Hello all,

About 6 months ago I purchased my first property, a duplex on the MLS at below asking price (and below market based on comps) in a high-demand, albeit up-and-coming neighborhood of Buffalo, NY. I've since rehabbed it and just about ready to list it for rent. The rehab has been exhausting, but a great learning experience. I work a full-time job so I want to find something more "turn-key" for my next investment purchase. I made an offer on a similar home, but in a higher-class area. Again, I found the property on the MLS, made an offer, had an inspection, etc. My realtor thinks I got a great deal, even though I went against my ideals this time and offered above asking price and I feel I may have made an emotional decision with the offer. The owner declined negotiating the inspection addendum and I have an out, but I think there is good long-term opportunity here according to my calcs - good cash flow + appreciation + stable rental market.

To sum it up, my question is: in your opinion(s), when is it acceptable to purchase an investment property in a hot rental market at asking (or above). what would you compromise on with initial up-front cost (i.e. no rehab, appreciation prospects, etc.)?

Thanks

[Andrew Johnson]

Qusay F. The definition of overpayment is always relative. Ask anyone if they "overpaid" in San Francisco 5 years ago, or Seattle, or even Austin for that matter. Even if the answer was a begrudging "yes" then I bet they are happy they did. That optimism aside, I would say that if you THINK you're emotionally attached then you've lost some degree of objectivity. Either it pencils or it doesn't, either it meets your hurdle rate or it doesn't. If you're flexing your pre-established parameters it might not end well. Falling in love with a property or having self-induced pressure to close a (any) deal can be destructive. My advice: start with a blank sheet of paper and rerun your numbers again. Based on your desired threshold for a return (likely cap rate) how much do your numbers say you should pay for the property? If it's over asking, who cares? Paying 50% under asking for an overpriced property is no more or less of a deal than paying 100% over asking for an underpriced property. Use your numbers, create your fair value, and offer less.