Buying Over Fair Market Value For Cash Flowing Rental?

[Bill Mitchell]

Out of curiosity, are there ever any situations where you would consider paying over the fair market ARV for a property if its cash flow / rent ready/ has a tenant placed?

For instance, a property has an ARV of 120k. The property is in great condition, good financing, will cash flow $400+ after debt service. And already has a tenant placed. Would you ever consider buying this property at 125 or even 130?

I ask because I have some colleagues that are doing it right now. Is this a common practice, becuase it seems mostly people buy at a percent discount (e.g. 70% rule).

[Mehran K.]

The 70% Rule and the term ARV are used when evaluating rehab deals. If there is a tenant in place and the property is in great condition (probably a turnkey provider?), the 70% rule doesn't really apply. With that said, I wouldn't pay more for a property than it will appraise for.

Like @Jon Holdman said, there are many "investors" trying to get in the game right now because real estate is "hot" and they want a piece of the action. They are overpaying for deals with the illusion of returns higher than what they'll actually get. This is driving up the prices in many of the "hot" markets right now.