Calculating what to offer for potential rental property - Helppls

[William Kwong]

Hi Everyone,

I have a lead that I've been doing working on and I have a beyond nice guy who I really bonded with who is a motivated seller potentially digging himself in a hole.

I've calculated ARV and it's been really difficult because a lot of the potential comps were foreclosed or short sales, etc. - I took a property that was similar and totally renovated that sold at 152K so I'm going off that.

(He told me there was a house across the street that sold for 175K that was similar to his however, I couldn't find that anywhere so not sure if it's true.)

He owes 140K on his mortgage and has put about 25K into renovations over the years, but I would say it still needs about 20K-30K repairs to be move-in ready. (Lower-Income Area)

SO, I'm trying to effectively calculate what I can offer for a cash buyer or a regular investor along with my assignment of contract fee included (let's hypothetically say 10K).

So help me out here --

Cash Buyer:

+ 38,400 = Potential Gross Income (Rent a Year)

- VARIABLE COST (Below)

- 8% Vacancy

- 5% Repair

- 7% Property Management

38,400 - 7,680 (20%)

= $30,720

- FIXED COST (Below)

- 7,000 = Tax 

- 1,200 = Sewage a year

- 2,000 = Insurance

30,720 - 10,200

= $20,520 Yearly Cash Flow

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So based on that, what can I offer if a cash buyer wants 10% ROI and hypothetically I want a 10K assignment fee. Also if the mortgage has 140K and the seller's asking 180K.

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Investor Using Loan:

Now that looks great, but if it's not a cash buyer, they're going to have to factor in the monthly mortgage out of the $20,520. -- With the seller's HIGH mortgage due to refinancing the house, he pays about 1700 a month or around 20K for the year which would cash flow only 520 a year. When an investor buys the property, I'm assuming he'd get a way better interest rate than the motivated seller did but not sure how to incorporate that. 

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 I hope this makes sense and any advice/calculations would be great.

Thanks guys!

[Chin P.]

Just some thoughts below. Let me preface by saying it could totally just be me not understanding something, but: 1. $3,200 hundred monthly rental income sounds high for a property with an ARV of $152k, or even $175k. Are you sure your income numbers are right? Feel like hitting 2% off of a market rate ARV (not some good deal some investor bought from a motivated seller at a discounted price) seems unlikely but does happen in places like the mid-west. But that's usually off of much lower prices and rents, right? But you stated it's a lower income area so maybe it's a multiple unit property such that the rental income number makes sense. 2. If I'm an investor and I agree with your ARV of $152k for properties in that area of that type, not sure why I'd be paying something higher than ARV like what Jay is calculating. Now I'm sure Jay knows his numbers and his calcs are right. I'm just scratching my head at a mid 100s ARV and investor purchase prices at 200k or above depending upon cash or financing. My gut feels like maybe some inputs or assumptions are off, but I could totally be missing the boat here. Otherwise I'd just be buying houses at ARV if the net operating income numbers were that good because I'd be getting well above the assumed desired rate of return buying at ARV. To me, I'm usually needing to get a number well south of ARV to make the buy and hold numbers work. 3. People calculate them differently, but 5% for repairs with nothing for CapEx on the expense side seems very low. Even if the repairs to get the property rent ready mitigates CapEx and repairs in the short term it's still going to be there. 4. I usually see property management quoted as higher than 7%, but I can see it being possible in a particular area. If I was looking at this deal for myself, I'd want to recheck that to confirm. 5. I personally do vacancy at 1/12th or higher depending upon the area, quality of the property, and tenant quality. It's quibbling, but I might bump 8% up to 8.3% at least. In a lower income area I might want closer to 10% at least, but my definition of lower income might be different from yours. Again, I'm not saying stuff is wrong here. Just that these are some questions about the property that come to my mind when looking at your write up and it could just be that I'm off base.