Originally posted by @Patti Robertson:
@Andrew Miller - I'm sorry if I came across that way. I didn't intend that. What you heard was utter shock - and recollection - coming through. It makes me so mad to hear about newbie investors being taken advantage of. You reminded me of a couple who I have been trying to help who had a friend put them in a similar - but worst - situation than the one you described. (Although I am assuming yours is in great condition. That may not be the case.) I manage property for a couple who live in the Northeast right now. Their "friend" sold them a house in my market that they believed was going to give them a positive $400/month cash flow that they needed to support their household. That same "friend" of theirs found me on-line and asked if I could take over the management of their turn key rentals. They told me they were working with wealthy individuals in the Northeast in markets where the purchase to rent ratios are much worst than they are in our market. According to her, these individuals were thrilled to pay 100 times rents. She sold her "friend" a house on a main street, in a bad neighborhood, that is about 100 years old and had NOT been fixed up for the price the house would have sold for fully rehabbed and in top condition. The buyer did not travel to put eyeballs on the house, because she trusted her "friend". Come to find out, this was NOT a wealthy couple. This family had a husband who worked in a blue collar job and the wife stayed home with their 4 kids, one of whom is very sick and has had multiple surgeries. This family counted on this money to live on and had not one cent for the many, many repairs that were needed.
I was just trying to point out that these numbers don't work. Research investor formulas on BP. You will see several on BP. The simplest and most typical one is to compare rent to investment price. The 1% rule is commonly used, and it works in our market. Using this formula, you want your purchase and repairs to be no more than 100 times the rent. That is doable in our market. Some BP peeps will only buy at 2%, or 1.5%. 1% is a good number to use in Hampton Roads. The numbers you quoted ($200K for $1100 rent) put you at a .55% Rent to purchase ratio - significantly less than 1%. If I give you the benefit of upping the rent to $1300, which is truer to market, you are still only at .65%. LIterally if you are investing in rentals here and have $200K to spend, you should be able to generate at least $2000/month in rents. Your friend is offering you a TERRIBLE deal. So badly, that I question the friend status. With friends like this, who needs enemies? That's all I was trying to point out.
In my opinion you should just walk away from this one. It is priced for an owner occupant, not an investor. There are no answers to questions that will make it work.
I do lease options and land contracts and actually taught this topic at the Hampton Roads Landlord Association not too long ago. If you want to PM me the address and your friend's name I will check it out and send you what I think the real market value is and a better rent estimate. The rent amount could be even higher than $1300, depending on the neighborhood. It shouldn't be lower though, unless the house is in terrible condition.
This is great, in depth insight Patti. Clearly I need to get some updated numbers.
In this case, there is no ill intent from anyone, just a lack of understanding on my part. I want to keep the conversation focus on the deal analysis.
I didn’t pay much attention to the cash flow because I am looking at this as an equity deal through the lease to buy option. Buy for $200k > sell for $245 min. Lease option benefits because I get a down payment, save on PM costs and light renovations, plus charge a higher rent. The current owner is finishing the repairs needed for the tenant to move in, any additional renovations the lease holder wants to do themselves.
With this said, do you still not agree with this deal ?
What would make it worth while? (Higher rent, lower selling cost, turning into a flip, etc?)
