All Forum Posts by: Michael D.

You can still find plenty of homes that rent for $800-900 and cost $45-50k all-in, which is around a 10-11% cap rate. Maybe a little better if you find a good one. They're in C areas mostly though and usually require some repairs (included in above numbers), so entail a bit greater headache. They also tend to be more difficult to finance, which also lowers your overall expected return if you would otherwise be getting a loan. One additional advantage of these is that you can often end up all-in below market price, so have an alternate out of just selling for a modest profit.

It gets much harder to find the same level of cash flow as you move up into B and A areas, where cap rates are more like 5-7%. Similar is true of solid multi-families.

Forget the mortgage for a moment - that's a separate issue from the property itself.

What I see is a property that after expenses (your mortgage payment is not an expense for this purpose, that's separate) is going to realistically yield around $450/mo in income, or $5400/yr. It cost $77k. That's a 7% cap rate. Pretty ordinary. The 5% debt will push your CoC return up slightly from that, and as other people have noted will probably leave you with somewhere around $50-100/mo in cash flow, plus some principal reduction.

That is the opposite of true. To a sophisticated investor, the interest rate and other terms of financing are critical aspects of a deal, near the top of a list of other important metrics like cap rate.

Overall this is an utterly ho-hum deal that will probably work out okay, but is far from great.

Justin, I've got a few well performing properties in the Pittsburgh area, and I'm considering whether to sell them as TK in order to buy a few more. Not trying to sell you too hard on these, but it might be worth talking about if you wouldn't mind being a little farther from home.

Oh - and back to the original question: It's hard to negotiate on a truly TK, already rented place, for the simple reason that the seller is almost by definition in no rush and has already a good handle on the property and cash flow.

Now it might be different if the seller is not really a TK operator, he's just selling a property that's already performing and he doesn't want anymore. In that case he might just over-price it hoping to snag someone, but really just wants it sold.

I think an important point is that everybody has a different idea of the types of deals they like to be in, the different areas of the market they like to focus on, different circumstances, etc.

For this reason, it's entirely possible to purchase a house from a TK and have it be a good deal BOTH WAYS. In fact, that's pretty much how markets work in general, and barring the occasional mistake, how we should expect them to work over the long term.

As one example, the TK who is very good at the initial acquisition and rehab might be happier to simply liquidate right away, with a $10k profit, still leaving a healthy cap rate for the buyer, putting that money and mental energy immediately to work on the next deal. This gives him more velocity in an area of the market that he is good at and interested in. This might mean he makes more money in RE in a given year - but it's a "job." Meanwhile the buy/hold guy still gets a good return without needing to worry about the things he's NOT as good at - and it never becomes his job.

@Jonathan Brown, what you should do is make a short list of all the major systems that fail over time: AC, Water Heater, Roof, etc. along with costs to replace each one. You can estimate these, or even get quotes if you're not sure. Then divide by their expected life in months, which again you can estimate or look up. This gives you the amount you need to save each month for each of these major systems.

But of course, that only works if the systems are new when you get them. if the roof caves in tomorrow, you need to be ready for that. So you also want to have and idea of the rough life remaining in each of those, which again you can estimate or ask an inspector or contractor. Then you just have to make sure you set aside enough extra to pay for them when they actually fail.

Lots of guesswork in their of course, but this is how you should be thinking about it. And those monthly numbers are important when considering your real RoR.

Example of roof only:

- It costs 18k to replace.

- it will last 360 months.

- It has a life remaining of 180 months

So it's going to cost me 18k/360 = $50/mo to save up for replacing the roof. But it's already halfway used up (180/360), which means I either need to start with 9k for it and save $50/mo, or I need to save up at twice the rate (100/mo) over the next 15 years.

There will always be folks further upstream than you and finding better deals, but that doesn't mean the smaller nuggets that make it down to you aren't worth anything. And as you gain experience you'll move farther upstream yourself. I think the mistake some make is waiting for the perfect, best-possible deal before pulling the trigger. It never comes, or they end up with fools gold.

Set yourself some reasonable expectations. Start with something small. Ask yourself how you'll feel when it goes bad and you lose some money. Try to make simplifying, risk-reducing decisions, even if it costs you some expected yield - for example, paying more for a good professional manager.

Or just put your money into a total-world index stock fund and call it a day. Honestly, you won't be losing out on much, and it's a lot less headache. see bogleheads dot org.

Maybe you purchased it with the intention of renting it out. You rehabbed it and found a good quality tenant. Then you decided to sell it to a turn-key investor. Sounds plausible to me.

It may have something to do with the seller's loan though. There might not be enough equity to pay the full commissions and fees, in which case somebody needs to pay the difference. The seller, buyer or some combination of both the agents could pay then. The seller really should be first in line to pay this, but he probably doesn't have any money.

Anyway, the selling agent doesn't get paid either if it doesn't close. Suggest that he split whatever commission is available. You, as the buyer, shouldn't have to pay this.

@Rich Hupper, you wouldn't be asking the attorney to give you any information. You'd be providing him with the information that you're interested in buying houses, and he can feel free to pass your contact information along to any of his clients. Sounds like a good idea to me.