| Test Yourself - Is This A Good Deal? |
Let’s take a look at a typical deal that came into one of my students. This is not as great as a wholesale or rehab but it could be a good rental. The after repaired value of the property is $105,000. The seller owes $69,000 and they are paying $650 a month for principal, interest, taxes, and insurance, piti. The seller is asking $89,000. In other words, they want to be able to walk away with $20,000. This particular house needs $15,000 of rehab.
Let’s analyze this to see whether or not this is a good deal. The student who sent me this deal actually had cash available and had enough cash in there that they wanted to put the cash to work. The rehab didn’t scare them. Now the seller is asking $89,000. Remember they wanted to walk away with $20,000 over what they owed. I don’t really care what the seller is asking for it. It doesn’t matter. When you buy your own personal house you do care what the seller is asking and you try to negotiate them off of their asking price. In this case when you are dealing as an investor it doesn’t really matter what the seller is asking. All that matters is what you can do with the property. What can you do to make a profit out of it? You have to buy it at a price that makes sense. If you can’t buy it at that price then it is not a deal and you walk away. At what price can you make a profit? What is important in this deal is that they owe $69,000.
Now as a resale there is just no money. Assume you could get the house for $69,000, and your buy, sell and hold costs are $16,000 (15% of the after repaired value). And then we have to add in the rehab of $15,000. If you subtract all that from the value of $105,000 that only leaves $5,000 left. You certainly couldn’t wholesale this property because there would not be enough in there for you and your investor buyer. The only thing you could do is try to renovate this property and try to resell it. And you know it just isn’t worth making a $15,000 investment to make a $5,000 profit. It just wouldn’t make sense. In fact, if you do a deal I always say that you need to make at least $10,000 in it. Let’s look at it again from a rental standpoint. Suppose you could buy this house ‘subject to’ the existing mortgage. This particular seller is behind in their payments and wanting to get out. Perhaps you don’t have to do as much rehab because the $15,000 was based on the fact that you were trying to resell it. With a rental a lot of times you don’t have to do the same level of renovations. Considering rent in the area is $950 a month and remember the current piti on the mortgage is $650 a month. Which means that gives you a $300 a month positive cash flow. Let’s leave 8% in there for vacancy and 6% in there for repair, and you still have $167 net positive cash flow a month. You’ve also built in there $36,000 in equity. You see it didn’t work as a wholesale. It didn’t work as a renovation. It did work as a rental property assuming you had the $15,000 needed to do the rehab. Or maybe even doing a little bit less rehab but still had the cash.
Lou Castillo is a national real estate investing expert and mentor to thousands of successful investors.
Lou specializes in creating powerful systems that allow investors to work less and earn more using the power of the internet in the real estate investing business.
To get more information or get Investing tips straight from Lou, visit: http://www.FreeRealEstateStrategies.com
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