Dallas-Fort Worth Real Estate Investor Club

Most people here are looking for investment properties to be purchased at a discounted rate. Unless this is a phenomenal property with great cash flow, or perhaps you're willing to carry a zero percent interest note, or some other creative solution, you may want to find a realtor to sell it retail. Checkout the Links page. I believe a couple realtors are listed there that could help.

Thanks for the input.  The property generates $1685 per month in rental income,  but I do cover electric, gas, and water, which runs am average of 300 per month.   So I'm not to far off of the 1400 you quoted. 

I understand the month to month concerns, but my tenants have been there for over two years. 

I am relatively new at this game;  what discount rate is a typical investor looking for on an occupied property? 

In my opinion, the fact that it's currently occupied adds little to no value.  In fact, it could possibly be a negative.  We've almost never had much trouble finding tenants, and, although we've inherited a few good tenants, we usually prefer to find our own tenants rather than inherit them.

As a comparison, we bought another single-family rental in February.  The purchase price was $140K, but our analysis indicated its After Repair Value (ARV) was $193K.  It needed about $6K in fixup.  It rents for $1695.00 now.  We paid $20K down to the seller who financed the rest for us at 5% based on a 30-yr amortization with a balloon payment due after 7.5 years.  We'll check with him in a few years to see if he'd like to extend the note.  If not, we'll start paying down the principal quickly.  The tenant pays for all of their own utilities.

I am a realtor/investor and would like to discuss listing your property.  Please contact me.

Thanks 

Michael Garner, REALTOR®
Fathom Realty
972.841.5486 Cell/Text
817.622.6119 Fax

mgarner@fathomrealty.com

TJ,

Here is my two cents regarding your questions:

What does a typical investor expect to pay relative to the retail market? - Investors and retail buyers measure value in different ways.  If you want to know what an investor will pay, calculate what the property is worth based on financial metrics.  There are many ways to approach this.  If you want to know what a retail buyer would pay, check the comps, then figure out how much you must spend to: get the house into retail-ready condition, market and maintain the property, pay for the carrying costs.

So if I believe the property will sell for 140 retail, what is a fair investor price? - I think it is better to ask "what price can I expect an investor to pay?"  Remember that investors exist along a spectrum, and that spectrum is multi-dimensional, i.e. there is not one price that many independent prospective buyers would converge around; everyone has their own yardstick and some people will waste your time pretending to have a yardstick in the first place.  Ask some investors you meet how they calculate what they are willing to pay.  Some people will give reasonable answers, some unreasonable, but some won't make sense or won't know...remember this when you are actually negotiating!

Let's say your property grosses $1,400/mo and your month-to-month tenant always pays on time.  What is your property APPROXIMATELY worth to an investor as a rental?  First, let's assume you're dealing with a viable counterparty, i.e. someone who is serious about buying, has the financial means to do so, and is serious about completing this transaction in good faith with you (a HUGE assumption).  Let's also assume the investor measures his return relative to how much cash he has in the deal, i.e. rate of return = annual net income / total cash invested (this is called "cash-on-cash return," although some investors use other measures, and very often they use multiple measures).

Let's say the investor figures in 3 weeks of vacancy per year (5.8% vacancy, or 94.2% occupancy), and the investor notices $5,000 in deferred maintenance on the property.  The investor is required by his lender to put 20% down to get a mortgage with a 30-year amortization at 5.5% interest, and let's say the investor has to bring $5,000 to the table just for closing costs.  Let's also say the taxes are $3,800/yr and the insurance is $1,200/yr.  The investor also factors in $175/mo for average operating expenses, which includes commissions.

Your annual gross income will be (1,400/mo * 12 months * 0.942 occupancy factor = $15,826).  Your annual expenses  will be ((mortgage payment (PITI) + 175/mo maintenance) * 12 months = SOME NUMBER...you don't know the mortgage payment yet).  The annual net income will be the gross income minus the expenses.

The investor's total cash invested will be (the 20% down payment + 5,000 deferred maintenance + 5,000 closing costs = ANOTHER NUMBER...we don't know the price yet, so we don't know the down payment).

Let's also assume the investor wants to make a 10% cash-on-cash return.  Now we can determine the price. 

If the price is $103,000, then the PITI would be $889/mo, and the down payment would be $20,600.  The annual net income will be (15,826 - (889 + 175) * 12 = 3,148).  The total cash invested would be (20,600 down + 5,000 closing costs + 5,000 deferred maintenance = 30,600).  So the cash-on-cash return = 3,148 / 30,600 = 10.2%.

Keep in mind this is a simplified analysis for a new investor.  Seasoned investors can easily critique this example and point to many other considerations.  One of the most important considerations is "how is the investor financing the property?" since leveraging an investment will give you the highest cash-on-cash return (if a prospective buyer gives you excuses about their unattractive financing, they are not a viable counterparty!).  Be sure to consider how/how much income can be increased and expenses be reduced.  It is also important to remember that a well-marketed deal will always find an abundance of interested investors, so reject non-viable counterparties.  But that doesn't mean you can be greedy.  You could shoot yourself in the foot if you hold out for a high price.

Feel free to contact me with questions, comments, or any REI-related matter!

979-450-1994
comanche3000@live.com