Too Good
Posted on November 17, 2006 - Filed Under Business |
Prologue: Every morning, I read 12 different REI blogs. Thanks to them for saving my bacon.
This ad for a four-plex jumped up and bit me
Lease-Purchase Option Terms
$9500 down for Lease-Purchase Option for Investors
$275,000 Purchase Option price (less your $9500) makes this $265,500
3 years 5 months left on option
$2100 a month (of which $390 monthly applied toward purchase price)
Total rent received $2350 a month.
A Lease-Option. This means I could take over the property, without having going through a mortgage company. No applications to fill out, no credit checks, nada. At the end of the lease, I could sell the property or purchase it for $249,000.
The only "out-of-pocket" expenses was $9500. This was to get into the lease.
I thought to myself "I could get my hands on $9500 right now if I wanted too!"
Simple math time. Take the gross monthly rent and subtract the expenses: $2350 - $2100 = $250 positive cashflow.
I thought to myself "Holy Cow! $9500 gets me $250 monthly positive cashflow? That’s an ROI of 30%! I’m calling today!"
The owner of the property was really nice. It was his first multi-unit property, back in the day. Now he manages his own apartment buildings. He doesn’t want to mess around with the 4-unit anymore.
The $9500 started coming together. But something wasn’t right.
My fingers flew over the cell phone keypad. "Does the $2100 include a property management company? What about maintenance or vacancy rates?"
No, no and no.
When taken into consideration, the property management fees, maintenance fees, and vacancy rates kills the positive cashflow. By my rough numbers, rents would have to be raised $550 just to break even.
The only way this deal makes sense is if I lived next to the property. I’d have to manage it myself; cut the grass myself; plunge the toilets myself. I’m sorry Texas but I must deny you of my presence at this time.
This experience made me step back. This deal could have really bit me in the bum (or "patootie" if you prefer). Reading all these REI blogs made me think of all the expenses involved with being a absentee-owner.
To prevent train-wrecking in the future, I entered the mad-scientist lab.
To be continued . . .
If you liked that post, then try these...
Free Laundry or Free Satellite on February 6th, 2008
For my tenants, I like to throw in laundry as part of their rent.
Stretch on January 25th, 2007
A knock at my door was followed by an interesting question:
"Clifford, my dad is going to help me buy something.
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2 Responses to “Too Good”
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Remember, you are really renting the 4-plex from the owner. Just like a regular renter, you pay rent and utilities. The only thing the $2100 should include is property taxes. With maintenance stuff it all depends on the contract.
Were the rents at market? What if you offered to pay him $1700 a month with no rent credit?
Ken, I asked the owner if he would consider $1800/month and he said that he couldn’t. He bought this property too high and was leasing it at a negative cashflow to himself in order to get someone else to foot the bill.
$390 of the $2100 goes towards principle. After three years, the purchase price falls to $249k.