Making an offer on a SFR

['Chair]

[ QUOTE ]
[ QUOTE ]
SFR listed at $589,000

It is also listed at as a rental at $1900 a month.

Spex made a post about making offers at 50% of market value.

Desert Cat made a post about rental analysis and I don't know wtf he is talking about. It is all in this thread;


[/ QUOTE ]

Your gross rents would be $22,800 per year, or 3.9% of the purchase price per year. If you owned it, your net rental income after expenses (taxes, insurance, maintenance and vacancy costs), but before financing costs, is likely to be around $10,000 to $20,000 per year, for purposes of this example let's assume you net $15,000. Divided by purchase price gives you a 2.5% cap rate.

The cap rate allows you to see how much of your financing costs are covered by rent. In this case assume you can get a 100% loan at 6% (you must have great credit). You will be losing 3.5% a year (6%-2.5%) on this rental, so you need appreciation to average over 3.5% per year plus another 6% for transaction costs when you sell it in order to make a profit.

If you buy a property with a cap rate of 7.5%, you can actually make a profit of 1.5% per year on 6% mortgage, and any appreciation would be gravy. Any cap rate below 6% in my mind is foolish, unless you have a solid reason that rents will increase. I say that because once you take on negative cash flow you risk being forced to sell at the worst possible times if you ever end up needed money. And note that cap rates are based on todays rental rates, if rents decline because more properties come on the market, your rate will decline as well.

As you have described this property, it's expensive. If you want to live there, renting is much cheaper than buying. For example, even without having tax deductions, renting is probably $500-$1000 cheaper per month. If the property didn't start appreciating for five years, the renter would be ahead of the owner by at least $40,000 and maybe $80,000 by that time.

And the renter would always have the flexibility to buy a good property at the right time and price. The owner is stuck trying to make this deal work.

[/ QUOTE ]


very well put. this made a lot more sense than the wiki article on cap rate. ty