Posted by Penny on May 22, 2007 at 23:02:18:
I don’t see a good exit strategy here. Maybe someone else who has done these can provide some additional insight, but here’s my run through of the numbers:
If you paid cash, it would take about 13 years to almost double your money via cashflow alone. If you finance, it will take longer because interest rates are higher than the returns and you would need to put down a lot just to break even with the debt service.
So the upside here is in the land appreciation.
Is the option to purchase in 2021 really $586k or is that a typo (maybe $856k?)?
If the option price is correct, then the following logic applies. The upside of the land appreciating + equity gains (if financed) is less likely to be realized since there is an option to purchase at a lower price 13 years from now than the $612,175 price today. Assume that the land will continue to appreciate. Even at a modest 3% annual inflation, the land would be worth about $875,000 in the year 2021. So there is considerable risk that the $586,000 option would, indeed, be exercised.
So your returns would be limited to the annual cash flow received over the 13 years minus the $26,175 loss against what you put down. And that’s before taxes.
If the option price is $856k (or whatever the correct number is), then things look a little different. Your main return comes with the land appreciation realized when the property is sold. So the property value trends in the local location are very important. They could be modest or substantial. Since no one knows, it is speculation. But there is an option cap on the price in 2021 and if appreciation is substantial, the same logic applies - the option is more likely to be exercised, thus limiting your eventual returns.
So it comes down to the acceptable return you seek for the funds you would invest in this property. If it doesn’t meet your goals, then move on to the next.
So there’s my $.02. If someone sees something I miscalculated or missed, please feel free to chime in.
Hope this helps.