Posted by vic - FL on August 02, 2003 at 23:48:59:
Thank you for your input. I kept reading and hearing what good investments “pretty houses” aka “almost new houses” could be - to buy sub2 and then lease option to a tenant buyer. But it worried me, at least in this area of south Florida. I like and agree with your comment “It’s all about the cash flow.”
“PRETTY HOUSES” SUB2 = NO CASH FLOW - Posted by vic - FL
Posted by vic - FL on August 01, 2003 at 23:50:16:
This is really a puzzle to me - I would appreciate hearing from anyone with ideas on this.
I’ve read a lot about buying these newer houses, and concentrating on this area of real estate appeals to me, but I can’t think how to make money doing this. Here in South Florida, if I look really hard, I may be able to find some houses in the $150,000 range - most are considerably more expensive. Taxes on these houses can easily be $3500-$4000 yearly.
Typically, investors then lease option these houses to tenant buyers. I don’t believe I could get rent to cover PITI on newer houses, even with somewhat higher rents that tenant buyers frequently pay. And cash flow seems really an impossible dream.
If anyone has ideas on how to make these transactions work, that would be greatly appreciated.
Re: “PRETTY HOUSES” SUB2 = NO CASH FLOW - Posted by BR
Posted by BR on August 02, 2003 at 08:35:22:
The niche you describe does not lend itself to higher priced houses for reasons stated. The ceiling in my area is about 150K but it works good from 90-120K. Regardless what the guru’s say this niche won’t work everywhere. It’s all about the cash flow. If it won’t cash flow from day one don’t do it.
Another way to profit is equity - Posted by William Bronchick
Posted by William Bronchick on August 03, 2003 at 13:50:20:
I’ve done a few lease/options on higher end homes and made a nice profit on the back-end equity.
So, for example, if you can lease/option a $300,000 home at a purchase price of $250,000, then sublet with option to tenant/buyer for $300,000, you could potentially make $50k on the back end. However, as Vic points out below, there’s no cash flow, even potentially negative cash flow in the interim (a $2100 PITI payment might only yield in a $1800/month rent).
And, there’s the risk that the market value of houses could drop in the next year, as well as the possibility you could have a vacant house for 3 months.
However, as a mentioned in another post, having a cash reserve on such a deal could work. For example, if you have to pay $300 per month for 18 months negative, that’s $5400. Add a few months vacancy, and you’re up to $6000. But, consider the $50k back end, and you’ll see that it’s a worthwhile investment. If the market values drop 10%, you could still drop your price with the tenant buyer to $270,000 and come out ok.
Use your common sense and basic, sound business principles.