Would You Invest In This Deal?

What a week-full of coaching, working on web site etc…Sorry for lack of postings! Last night I went to dinner with a buddy of mine and he bounced this idea off of me. He is purchasing a model home in a new development from the builder. The area is an upscale area here in Denver and geared toward empty nesters. Here are the specifics. Purchase price of home is $490,000 with an interest only loan. His monthly payment is $1,800. The builder is renting it back from him for $4,200 a month with a 2 year guarantee and an additional 1 year option. At the end of the 2/3 years the builder goes in and repaints everything and makes any necessary repairs. My buddy then has to sell it or live in it. I like the $2,400 a month cash flow plus the write off but have not personally done a deal like this-have you? What do you think-would you do this deal? Steve

4 Responses to “Would You Invest In This Deal?”

  1. Jheera says:

    I am not a pro investor but just based on my instincts I dont think its a bad deal.

    Here are few things that I would like to clarify though:

    1) What is the home appreciation value in that neighborhood?

    2) Let us assume they go for the 3 yeaar time period, that means a little over $86k will be ‘earned’ by him through rent …. but how much is he going to loose on equity (if any)?

  2. thc says:

    Why would the builder do this? I don’t see what his motive is.

  3. Steve Mertz says:

    To answer the questions: the area is in a fairly good one for appreciation-the homes are selling well,always a good sign! To answer THC’s question-the builder gets immediate cash flow from the sale of the property. He needs a model home for people to view so the money he guarantees to my bud assures that people can view the model home. Come to find out there are a lot of people that only buy model homes under these conditions. Pretty Cool-I learned something!

  4. youngmiser says:

    I would make sure the developer has the money to build the development. This is because they could have you purchase the model home, but then stall because of higher interest rates or other reasons and run out of money to build the next house. You are at the mercy of someone else being able to pay the bills.

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