Hello BiggerPocket Community,
I currently have one rental (the home that I used to live in) and am refinancing so I will soon have ~60k to spend on purchasing rental properties.
I'm looking at two properties and would appreciate the communities feedback in the purchases as well as in the structure of the deals.
Property 1. 28k house, can pay cash, currently rented for $450 per month by the same person for the last 13 years (according to the listing agent). After taxes, upkeep and insurance, I'd cash-flow ~300 per month for a CAP rate of ~13%. Could inquire about owner-financing, however its an estate sale and the heirs likely want cash.
Property 2. ~40k house and get owner financing for the remainder. Currently rented for $650. Would ask for 20k down, 20k owner-financed at 8% for 5 years. After taxes, insurance, upkeep and vacancy, I'd be able to have a positive cash-flow of ~70 per month for a CAP rate of 14.5 and an ROI of 25%.
These houses have been updated consistent with the standards of the neighborhood, but one of them will likely need a roof in a few years. Obviously neither are currently in the best areas, but the city is growing and there is a possibility for some appreciation. The numbers seem to work even if I sell the units at the purchase price years down-the-road.
The remaining funds will be kept in reserve for about a year in case a surprise develops with the houses/renters.
-are the structures of the deals reasonable (interest rate, timeline, percent down)?
-is anything hidden in the numbers that I quoted that raises red-flags that I may have missed something glaring?
-my current rental property is worth ~200k, these will be my first rentals on the lower-income side of town. Any advice/recommendations about differences to expect and the best way to handle them?
I would go property 2, but work on the terms. Your cash flow is tight, get the interest rate down and a longer amortization. Half down shows them you are serious, but they aren't going to make even 5 percent on that money elsewhere. They have a first position lien against a property they know well and $20,000 in cash. They also spread the profit out over five years on their taxes.
More importantly for the cash flow, get a 15 or year amortization with a 5 year payoff. This improves your cash flow to cover repairs or pay down the loan.
Ryan Arth, Acacia Capital Investment Ltd. | [email protected] | (216) 832‑1935
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