Owner financed 17 Unit Apartment Complex with 0% interest
The Power of Zero is a magical thing. If you can buy a deal with zero of your own money, and have 0% interest financing, you've hit a grand slam. Deals like that do not come around very often, but they do come around! You just have to ask for it. Here is how I bought a 17 unit apartment complex by obtaining owner financing that came with 0% interest:
How I found it - Wholesaler brought it to me. Networking and relationships are HUGE in this business. I cannot stress that enough. A wholesaler brought me the deal with straight cash attached to it. At first glance, the deal was overpriced for what it was, which is where the inexperienced investor would've have stopped, but I said to myself: "How can I make this deal work."
The Cash Flow Numbers -
- Purchase price - 775,000 - the guy was dead set on this price. I remember meeting him and the wholesaler out at the property, and it was every 10 minutes "I just want my price. 775,000 and not a penny less." In my mind the deal was only worth 650,000 if I bought it outright with cash or traditional financing. I will explain later why I chose to overpay
- Gross income - 13,100 a month
- utilites (water and electric) - 1,800 a month (I know you guys want me to submeter but the thing is 100% occupied with long term tenants, I will explain later on, just keep reading :)
- insurance - 500 a month
- taxes - 458 a month
- management - 1,310 a month
- cap ex - 1,310 a month (my estimate, which is continuing to hold true)
- vacancy - right now this is 0 - haven't had a unit go vacant yet
- 4,500 monthly payment to the seller (I will explain this next)
- 850 payment to LOC I used for down payment
- Monthly Cash Flow - 2,372
- Look's good right? It gets even better
Deal Structure
- 775,000 purchase price (remember I said the deal was worth 650)
- 150,000 down (I used a LOC to pay this)
- 4,500 a month for 48 months with a balloon at the end
- 0% interest on the 4,500 a month
Why I Overpaid
- First things first - purchase price when getting your terms is irrelevant and here is why
- If I would've gotten this deal at 650,000 like I wanted and financed it using commercial financing (5% interest, 20 year am, 5 year arm), I would have financed a total of 520,000. The total payment over that time is 823,618.38 to the bank (not including my down payment of 130,000). Add the down payment and my total cost in the deal is 953,618.38. By getting this thing at 775,000 with ZERO interest, my total payment is what...... that's right, 775,000. I am saving myself in the long run almost 200,000 to overpay!
- Where it gets better - Every time I write a check for the 4,500 a month, I am writing myself a check in equity. I am building 54,000 a year in equity, 216,000 in equity over the course of the note. I will owe the seller 409,000 when the ballon comes due. At that time, I will refinance with a bank.
- The refinance - Let's speculate a little and be conservative with it. Let's use an 8 cap on the refinance (Nashville is trading at 6-7 caps right now). My NOI now is 7,722 a month / 92,664 a year. On an 8 cap, that brings the total valuation of the property to 1,158,300
- I will be getting the 150,000 back for the LOC
- That leaves me with a cash out is 599,300
- Here's the best part. IT'S NOT TAXABLE. The tax rate for debt is ZERO. The IRS can bang on someone else's door that year :)
So how did I get the seller to finance with zero percent interest? Why would anyone in their right mind do that? That answer is actually very simple:
- There is really only one type of seller that is going to do this: The seller that only cares about the price. If the seller needs that money to go buy another house or do something else with it besides stuff it in a bank, they won't do this. If you overpay, you can get your terms. The guy knew it was overpriced, I knew it was overpriced, everyone knew it was overpriced, but I got my terms. Give seller's their price, but get your terms, and everyone wins
Here is the thing I want every investor to start thinking about. I hear people all the time complain about how there are no deals out there, seller's want too much money, everything is overpriced, market is too hot right now. TAKE ADVANTAGE OF THEIR GREED AND USE IT TO YOUR ADVANTAGE. If they want too much money, give it to them on your terms. There is more to a deal than the purchase price. And you newbies with no money, this strategy is the one I would use if I were you to get started