?Creative Financing Question

12 Replies

I’m looking at a property that seems like it will be an alright investment for me to buy and hold. The owner is looking for $170k and I can get $1900.00 a month in rent for it. The owner also has a second property that they are looking to sell and from what I can tell it’s very similar to the first. I’m told that the owner is VERY motivated. So here is what I’m thinking, and please let me know if it sounds like a bad idea, or add any comments that you would like:

I can finance one property using traditional financing, and I’ll even give him his asking price, if he is willing to owner finance the second property with terms that are favorable to me. This gives him the cash up front from the first property, gets him out of the properties, and allows me to pick up two properties when I otherwise would normally only be able to pick up one.

Will this work? How would you structure something like this? Do you need more details?

Thanks in advance!

Hi Jeff Sure it will work... Question: is there existing financing on the 2nd home

Also depends on whether it is turnkey or whether you have to put in a ton of cash to rehab or take care of a lot of deferred maintenance.  The price to rent is workable but tight unless you expect amazing appreciation

@Jeffrey Bradbury  how does the asking price compare to Fair Market Value?  Are you suggesting to pay full retail for the property?  The numbers you posted will negative cash flow on the first property and I have no idea why you would consider the second to try to recover from the first?

Think more from a business perspective.  Buy low - sell high.  I know you want to buy/hold this property, but what is your plan B? If a life event happened tomorrow and you suddenly needed to change course and sell, then what?  You have no margin to recover your transaction costs (closing costs).

With the given information, I would have to call this a bad deal.

@Bill Jones  I'm not sure, I still have some digging to do.  I went out and looked at the property and that's when the selling agent told me that he had another property that he was trying to get rid of as well.  I'm going to assume he does though because that would add a layer of complexity to the situation.

@Andrew S.  I'm expecting very little appreciation because the area isn't great, the hope is that I will be able to bump the rents a little over the next few years, but I didn't think they looked horrible. I could be wrong though? I'm relatively new to this.  

The hope was to make up for it one the financing for the second property.  My thinking is that between the two I could make a decent profit.  I was going to walk away from the one because I wasn't excited about it, but then when I was told about the second property it got me thinking.  I'm only in a position to finance one using conventional financing, and the thought was that this would get me two ok properties.

OK Jeff get more info and I'll explain how to buy it creatively with little or nothing down your agent is going to want to get paid so maybe we can talk the seller into paying

Bill

Can you ascertain the " motivation" of the seller ? Is there a balloon payment due ? A divorce or medical issue ? It might help to understand the WHY behind the desire to sell. 

Anne Wallace

@Robert Leonard  Thanks for the comments.  My thoughts were to pay market on the first and make it up on the second, so that he gets more of his money up front and assuming that I can get a lower price on the second and good financing, I make it up for things on that side.  

I guess I'm wanting it to work, and maybe that's clouding my judgement.  

That said, it looked like the numbers were going to be tight, but still be positive.  My (rough) assumption was one month empty, 10% for repairs, 10% for misc -- and it still left me putting a few dollars in my pocket each month.  Any info on where I'm messing up on this would be greatly appreciated!  (I'm not doubting you, just trying to refine my "process")

Thanks again!

@Robert Leonard  

How do you know off the bat that it will negative cashflow with the given info? All you have is a purchase price and rent amount, so how do you determine (by just that) that it will negative cashflow? I wish I could analyze numbers that quickly! Please enlighten me (:

@Jeffrey Bradbury  it's okay to ask for further explanation.  Here's my quick desktop analysis (it is a guestimate):

170k Purchase Price * 20% (Down Payment) = 34k + ~4k (3% for estimated closing costs & prepaids)=~$38k total acquisition cost.

That leaves 136k (principal balance) @ 5.5% for 30 years with a payment of 772 Principal & Interest, plus ~300 (?) Tax/Insurance (probably more). Using these numbers, your payments would be ~1072/month.

1900 Rent - 50% (estimated operating expenses) leaves you with 950 of income to make your monthly payment of 1072 with. And that leaves you $-122/month.

As you figure out the real numbers, you can plug them in to the equation above to come up with a better estimate.

The 50% I used to estimate expenses is what is known as "the 50% rule."  People will tell you all the time, you can do a lot better than that.  It's not written in stone, and you can beat it with some exceptional property management you do for yourself.  BUT, over the long term, you will find that it is pretty accurate and serves as a good way to conservatively estimate operating expenses of residential properties.

That wasn't as quick as I meant it to be. :-)

Thanks for going over the details @Robert Leonard  .  And the other "quick and dirty" way to assess the deal is the 2% rule which says the monthly rent proceeds should ideally be 2% of the purchase price.  Now that number depends a lot on location/region, and there are many, many places where 2% is not realistically achievable anymore.  However, I think pretty much everyone here on this board agrees that somewhere between 1% and 2% can work fine but below 1% is not a workable deal in all but the most exceptional cases.

This deal is a little bit above 1%, but not much - and that's why I asked about exceptional appreciation potential.

Originally posted by @Robert Leonard:

@Jeffrey Bradbury  it's okay to ask for further explanation.  Here's my quick desktop analysis (it is a guestimate):

That was my question, but it's ok (: I'm glad you cleared that up for both me and Jeffrey. Now we can both use that equation to use as a quick analysis. I'm sure in the future we'll both be referring back to this forum!

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