I may be looking at my first Creative Financing deal. I have an offer accepted in the Boston area for a Mixed Use 4 unit building. I have a couple of commercial lenders willing to work with me. Alternatively, I also have a retired friend who’s looking for a stable return of 5% on his retirement funds. Below are the two options as I see them along with the numbers.
Background: I’m a buy & hold investor. I’d like to hold for the long term to generate income in retirement (20 years away) but also happy to use the income now to help put my kids through college. I have 2 other properties with fixed 30 year debt on them and both producing good cash flow.
My Question: In a nutshell option 2 allows me to put less down, increase cash flow, and reduce interest rate risk. The downside is that I’m not building equity via a loan amortization. Any other aspect I should consider?
Option One – Commercial Loan:
- Purchase price $395,000
- $98,750 (25%) down, 25yr amortization at 4.5% with rate adjustments every 5 years.
- No limit on how high the rate can jump.
- Yearly cash flow before taxes = $11,500 … after taxes = $9,350
- Cash on cash return on before tax cash flow: 11.5%
Option Two – Friend's Retirement Funds:
- Purchase price $395,000
- $79,000 (20%) down, and an interest-only loan set at 5%.
- I would probably build in 5 year renewals where the rate can go up by no more than 1% or 2% base on what the mortgage market is doing.
- Yearly cash flow before taxes = $15,500 … after taxes = $14,100
- Cash on cash return on before tax cash flow: 19.5
- Rents are below market on this property and I’ll be doing light paint & carpet work. I think the value will increase by at least $50,000 in year 2. This should give me plenty of equity for refinancing the property down the line.
- I believe I could get 15 years out of this retirement money and this could open the door to more retirement funds on future deals.
@Steeve Breton I would think that option 2 makes the most sense as it provides the highest cash on cash return. If you are asking this question to the forum, it makes me wonder if you have concerns regarding lending from someone you know as opposed to borrowing from a financial institution. Are you comfortable with borrowing from someone you know, as long as it makes the most financial sense? Just wondering if you had any other concerns other than the numbers.
Oops. Premature post.
Brian, I'm comfortable with lending from someone I know in this situation as it isn't a favor to me but rather an offer I am making that benefits us both.
I just want to make sure there aren't other aspects of doing the deal this way that I may not have considered. I don't want to gush over the cash flow or CoC returns and miss potential pitfalls.
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