New to Real Estate investing

15 Replies

Hello everyone!! My name is Larry Chancellor and I am new to real estate investing. My wife and I have started our company with the goal of financial freedom and travel. I have been networking in the Pittsburgh area and spreading the news about my interest to everyone that I come in contact with. I have a co-worker who has recently began to dissolve his real estate business because his partner moved out of state. He has property that he is trying to dump and he is giving us the option to finance the property through his company. My question is, would this be a good way to start acquiring property? The property has tenants occupying them, however the terms he has offered would create a negative income stream for 3 years.

Hi @Larry Chancellor

Welcome! That's not a bad strategy (buying properties with owner financing), but I wouldn't buy cash flow negative properties. The deal probably isn't that good in this case then. 

Is his interest high, what's the deal with the terms that make it negative? Could still work out if the terms would mean that the building is free and clear after 3 years, but would need more detail to know. 

Anthony Angotti, Real Estate Agent in PA (#RS335936)
(412) 254-3013

Hi Larry! Welcome to BP and congrats on making the decision to take action and pursue financial freedom! I'd encourage you to explore the forums and blogs here on BP, they contain a wealth of useful information. 

I'd be hesitant to purchase any property that I knew would have negative cash flow. Even if on paper it seems like a manageable cash loss over the 3 years, in reality things never work out exactly like you plan on paper. There are always surprises (like emergency repairs) even when your property is cash flow positive, but they hurt way more when you're losing money every month.  It sounds like the terms your co-worker is offering are a good deal for him, but maybe not a good deal for you.  

Best of luck to you! See you around the site!

Hi @Anthony Angotti

The terms are $5000 down and 25,000 over three years with 7% interest. There is a tenant there now paying $700/month. The property would be free and clear after the three years and he would transfer title at the closing.

Hello @Luke Lanier

Thanks for your honesty and advice. That makes perfect sense. I just did not want to pass on an opportunity without giving it some consideration. 

I spend every possible hour reading the blogs and forums here on Bigger pockets and I recently read a thread of an investor in a similar situation, although the terms may have been different, that was encouraged to proceed with the deal. Should I counter with different terms that would not incurr negative cash flow?

@Anthony Angotti

That's what I was thinking...but I am new to this and I wanted to make sure that it makes sense. Thank you!

@Anthony Angotti

Since you are familiar with the Western Pennsylvania market, I am also looking to purchase a home in move in condition and possibly milk the equity later on down the line. My search comes across some very attractive newly remodled homes. Should I purchase what I personnally like or try to find a property that needs some TLC and has more potential build a larger equity amount?

Originally posted by @Anthony Angotti :

@Larry Chancellor That's entirely a personal choice. The benefit to fixing something up to what you want is that you could use that equity in the form of a HELOC to invest.

That's what would draw me in. 

 This is exactly what I did with my first home which later turned into a rental. Having that line of equity not only allowed me to rehab it, but gave me peace of mind for any surprises that popped up while it was rented. Down the road that equity may give you the money you need to snag up a great deal. I'm a big fan of the fixer upper with a heloc because it let's you control the money and do the rehab at your own pace especially if you're doing it yourself. Plus if you get hit with an costly surprises your not having to come up with cash, or putting it on a high interest credit card. 

I would ask for 5+ years on the terms.  Figure out the difference in the interest you would pay over the longer term compared to the shorter term he offered.  I would point out the extra $$$ he would make with the longer term and see if you can entice him with that.  If he is stuck on the 3 years see if you can get the interest rate dropped some.  I can get 7% on a 15 year term from a local bank.  The shorter term should reduce his risk and thus correspond to a reduced interest rate.  But the term will have the best impact on your monthly cashflow.  Remember to include vacancy and all the costs.  It feels to me like you might be missing something, but every property is different.  Possibly some deferred maintenance things need done?

If the first deal is a good deal the other ones will start to come pretty quickly.  If it is a bad deal it could take you years to recover and get back into things.  Remember, when you are starting out you will only have a few units in your portfolio and since then you are subject to large differences in cashflow when a unit goes vacant.  I currently have 11 units.  When one goes vacant you dont miss the income as much.  I would also suggest keeping large cash reserves if possible.

Originally posted by @Larry Chancellor :

Hello @Luke Lanier

Thanks for your honesty and advice. That makes perfect sense. I just did not want to pass on an opportunity without giving it some consideration. 

I spend every possible hour reading the blogs and forums here on Bigger pockets and I recently read a thread of an investor in a similar situation, although the terms may have been different, that was encouraged to proceed with the deal. Should I counter with different terms that would not incurr negative cash flow?

I would definitely try to negotiate terms that would keep me cash flow positive.  But also consider this: are you buying the property at a discount relative to its current value?  If he's selling it to you at 50% of as-is value, then even I might consider taking that deal in spite of the negative cash flow.  In 3 years time you could refinance and get your initial investment back out of the property.  But if you're buying at 100% of as-is value, then that's not a deal to me.

One of the benefits of buying on owner-financing terms is the ability to space your purchase out over time.  A 3 year term seems awfully short; it's so short that it's almost like you're paying cash.  Now there's nothing wrong with paying cash, but I like to make sure I'm getting a really good discount when I pay cash so that I have the ability to refinance and pull the cash back out.

@Luke Lanier

It is at %65 of as-is value. I am definitely going to counter to try to make it a positive cash flow. However, if it were still negative (and I calculated $71/month negative flow) would this still be a decent deal?

Now that sounds more like a deal. And if you can renegotiate that negative cash flow, even if only by turning it into a break-even position, I'd say you got a home run.  $5000 down and a free and clear property in 3 years (and with a tenant already in place) is hard to beat.

Do you think he would sell it to you out-right, or is the 7% financing a contingency in the deal? 

If you're buying it at 65% with $5,000 down, and he's charging you 7% for 3 years, why not go through a local lender to get a longer term with a similar rate which could make the property cash flow positive. Those figures are all within the parameters that most lenders would accept. Don't get me wrong, being free and clear in 36 months is great and may be the smarter thing to do. 

To pay off or not to pay off seems to be an on going debate. If you are of the Dave Ramsey train of thought, then the deal doesn't sound too bad. The flip side is that it will tie up $7,500 ($5k down + $2.5k in neg cashflow) for 36 months before you see any return or cash flow. 

Plus, if you think you'll ever dip into the equity on this property to buy another, then this whole thing is an exercise. Try to stretch out your term with him, or finance through another lender with minimal down for 10 years and keep your money in the bank. Just my .02

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