Would you take this low/no cashflow deal?

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Would you take this low/no cashflow deal?

Johnnie Bembry
Las Vegas, NV · Member since 2019 · 38 posts · 6 votes

Hey guys, I'm a newbie looking for some advice. I'm looking to do a BRRR back in Kansas and I came across a deal where the owner is offering owner financing. I know for the most part people love owner financing but in this case, I'm not sure if it's worth it. The owner is looking for a total purchase price of $25K with $3K down at 10% interest over 6yrs so my monthly payment would be about $410. The property is a 2bd/1bth 720sq ft single-family residence and the details in the listing say the roof is newer, the vinyl siding, and the foundation is "solid" which I'll verify all this if I decide to look deeper into this deal. Just from the pictures, this house needs about $10K worth of updates (paint, appliances, and curb appeal)...ARV is $38K-$40K based on recently sold comps.

My biggest concern is cash flow. After running my numbers, I'll be hovering just over the break-even point but will own the house in 6 yrs which then I should be able to pull about $30K after refinancing. This is the only reason I'm considering this offer. (My cash flow numbers are taking into account the vacancy, management fee, maintenance cost, and CAPEX.) So should I look more into this deal?

Good or bad let me know what you guys think. Thanks in advance!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Originally posted by @Ned Carey:

@Johnnie Bembry yes lots of people like owner financing but you should never do a bad deal just because it has owner financing. (Not saying this is a bad deal)

Whether to hold for 6 years and then own free and clear depends on your financial position overall. Can you support the property is something goes wrong? do you have cash reserves?  Doing these kinds of deals will make you very happy when you own the properties free and clear in 6 years.

One reason for owner financing is the ability to get in for a low down payment. That is not the case here because in addition to your $3k down you are putting up $10k in repairs.

Keep in mind with such a low price refinancing may be tough when it is paid off just because of the small size of the loan.

If you want to get geeky about it calculate your IRR for a reasonable holding period of say 10 years. Does the opportunity cost of earning nothing on $13k for 6 years pay off in the long run.

@Joe Villeneuve

Do you want to comment

Yes I would like to comment @Ned Carey, thank you.

"Ditto".

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  • Tchaka Owen
    Real Estate Agent · Merritt Island, FL · Member since 2017 · 974 posts · 1k+ votes
    6y

    @Johnnie Bembry - we each have our own criteria. Personally, I wouldn't take the deal for a number of reasons:

    1. $25k purchase + $10k repairs = $35k. ARV = $38-40k. So you're doing all that work to gain a few k's in equity? No chance. If I'm putting in $10k, my criteria requires at least 10k of equity gained. So if ARV isn't a minimum of $45k, no dice.

    2. A 2/1 SFH does not fit my purchase profile. (note: not everyone feels this way)

    3. I don't know where you are in KS, however I hear it's a good place for investing. That leads me to believe there are better options out there. 

    If he drops it to $20k purchase, consider it. Otherwise, I suggest you keep looking. Good luck!

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    6y

    What can it realistically rent for ?

    Doesn’t sound to be too bad except the interested rate sucks 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    The interest rate is great for the seller, not so much for the buyer.  What would it rent for and what do taxes and insurance run for? 

    0Reply
  • Johnnie Bembry
    OP
    Las Vegas, NV · Member since 2019 · 38 posts · 6 votes
    6y

    @Tchaka Owen Your criteria makes sense, my thinking was that after putting in my $10K and the renter paying down the bill that I'd refinance after 6yrs that I would pull out $30K and get my money out of the deal. Worst case, I can see what the owner says about $20K and lowering the interest rate and he says no. Thanks, man! 

    @Dennis M. According to Rentometer, rents in the area are between $600-$650. If I decide to get serious with this deal I'll reach out to property managers to see what they're saying about rents in the area. Do you have any other suggestions to find the going rents?

    @Theresa Harris The more I read about interest rates for seller financing I agree with your statement. What's your opinion on what the interest rate should be? I'm reading the average is between 5%-8%. Regarding rent, the area rates for similar properties are between $600-$650. As far as taxes and insurance, Zillow is estimating $45 and $15 but I'm not sure that's correct. 

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    6y

    @Johnnie Bembry yes lots of people like owner financing but you should never do a bad deal just because it has owner financing. (Not saying this is a bad deal)

    Whether to hold for 6 years and then own free and clear depends on your financial position overall. Can you support the property is something goes wrong? do you have cash reserves?  Doing these kinds of deals will make you very happy when you own the properties free and clear in 6 years.

    One reason for owner financing is the ability to get in for a low down payment. That is not the case here because in addition to your $3k down you are putting up $10k in repairs.

    Keep in mind with such a low price refinancing may be tough when it is paid off just because of the small size of the loan.

    If you want to get geeky about it calculate your IRR for a reasonable holding period of say 10 years. Does the opportunity cost of earning nothing on $13k for 6 years pay off in the long run.

    @Joe Villeneuve

    Do you want to comment

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    6y

    You better look at what Zillow rentals in the surrounding area are actually going for on a small 2 bed house . Rent o meter is way off in some of these areas I’ve found . 
    doesn’t sound like a bad deal other than that interest rate . Get that down below 7 then you might have something to work with . It’s so short term and price low enough it probably isn’t a deal killer but it’s more than you should pay . When I seller finance I sell at 9% + ...but when I buy I don’t pay more than 6% 

    0Reply
  • Johnnie Bembry
    OP
    Las Vegas, NV · Member since 2019 · 38 posts · 6 votes
    6y

    @Ned Carey I agree, there's no reason to jump into a bad deal because of owner financing. I believe I have the reserves just in case something goes wrong. Right, the thought of owning the property in 6yrs is one of two reasons I'm thinking about this property. I've actually been looking into refinancing a lower-priced loan because others have had the same issue in their past deals Do you have any suggestions on how to avoid this?

    @Dennis M. I forgot to mention that I used Zillow as well for the rents. Yeah, I'll look into lowering the rate because the rates you mentioned are what I'm reading from other BP posts. Thanks!

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    6y

    @Johnnie Bembry if you have multiple lower cost properties you can combine them into one loan to get a large enough loan. I just did that with Lima one. Did three properties in one loan. 

    0Reply
  • Johnnie Bembry
    OP
    Las Vegas, NV · Member since 2019 · 38 posts · 6 votes
    6y

    @Ned Carey Oh wow, that's interesting. I'll keep that in mind. Thanks again! 

    1Reply
  • Account Closed
    Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
    6y

    @Johnnie Bembry

    Lower the interest a bit and try the term on a 10 year instead of 6. I took many deals over the years that nobody else wanted. You ever play monopoly? 

    1Reply
  • Zachary Collins
    Denver, CO · Member since 2017 · 33 posts · 15 votes
    6y

    @Johnnie Bembry

    No

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Ned Carey:

    @Johnnie Bembry yes lots of people like owner financing but you should never do a bad deal just because it has owner financing. (Not saying this is a bad deal)

    Whether to hold for 6 years and then own free and clear depends on your financial position overall. Can you support the property is something goes wrong? do you have cash reserves?  Doing these kinds of deals will make you very happy when you own the properties free and clear in 6 years.

    One reason for owner financing is the ability to get in for a low down payment. That is not the case here because in addition to your $3k down you are putting up $10k in repairs.

    Keep in mind with such a low price refinancing may be tough when it is paid off just because of the small size of the loan.

    If you want to get geeky about it calculate your IRR for a reasonable holding period of say 10 years. Does the opportunity cost of earning nothing on $13k for 6 years pay off in the long run.

    @Joe Villeneuve

    Do you want to comment

    Yes I would like to comment @Ned Carey, thank you.

    "Ditto".

    1Reply
  • Josue Vargas
    Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
    6y

    On average, must people get auto loans at 5 years for vehicles $25K+ at a way lower interest rate (about same 3K down payment).  Unless you have a horrible credit history, you should be able to find better deals.  You don't have to wait 6 years and paid off your mortgage to get a loan.  There are ways to get loans against what you really owns off the property (equity).  This is not look like a great or even an OK deal to consider.  Good luck.  

    0Reply
  • Account Closed
    Rental Property Investor · Twin Cities, MN · Member since 2019 · 122 posts · 150 votes
    6y

    @Johnnie Bembry

    I don't like this deal. Can you just pay cash for the house? Offer him 22k cash and close it quickly. Once you have done your remodel, find a good local bank and take 75% of the homes value back out to use again.

    It will cash flow with bank financing at 75% LTV.

    0Reply
  • Angela Smith
    Member since 2018 · 161 posts · 152 votes
    6y
    What bank will refinance a property that low? Banks don't make money on those kinds of loans. Maybe get a personal loan and just buy the property that way?
    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    6y

    @Josue Vargas. Interesting you should compare this to a car loan. I did exactly that a few years back. I needed some cash for a down payment on a property. I had a car that was about 1/2 paid for. I did a cash out re-fi on the car. Interest rate was 2.5%. Netted me 18k and lowered my car payment at the same time. I ended up with a duplex and a 3x2. The 3x2 was bought with no out of pocket money. If a guy had 2 cars?? RR

    1Reply
  • Account Closed
    Rental Property Investor · Twin Cities, MN · Member since 2019 · 122 posts · 150 votes
    6y

    @Angela Smith

    A small local bank in the same town where you can buy homes for 25K and ARVs are 50K.

    Someone wrote paper on all the houses in the neighborhood where he is looking - the whole town didn't pay cash.

    1Reply
  • Johnnie Bembry
    OP
    Las Vegas, NV · Member since 2019 · 38 posts · 6 votes
    6y

    @Account Closed Exactly! 

    0Reply
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