@Delbert Standifer The unpermitted add-on can be a problem. The city can shut it down any moment so the $1,200 cash flow will be substantially less. Nobody pays for an unpermitted unit.
As for the difference:
All cash: they keep all the rental income 50% down: they have to make payment to the seller every month. The seller decides on how much they will pay every month.
Dallas, TX · Member since 2014 · 31 posts · 19 votes
5y
@Delbert Standifer
Hi again,
If you are nervous about having debt, then all cash is obviously you’re only route. It just negatively affects your Return on Investment. There is a Bigger Pockets article that just came out weighing the pros and cons of debt purchases vs all cash purchases.
I’m not sure why you haven’t given us any numbers yet. That is where you will be able to make an easy decision or let others help you make a decision. If you don’t know how to get those numbers or can’t get them, you have no business buying the property. When you say it cash flows $1,200, what does that mean? Is that the gross rent? You need to subtract property taxes, insurance, maintenance, capital expenditure allowance, and your note payment. My guess is you won’t be making any money. But if you buy it, you’ll learn a lot! Ha
Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
5y
Seems like you are going off feelings and trusting your friend. Not saying your friend isn't smart but verify comps with an agent, verify rent with a PM, get an accurate idea on costs. With it being an unpermitted duplex that'd concern me too. 45K cash can be used in many different ways. Good debt is not a bad thing. With interest rates being cheap it makes sense to leverage.
Rental Property Investor · Carson, CA · Member since 2019 · 185 posts · 74 votes
5y
@Mike L.
Ok here are the numbers best to my abilities.
As of now the house rents for 1500. The house is paid off. If and when I purchase it and place my son in it I should get 1600. I will have to pay for the water because it’s not separate meters. I’ll have to pay the owner 650 for 7 years. PM is 10% and I take out another 10% for capex repairs and maintenance. Taxes and insurance is about 250 per month. After all that I see myself with about 380 cash flow. What am I missing and I hope this helps. The 380 will jump to 1000 in 7 years.
Rental Property Investor · Carson, CA · Member since 2019 · 185 posts · 74 votes
5y
@Ivy Baca
My friend has one large family living there. They use front house and back house and pay 1500 and all Utilities. My son is a student Athlete I will have him and 3 teammates live in the back (300 each)and rent out the front house for 1000.
Pittsburgh, PA · Member since 2016 · 11 posts · 9 votes
5y
The way you make money in real estate is finding great deals .... allowing someone to dictate a "good" deal means youre definitely not getting the full benefits, howeverrrrr
If you're looking to buy for education/ mentorship/ or just good rapport for other future deals - pull the trigger!
Dallas, TX · Member since 2014 · 31 posts · 19 votes
5y
@Delbert Standifer
Wow, if you can get $1600/month on a house that sells for $90k, you’ve found the goldmine. I’ve honestly never seen that, but then again I haven’t seen everything. Looks pretty juicy. I’d be skeptical of those numbers though. In Dallas, if a property can be bought for $90k, then you probably can’t even rent it.
If those are the true numbers, you should ask if you can buy more of his. Haha. You can’t really mess up the financing when you are getting rents that big
Rental Property Investor · Auburn, ME · Member since 2015 · 236 posts · 140 votes
5y
Duplex (unpermitted) - $85k current market
Collecting $1500 in rent now
Friend will sell to friend for only $90k ($5k over current market)
Wants 50% down - $45k
6% (at least 2-4% over current market rates) on remaining for 7 years
Total interest just over $10k
Has son moving in back with 3 college friends each paying $300
Will rent front for $1000
Says will collect $1600 a month.
Just summarizing it to wrap my head around all the posts.
How many bedrooms, baths, location, comps etc.
First glance seems like a bad deal, a friend would not overcharge you on the price and the loan rates. I would search for a bank that would finance this as a single family and get a regular 30 year at around 3%.
Or just find a duplex/house for your son and friends to rent with a lot less down that can be financed through a bank because it is a permitted building.
Rental Property Investor · Davison, MI · Member since 2019 · 76 posts · 24 votes
5y
@Delbert Standifer My humble opinion here is that your “friend/mentor” just MIGHT be trying to pull the wool over your eyes.
1) Regardless of when you will “own” the house, you are buying a MONSTER of a problem. Depending on municipality, that addition could cost you thousands in the further when the city finds out.
2) I’d only spend 45k down if I were getting over 8k back in my pocket on year 1.
3) It doesn’t even sounds like you’re getting a “deal” at all with your friend discounting you 5k. If that dude thinks he can market and sell for 90k in today’s market there is NO WAY that 85k for you is a good deal.
A friend of a friend actually sold me a house last year. My first rental. I didn’t have a lot so they wanted to help me. He sold me the house at 43k, and it appraised at 62k. Even though we agreed I’d pay him some down, he let me get a mortgage. I ended up doing a 60k mortgage, which required 19k down. After the sale, he gave me about 17 back (the difference between the 60k mortgage and our agreed upon 43k price). 10 months later I’ve recovered my initial investment and I’m cash flowing 350 a month and now have around 33k equity thanks to this market. Now THAT is a friend helping out a friend.
I’d be super concerned for you as a new investor, that you aren’t being set up for success on this one. If you want to move forward however I would at least do these few things.
1) Get the property under contract with plenty of contingencies (ways out are VERY important here) and a closing date maybe two months out. If he’s truly your friend, none of these will be showstoppers.
2) Contact the municipality and find out what the ramifications are of the unpermitted addition. YOU ARE BUYING THIS PROBLEM AND NEED TO FIX IT.
Investor · Bloomington, IL · Member since 2016 · 59 posts · 19 votes
5y
@Delbert Standifer personally I'd structure it so I didn't have to tie up so much money for one deal. $10 or $20k should be plenty. Plus allows you to take the other $30k or so and do it again. .. and again. Good luck!
Rental Property Investor · Carson, CA · Member since 2019 · 185 posts · 74 votes
5y
We all know and experienced seeing all cash buyers come in and purchase properties. Originally that’s what my friend wants but we negotiated I come in with at least half. It’s hard to compete with all cash buyers.