Should I look into a partner or try Seller financing???

Question

Hey fellow Real Estate junkies, Ive been trying to acquire a duplex that would have instant equity and has major potential to become a cash cow. Although my financing has not been the best of situations I am only approved for 250k when the property is 280k. Ive ran into a brick wall, and even though I’ve tried to find a solution I really don’t want to miss out on this deal since its a great opportunity. I’m now seeking the options of either looking for a partner that will bring the money or my last resort will be trying to sale the owner on seller financing. What do you guys think? What should I look for first? The property is a huge 6/4.5 duplex with an unfinished mother in law suite in the backyard. Rents are currently at 1,000 on each side, but can easily be increased to 1400$-1550$, and the mother in law suite can bring 700$-800$.

Juan Aguirre · Answer

Thank you guys for the advice, this property has the potential of 700$ cash flow after the repairs and mother in law suite. Granted I would have to spend a 8k-12k Investment but overall it would be a 15% cash on cash return. I hop this works out and I will be keeping y’all updated!

Tim Delaney · Answer

@Juan Aguirre without all the numbers it’s tough to analyze, but if you are borrowing $250k your principal and interest payment alone is over $1000/month - possibly as high as $1200. If you borrow the $280 at around 4% then your payment jumps to over $1300. Since you said this is an FHA that means you plan on living in one unit. So day one, you are only collecting $1000/month in rent. That isn’t in itself a terrible thing as I assume you have some other income source that qualifies you for the loan, and hopefully this is still saving you money in rent expense. I am pointing this out because in addition to the cash to close, you will need cash to finish that mother in law suite before you can generate income with it. It is also good to have some reserves (what happens if a hot water tank or furnace breaks down the day after closing). Then you will most likely need to turn over the other unit as well if you want to bump the rent 40-50% with no renovations. So you have to hope that you can do that fast with minimal downtime.

Without knowing the insurance, taxes, condition of the house and it’s mechanicals it’s tough to say how great of a deal this is. But if this is your first deal and you are stretching yourself to spend every penny you have I’d probably go the partner route before asking for seller financing and further stretch yourself. If it is such a great deal you shouldn’t have a problem finding a willing partner.

I don’t mean to discourage you from investing, I think it’s awesome that you are trying to figure out ways to make something happen even though on paper it looks like you can’t afford the house. I just caution against getting stuck in a situation where you are house pour and can’t generate the income you planned on because you don’t have the cash for repairs.

Juan Aguirre · Answer

Thank you for your response Tsipora, and yes it is an FHA loan but this is already accounting the rents as income. I tried adding a non occupying co-borrower, but I keep getting mixed information on wether I can still get the 3.5% down payment. If you have any experience in this I would love your feedback!

Tsipora Smith · Answer

The 250k approval that you currently have is what type of loan? If it is conventional or FHA, then you actually qualify to purchase the property because their approvals are based off of single family income. With a duplex, you'll be able to count the rent from the other side of the duplex as income which will increase your approval enough to qualify on your own.