An agent approached me with an off market deal he had for a 6-unit in a C class neighborhood. This is the first time doing an analysis on a 4+ unit so wanted to run numbers by everyone. The owner is willing to do owner finance on the deal with the below terms.
Asking Price: $280,000
Down payment: $42,000 (15%)
Amortized: 360 months
With the current numbers on the property this is how it would cash flow however market rents are around $650-675 on average so the rent could go up slightly but rather account for current rents. Also I would consider looking into billing the tenant back for water or trying to sub-meter down the road to increase cash flow.
Current Rent: $3,725
Taxes: $308.33 (3,700/year)
Insurance: $133.33 (1,600/year)
Vacancy: $372.50 (10%)
Repairs: $186.25 (5%)
Capex: $279.38 (7.5%)
Water Bill: $266.67 (3,200/year currently paying)
Property Management: $372.50 (10%)
Cash Flow: $635.22
However I am thinking about taking a loan out for the down payment from a friend/investor who is looking to park his money for a few years at 8% interest. The terms of that loan would be the following:
Down payment/Closing costs: $49,000
Interest Rate: 8%
Amortized: 120 months
Monthly Payment: $590.79
Cash flow with assisted down payment: $44.43
I would like to go this route and just save the $44.43 towards any future repairs in those 5 years. Even though its amortized for 120 I would pay off when I refinance the building whether that be from equity or cash I have saved up.
The building does have a new roof and windows installed last year also. I am going to be looking at it this weekend. Just wanted to keep my capital for when I find a deal and need to go the traditional route. I know the cash flow is not the greatest but since its owner finance I figured I would put some thought into it.
How does everyone feel on my numbers did I account for enough or too little?
Thanks in advance
I've yet to invest in a MU property, so this feedback is only coming from my point of view as someone who is running numbers like you, thinking through pros and cons. In your scenario the CoC returns are infinite BUT I would be concerned about how little it is cashflowing and unknown expenses. You have very little margin for error. You would almost need to hold back the cash that you're trying to save (at least some of it) to handle any surprise expenses. Some ideas/thoughts:
-see if the seller will take less down, maybe offer another concession to put less down
-only borrow half the amount from the friend/investor
-be conservative, put your own money down, enjoy 15%+ CoC returns and execute the BRRRR strategy in a few years.
I don't have experience in the above but I am interested in following this post as I have thought about doing something similar!
Depending on plumbing/electrical/systems age, you may not have put enough aside for repairs. Other than that, I may do this deal if I knew the area was on its way to being revitalized and values are going up. Why would you not use your cash for the down payment on this one vs another conventional deal?
@Scott Skinger I did run the numbers a few certain ways as far as less money down and so forth. The seller is only looking to do owner finance if he gets between 40-50k down. I am able to get 20-25% CoC return where I invest on SFH which is why I rather not put much of my own money into the deal as I know I can get higher return elsewhere. I just figured this deal would be nice if I could get into it with no money out of my pocket. I always keep reserves also. I will get a better idea of how old everything else is on the property this weekend, also I would have a partner so if anything breaks we would be able to split the repair costs which I forgot to mention.
@Matt Conrad ill have a better idea this weekend when I view the property as far as how old everything is in the home. The area I don't see going down but I also don't see them really going up either too much. They have been pretty stagnant over the past 10 years. I don't expect the value of the property to go up too much. I do not want to use my own cash for this because I would only get around 15% CoC return where as I can get 20-25% in the area I typically look for homes in an this area the home values have been increasing a lot too over the years.
I agree mostly with what everyone said but I see one problem. You didn’t seem to build in downside risk, unless I’m missing it or you just didn’t mention it. What happens 5 years down the road if that refinance doesn’t come it at the appreciated number you thought it would have? Then you can’t pay your friend back if you don’t get that liquid cash from somewhere.
On the other hand, if you finance the down payment yourself or with much less interest, you decrease your exposure to that downside risk. What I mean by this is, if you pay cash down payment and maintain $600 in positive cash flow each month, you would be able to absorb $600 dollars of downside risk (all theoretical) before your investment started to flow cash negatively. If you leverage your down payment you are also taking on a lot more risk. This is also assuming that you don’t have the liquidity to pay your obligations any other way.
To close I would just make sure that you are assessing your risk from every angle. More interest, no matter where it’s coming from can be added risk if it’s not calculated fully.
I’m also a noob so feedback is greatly appreciate! Hope this helped,
Thanks for the interesting thread,
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