Creative Down Payment for 6 unit....Good deal?

[Zack Clopper]

Hey everyone,

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%)

I/Y: 4.25%

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

Mortgage: $1,170.82

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

Zack

[Tom Conant]

Hey peeps,

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,

Tom