Could I get someone to analyze this deal?

Question

So I'm still new to investing. I have found a potential 2nd property. I'll list the details below

Owner died so it's an estate sale by the family. They listed this house at $239k, which is the going rate for any other house in the neighborhood. Upon further inspection I discovered that that roof needs to be replaced. It's leaking, which caused water damaged to the ceiling drywall. House smells like cigarettes, so obviously painting.

I got a quote for the roof for $9500, which includes replacing the damaged OSB. The paint and minor repairs of the house I can do myself. I figure $3k - $5k for the repairs. So clearly the house is not worth $239k. I want to offer $215k.

Now because I do not have any capital (lost 35% in the market since Jan) I am getting a HELOC on my primary for $50k, which will be used as a down payment. Then either a conventional or DSCR loan, if that is possible.

Here is the house detsils

location is Prattville AL

$239k

1440sqft

$43k down

Loan was quoted at 8%

HELOC 7%

Up to $15k in repairs

House will only be worth $239k afterwards

Rent will be $1700 (could possibly be $1800 but that's a stretch)

Mortgage after PITA will be $1200 and then $300 for the HELOC (interest only payments for the draw period)

Cash flow $200

I'll profit nothing because any remaining money will be set aside for maint and CAPEX

So here I am asking you seasoned investors to roast my deal. I have not made any moves yet. If the seller rejects my offer then I move on because the numbers are much too tight. Thanks y'all

Lindsay Davis · Answer

@Eric Blair,

I second what @Seth McGathey is saying here. You’re taking out a $50,000 HELOC for the down payment (and repairs, I assume), and borrowing the rest. So effectively, you’re at 0% down and financing 100% of the purchase.

The $200 in “cash flow” that you forecast is assuming no principal paydown on the HELOC and mandatory amortization on the mortgage only—this, in my opinion, is a pretty risky proposition, and I’m willing to say that you’re levering up to a pretty uncomfortable extent.

Consider what happens if rents decline by 5%, or if you need a month or two to get the property leased up, or repairs run over budget…you get the idea. If any of these things happen, you’d immediately be cash flow negative, even if you make interest-only payments on your HELOC.

If I were you, I’d find a way to pony up equity for the deal—not a HELOC!—or skip out on the deal altogether.

Eric Blair · Answer

@Lindsay Davis thanks for the reply! Yea after reevaluating I've decided to pass. There's gotta be a better deal so I will keep searching. Thanks for your input!

Ying Tang · Answer

@Seth McGathey Hi Seth! That sounds a really smart move. Could you share which bank allows the credit card payment? Thank you!

Seth McGathey · Answer

I don't have time to run all your numbers right now but one thing that jumped out at me is don't hold that $200 "cashflow". Dump it into the HELOC. You have until the end of the draw period to pull it back out, so put it towards paying down your HELOC faster to save on interest payments. Then if a repair or anything comes up, just draw from your HELOC again. You will still be better off than you had been if that cashflow just sat in a bank account getting maybe 4% rather than paying down your 7% HELOC.

Also, this is rare, but my current bank I have a HELOC with allows you to pay the HELOC off with credit cards on their website without a fee. This has allowed me to take out two extra credit cards. Carry the majority of my HELOC on those. Then every month I just pay them off and then when the statements close I pay off the HELOC again. So I am paying almost none of my HELOC interest plus getting about $40,000 worth of points on my cards each month. So double check if that's possible.

Final thing I will say, is are you sure there isn't a value add property you can find? My HELOC was used for a great property that is going to make me a lot of money long term. But, since I don't have a way to get very quick value add, I am basically stuck for at least a year+ before I can make another deal. A big part of me wishes I had bought something I could immediately pay  most of the HELOC back with so that I could be on to my next investment already. But that also depends on how much you care about making the next deal sooner rather than later.

Good luck!

Benjamin Aaker · Answer

If you're correct on the ARV of 239k, then your max price will be 225k. It's unusual for your loan to be a higher rate than the HELOC, but looks like your LTV is 83%, also unusual.

A typical commercial loan for this property would have LTV of 75% for a new investor. That will mean you'll need to come up with 56k down. Just make sure you have your loan quote numbers correct. Additionally, I suspect you could do better on the rate, but maybe you have negotiated for a higher LTV and higher rate?

At those numbers, mortgage is 1,400 a month and you'll be under water with the HELOC payments.

Going with your figures, $200 for cap ex and repairs seems reasonable, so if all your assumptions are correct, your rent would pay the HELOC and its own mortgage with the leftover for capex/repairs. Make sure you have a contingency for paying the loans when you are doing the initial rehab and factor in vacancy as well.

Eric Blair · Answer

@Seth McGathey thanks for your response! Also I love that idea of paying the HELOC back and drawing from it if I need it! I didn't even think of that. That's why I come here. That credit card thing sounds awesome. I'll see if my bank does that. As of right now I have not found a cheaper house. I'm ok with holding for a year or 2. I just need to get my 2nd property since it's been 4 years since I bought my first one

Could I get someone to analyze this deal?

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