I am 23 years old and just purchased my second house in Philadelphia (manayunk, roxborough area). I was wondering how you think I am doing/ if you think I am rushing into a next deal. Since I just purchased house #2, I am low on funds (only have a couple thousand saved up). I came across a deal where I can get into the property with no money out of pocket with some owner financing. The seller has had some trouble selling this property because it is classified as a mixed use property (office on the bottom and residential on top) I would offer $140,000 on the place and not go a dime above that. The office is generating $600 a month and the upstairs apartment in bringing in $1125 a month. Total rent is $1725, utilities are split, tenant pays all utilities including the water.
My plan would be to offer $150,000, with a $10,000 seller assist for closing costs with 20% seller financing in the form of a 5-year 0% interest balloon payment. the other 80% would be a commercial loan since it is mixed use where rates are about 5.5% on investment properties.
the 80% financing loan w/ taxes and insurance would be about $1070 a month w/ taxes, insurance and P&I.
P&I only is $736.90. Using the 50% rule the cash flow of $988/2=$495
The $495 a month cash flow will give me $29,700 in 5-years, $300 under the balloon payment. a free $30,000 in extra equity 5 years from now.
Is this worth it with 0 down and a $30,000 balloon payment due in 5 years?
My plan is to buy and hold- long term. If the office space moves out, I would like to convert it to a residential space (if possible)- I will do my due diligence on this before purchasing. Also, It would be converted into one whole house if needed.
This property also has extra potential for improvement- I can possibly add another bedroom upstairs to get at least an extra $500 a month. From my perspective, this seems like a good deal to get into and start off with for my first multi-unit property/seller financing. Ideally down the road I would like to go into more units.
FYI: The property was appraised for $180,000 in November 2013 based on recent sales comps.
I worked full time in the mortgage industry up until last week for a year and a half- I am going full time for my MBA and have 0 other debt besides my two mortgages.
Here is my financial picture:
P&I, Taxes, Insurance= $1050
House # 2: (I live in this house and rent out the other three bedrooms)
P&1, Taxes, Insurance= $1010
How much debt is too much to have? What is your ideal DSCR for your portfolio?
Your Seller financing makes this deal. Looks good if you're playing for cash flowing buy and hold. If I was in your position, i would buy this, get it to where I want it to be ASAP and put a price tag on it and wait for a Buyer while enjoying the cash flow.
All loans are a gamble for the borrower as much as the lender. We learned that from the last crash.
Just make sure all your deals like this are assumable.
Good luck with it, whatever you decide.
Jeremy, just make sure you have an exit plan. On paper the deal looks good, but what happens if you loose a tenant? Can you cover the expenses for a few months while you fill it? What if one of your room mates moves out? You don't want to be the guy having to sell at a loss to get out from underneath a note you can't pay. Make sure you have 6 months of wiggle room in cash to weather those storms. Even if it looks good on paper you don't want to risk what would happen if you can't make a payment.
Risk management in my opinion is even more important than cash flow. Good luck.
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