Veteran needs help in first SELLER FINANCING deal; HELP!!!

[Nia L.]

3 unit mulitfamily priced at $499,999 (a few thousand above value), rents $3550; and I can not seem to make seller financing work utilizing the 50/50 rule or when I price out the general expenses. The expected appreciation on the property is 1.9% and in 5 year the home will be valued at appximately 525,000. There is an extra lot, this is in a historical district, thus, determining if it is buildable is a challenging. Every scenario I run I cash flow in the negative, unless I turn the units into short term rentals; AirBnB, VRBO, etc.; then the property positively cash flows. Any ideas on how I might be able to structure seller financing so that I can cash flow year one (1). The seller is in his 70s and is liquidating, and plans to buy the property from his son in a 1031 exchange and sell it to me. I just do not want to drop the ball on this one. Here is what I have for the LOI so far:

RE: Non-Binding Letter of Intent to Purchase 3 units at...

Upon agreement by both parties, a Purchase Contract will be prepared by the Purchaser and can be negotiated and signed by the parties.

Purchaser: Nia **** and Alex ****

Seller: Gary *****

Purchase Price and Owner Financing Options:

Option 1

Purchase Price-475,000 Financing Terms- $1,500 per month for five (5) years, with balloon payments years one (1) thru five (5) of $20,000, $30,000, $50,000, $60,000, $225,000; respectively. Purchaser has option to pay off without penalty at any time.

Option 2

Purchase Price 515,000- $1000 per month for ten (10) years, with balloon payments on even years only two (2) thru eight (8) of $25,000*, with final payment in year ten (10) of 249,999. Purchaser has option to pay off without penalty at any time.

Option 2

Purchase Price-$525,000 Financing Terms- $2,1875 per month for twenty (20) years, zero down and no balloon payments. Purchaser has option to pay off after year five (5)

A single purchase price and financing term must be elected by both seller and buyer before the LOI is effective; the above terms are customizable to fit the tax and financial desires of the seller.

1)Insurance Documents	2) Environmental Report	3) Property Condition Report
4) Previous Title	5) 5 Year Loss Run Report	6) Rent Delinquency Report
7) Electronic Building Plans (Any)	8) Past 5 Years Major Capx	9) Previous Survey
10) Current Rent Roll	11) 3 Years Trailing P&Ls	12) Property Tax Bill
13) 3 Months Utility Bills	14) List of Personal Property	15) Copies of Service Contracts
16) Access to All Leases

Deposit: If there is a balloon payment in year one per the respective price and financing terms, $5,000 initial deposit will be paid to Seller within 3 days of effective date.

Inspection Period: The Purchaser shall have 30 calendar days to conduct such feasibility, structural and environmental studies, tests, and inspections of the Property as Purchaser deems advisable, including verifying that the properties are insurable. The Purchaser may in its sole discretion terminate the Purchase Contract during the Inspection Period and receive an immediate refund of its Deposit. In order to expedite a successful Inspection Period upon execution of a Purchase Contract, Purchaser will be requesting at minimum the following documents in Seller’s possession:

Closing: Closing shall occur 30 days after expiration of the Inspection Period.

Commission: ..., realtor for the buyer shall be paid by the Purchaser per a separate agreement.

Miscellaneous: This Letter of Intent is confidential and shall expire 20 days from the date it is executed by the Seller. During this period the Seller shall not negotiate the sale of the property to anyone except the Purchaser. The Purchaser and Seller shall negotiate in good faith to enter into a Purchase Contract during the 20-day period.

Accepted and approved this __________ day of _____________________, 2022 by

[Andrew Postell]

@Nia L. ohhhhhhh, I didn't understand the 50/50 rule.  I'm not sure where you read that "rule" at but unless you have millions of dollars, you ain't following that rule.  Some articles are written with a very slanted/privileged outlook.  What us "regular" people do is we take our gross rent and then multiply it at 85% or 80% (depending on what metric you want to use) and THEN we calculate our cash flow. So if your rent was $3550 x 80% = $2880. That's where you should be at when analyzing a deal.  Even the most conservative method, used by lenders is 75%.  Nobody is using 50%.  You can even lean on some other investors in your area to see what their expense ratio is and I would bet that it's somewhere from 12%-18%.  Historically, I am at 14% (that's a 20 year history).

Also, in my market we have had 9% appreciation each year over the past 10 years (with the exception of the past 2 years where it has been significantly higher) and I still try to calculate at 5% appreciation to be conservative. 

Hope this helps in some way.