Seller Financing but Negative Cash Flow

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Seller Financing but Negative Cash Flow

Colby Burt
Member since 2022 · 62 posts · 16 votes

Hi,


I have an opportunity to acquire a 3/2 under the following seller financed terms: Purchase Price: $420,000 5 Year Note & Mortgage Principal-Only Payments of $2,000/month 4% interest, paid at the end of the term along with remaining principal balance I have ran conservative and aggressive numbers for a long-term rental: any way you slice it, it negatively cash flows about $400/month. I am unable to run it as an STR due to zoning laws. I ran numbers as a mid-term rental (such as for travel nurses using a corp lease platform like Furnished Finder) and it also negatively cash flows at about $200/month. My question is, should I not do this deal bc it negatively cash flows? Or does the fact that I put no money down, and a tenant would pay down most of the principal each month make this a good deal? (In short, is paying $400/month for an asset with principal being paid down for 5 years a good investment?)

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Taylor Dasch
Real Estate Agent · Temple, TX · Member since 2022 · 1k+ posts · 700 votes
4y

I wouldnt do it, negative cash flow can hurt your ability to scale in the future. It may appreciate but that is never guaranteed. 

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  • Taylor Dasch
    Real Estate Agent · Temple, TX · Member since 2022 · 1k+ posts · 700 votes
    4y

    I wouldnt do it, negative cash flow can hurt your ability to scale in the future. It may appreciate but that is never guaranteed. 

    7Reply
  • Jim Pellerin
    Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
    4y
    Quote from @Colby Burt:

    Hi,


    I have an opportunity to acquire a 3/2 under the following seller financed terms: Purchase Price: $420,000 5 Year Note & Mortgage Principal-Only Payments of $2,000/month 4% interest, paid at the end of the term along with remaining principal balance I have ran conservative and aggressive numbers for a long-term rental: any way you slice it, it negatively cash flows about $400/month. I am unable to run it as an STR due to zoning laws. I ran numbers as a mid-term rental (such as for travel nurses using a corp lease platform like Furnished Finder) and it also negatively cash flows at about $200/month. My question is, should I not do this deal bc it negatively cash flows? Or does the fact that I put no money down, and a tenant would pay down most of the principal each month make this a good deal? (In short, is paying $400/month for an asset with principal being paid down for 5 years a good investment?)

     I dont ever recommend in anything that has a negative cashflow. And there wont be much principal paid over 5 years after you take into account the interest.

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Colby Burt:

    Hi,


    I have an opportunity to acquire a 3/2 under the following seller financed terms: Purchase Price: $420,000 5 Year Note & Mortgage Principal-Only Payments of $2,000/month 4% interest, paid at the end of the term along with remaining principal balance I have ran conservative and aggressive numbers for a long-term rental: any way you slice it, it negatively cash flows about $400/month. I am unable to run it as an STR due to zoning laws. I ran numbers as a mid-term rental (such as for travel nurses using a corp lease platform like Furnished Finder) and it also negatively cash flows at about $200/month. My question is, should I not do this deal bc it negatively cash flows? Or does the fact that I put no money down, and a tenant would pay down most of the principal each month make this a good deal? (In short, is paying $400/month for an asset with principal being paid down for 5 years a good investment?)

    What?
    How does not putting any money down change the fact you are still going to be paying every month out of pocket?
    Negative CF is a cost to you.  Putting up a DP would just make it worse.  Not putting up a DP doesn't make it better...just less bad,...bad still bad.
    Kind of like choosing between getting your foot run over by a bus or a motorcycle.  
    5Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @Joe Villeneuve:
    Quote from @Colby Burt:

    Hi,


    I have an opportunity to acquire a 3/2 under the following seller financed terms: Purchase Price: $420,000 5 Year Note & Mortgage Principal-Only Payments of $2,000/month 4% interest, paid at the end of the term along with remaining principal balance I have ran conservative and aggressive numbers for a long-term rental: any way you slice it, it negatively cash flows about $400/month. I am unable to run it as an STR due to zoning laws. I ran numbers as a mid-term rental (such as for travel nurses using a corp lease platform like Furnished Finder) and it also negatively cash flows at about $200/month. My question is, should I not do this deal bc it negatively cash flows? Or does the fact that I put no money down, and a tenant would pay down most of the principal each month make this a good deal? (In short, is paying $400/month for an asset with principal being paid down for 5 years a good investment?)

    What?
    How does not putting any money down change the fact you are still going to be paying every month out of pocket?
    Negative CF is a cost to you.  Putting up a DP would just make it worse.  Not putting up a DP doesn't make it better...just less bad,...bad still bad.
    Kind of like choosing between getting your foot run over by a bus or a motorcycle.  
    I see what you mean. But, It would be betting on appreciation. It would be saying “hey do you want to pay just $400/month to own an asset that will appreciate while its loan balance will be paid down primarily by a tenant?”
    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    So now you're justifying this by saying something you have no control over, and no guarantee of happening, or how much that appreciation would get you, will make a bus running over your foot seem like it was only a motorcycle?

    2Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @Joe Villeneuve:

    So now you're justifying this by saying something you have no control over, and no guarantee of happening, or how much that appreciation would get you, will make a bus running over your foot seem like it was only a motorcycle?

    Well, if you read what I wrote, I was asking a hypothetical. Justifying implies I already made the decision to proceed and am trying to prove and/or rationalize why I am proceeding. 

    But thanks, I think. 
    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Colby Burt:
    Quote from @Joe Villeneuve:

    So now you're justifying this by saying something you have no control over, and no guarantee of happening, or how much that appreciation would get you, will make a bus running over your foot seem like it was only a motorcycle?

    Well, if you read what I wrote, I was asking a hypothetical. Justifying implies I already made the decision to proceed and am trying to prove and/or rationalize why I am proceeding. 

    But thanks, I think. 
    No, the fact that you presented this an an option, and the way you wrote your reply, says you're trying to find a reason to do it...which is just another way of saying rationalization.
    0Reply
  • Marco Bario
    Specialist · Frederick, MD · Member since 2017 · 475 posts · 454 votes
    4y
    Quote from @Colby Burt:

    Hi,


    I have an opportunity to acquire a 3/2 under the following seller financed terms: Purchase Price: $420,000 5 Year Note & Mortgage Principal-Only Payments of $2,000/month 4% interest, paid at the end of the term along with remaining principal balance I have ran conservative and aggressive numbers for a long-term rental: any way you slice it, it negatively cash flows about $400/month. I am unable to run it as an STR due to zoning laws. I ran numbers as a mid-term rental (such as for travel nurses using a corp lease platform like Furnished Finder) and it also negatively cash flows at about $200/month. My question is, should I not do this deal bc it negatively cash flows? Or does the fact that I put no money down, and a tenant would pay down most of the principal each month make this a good deal? (In short, is paying $400/month for an asset with principal being paid down for 5 years a good investment?)


    The five-year term is the biggest concern. It increases the dollar amount of your payments, and you'll be forced to find cash in five years. You'll be backed into a corner if the lending environment is unfavorable when that occurs. Can you access other sources for purchase money? Some hard money lenders offer buy and hold financing. The Norris Group is operating in Florida now (began in CA). They offer it, and there are others, I'm sure. 

    1Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @Marco Bario:
    Quote from @Colby Burt:

    Hi,


    I have an opportunity to acquire a 3/2 under the following seller financed terms: Purchase Price: $420,000 5 Year Note & Mortgage Principal-Only Payments of $2,000/month 4% interest, paid at the end of the term along with remaining principal balance I have ran conservative and aggressive numbers for a long-term rental: any way you slice it, it negatively cash flows about $400/month. I am unable to run it as an STR due to zoning laws. I ran numbers as a mid-term rental (such as for travel nurses using a corp lease platform like Furnished Finder) and it also negatively cash flows at about $200/month. My question is, should I not do this deal bc it negatively cash flows? Or does the fact that I put no money down, and a tenant would pay down most of the principal each month make this a good deal? (In short, is paying $400/month for an asset with principal being paid down for 5 years a good investment?)


    The five-year term is the biggest concern. It increases the dollar amount of your payments, and you'll be forced to find cash in five years. You'll be backed into a corner if the lending environment is unfavorable when that occurs. Can you access other sources for purchase money? Some hard money lenders offer buy and hold financing. The Norris Group is operating in Florida now (began in CA). They offer it, and there are others, I'm sure. 

    Thanks, Marco. That 5 years does scare me. I don’t have that kind of coinage liquid (hopefully I do in 5 years) and I wouldn’t want to use my own money anyway. I will research that money source you mentioned. 
    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Colby Burt

    If I had no money down I would consider it depending on several factors

    You mention payment is principal only - that seems counterintuitive from a lenders perspective- how are they calculating interest and why are they deferring it(irs will still make them pay taxes as if there was interest)

    If its $400 month for 60 months that’s $24k out of $420k purchase price so 5%. I would strongly consider this deal if the numbers are correct

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    0Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y

    Hi Chris,
    Thanks for replying.
    They are calculating 4% APR but deferring it as a favor to me.
    The 5% part I don’t understand, sorry. Agreement was 4% interest. I probably and not understanding that part of your reply.

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Colby Burt:
    It would be saying “hey do you want to pay just $400/month to own an asset that will appreciate while its loan balance will be paid down primarily by a tenant?”

    You're missing a huge point here. You can never be sure that an asset will appreciate. Yes, Real Estate usually does. But we are in a real dubious arena right now regarding everything financial in this country. Are you 100% positive that this will appreciate? I mean like bet your family's life on it?

    Imagine for a minute that it goes down in value 25% during this time period and you still have that $5k yearly negative cash flow....does that still work for you?

    I know this is attractive because you can get in without putting up your own money, but too many possible/probable negatives here for me. And I am a huge gambler so you should probably run.....

    3Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Joe Villeneuve:
    Joe, you slay me, man...... :-)
    1Reply
  • Quintin “Q” Grant
    Investor · Rockland County, NY · Member since 2018 · 26 posts · 11 votes
    4y
    Quote from @Colby Burt:

    Hi Chris,
    Thanks for replying.
    They are calculating 4% APR but deferring it as a favor to me.
    The 5% part I don’t understand, sorry. Agreement was 4% interest. I probably and not understanding that part of your reply.


    He means the $24k out of pocket is only 5% of the purchase price. Before I add my 2¢ let me ask what is ARV or what are the comps in the area? Is $420k market value or is this below/above market value? Since you will be negative cash flow when something goes wrong with the property are you able to cover? (Assume worst case like roof or mechanical systems) Assuming you refi out will you be willing and able bring money to the table? Also make the worst case scenario will this property cash flow under a 30yr fixed at a higher interest rate like 6-7%? These are questions I would ask. Because with the 4% interest and principal only payments of $24k/yr after 5yrs you will have a balloon payment of $375k+ if my math is correct and like others said if the market turns and your now under water you will have to bring money to the table assuming $420k is the current market value. Even if the market stays flat you will have to bring money to table to refi out so you are really banking on appreciation. Ultimately it's your decision and if you feel you can handle the risk then I say go for it but this isn't for the faint of heart that's for sure

    1Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @Quintin “Q” Grant:
    Quote from @Colby Burt:

    Hi Chris,
    Thanks for replying.
    They are calculating 4% APR but deferring it as a favor to me.
    The 5% part I don’t understand, sorry. Agreement was 4% interest. I probably and not understanding that part of your reply.


    He means the $24k out of pocket is only 5% of the purchase price. Before I add my 2¢ let me ask what is ARV or what are the comps in the area? Is $420k market value or is this below/above market value? Since you will be negative cash flow when something goes wrong with the property are you able to cover? (Assume worst case like roof or mechanical systems) Assuming you refi out will you be willing and able bring money to the table? Also make the worst case scenario will this property cash flow under a 30yr fixed at a higher interest rate like 6-7%? These are questions I would ask. Because with the 4% interest and principal only payments of $24k/yr after 5yrs you will have a balloon payment of $375k+ if my math is correct and like others said if the market turns and your now under water you will have to bring money to the table assuming $420k is the current market value. Even if the market stays flat you will have to bring money to table to refi out so you are really banking on appreciation. Ultimately it's your decision and if you feel you can handle the risk then I say go for it but this isn't for the faint of heart that's for sure


     Hey Q,

    Truthfully, the ARV is right around $420,000, maybe slightly less. If things go wrong with the property, I am able to cover the expenses (though I would soo not want to lol). Your math is correct and you have given me a few additional questions to mull over. I think my burning desire to finally acquire a property was outweighing the numbers and it was also minimizing the risk (betting on appreciation) which is a risk that shouldn't be minimized.

    0Reply
  • Quintin “Q” Grant
    Investor · Rockland County, NY · Member since 2018 · 26 posts · 11 votes
    4y
    Quote from @Colby Burt:
    Quote from @Quintin “Q” Grant:
    Quote from @Colby Burt:

    Hi Chris,
    Thanks for replying.
    They are calculating 4% APR but deferring it as a favor to me.
    The 5% part I don’t understand, sorry. Agreement was 4% interest. I probably and not understanding that part of your reply.


    He means the $24k out of pocket is only 5% of the purchase price. Before I add my 2¢ let me ask what is ARV or what are the comps in the area? Is $420k market value or is this below/above market value? Since you will be negative cash flow when something goes wrong with the property are you able to cover? (Assume worst case like roof or mechanical systems) Assuming you refi out will you be willing and able bring money to the table? Also make the worst case scenario will this property cash flow under a 30yr fixed at a higher interest rate like 6-7%? These are questions I would ask. Because with the 4% interest and principal only payments of $24k/yr after 5yrs you will have a balloon payment of $375k+ if my math is correct and like others said if the market turns and your now under water you will have to bring money to the table assuming $420k is the current market value. Even if the market stays flat you will have to bring money to table to refi out so you are really banking on appreciation. Ultimately it's your decision and if you feel you can handle the risk then I say go for it but this isn't for the faint of heart that's for sure


     Hey Q,

    Truthfully, the ARV is right around $420,000, maybe slightly less. If things go wrong with the property, I am able to cover the expenses (though I would soo not want to lol). Your math is correct and you have given me a few additional questions to mull over. I think my burning desire to finally acquire a property was outweighing the numbers and it was also minimizing the risk (betting on appreciation) which is a risk that shouldn't be minimized.


     Hey I get it, sometimes we get excited about a deal and let our emotions take over. Remember you’re an investor now and your decisions need to based off numbers not emotions. Trust your gut I’m sure you knew the true answer to your question and you just came to BP hoping we would agree with your heart instead of your gut lol

    2Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @Quintin “Q” Grant:
    Quote from @Colby Burt:
    Quote from @Quintin “Q” Grant:
    Quote from @Colby Burt:

    Hi Chris,
    Thanks for replying.
    They are calculating 4% APR but deferring it as a favor to me.
    The 5% part I don’t understand, sorry. Agreement was 4% interest. I probably and not understanding that part of your reply.


    He means the $24k out of pocket is only 5% of the purchase price. Before I add my 2¢ let me ask what is ARV or what are the comps in the area? Is $420k market value or is this below/above market value? Since you will be negative cash flow when something goes wrong with the property are you able to cover? (Assume worst case like roof or mechanical systems) Assuming you refi out will you be willing and able bring money to the table? Also make the worst case scenario will this property cash flow under a 30yr fixed at a higher interest rate like 6-7%? These are questions I would ask. Because with the 4% interest and principal only payments of $24k/yr after 5yrs you will have a balloon payment of $375k+ if my math is correct and like others said if the market turns and your now under water you will have to bring money to the table assuming $420k is the current market value. Even if the market stays flat you will have to bring money to table to refi out so you are really banking on appreciation. Ultimately it's your decision and if you feel you can handle the risk then I say go for it but this isn't for the faint of heart that's for sure


     Hey Q,

    Truthfully, the ARV is right around $420,000, maybe slightly less. If things go wrong with the property, I am able to cover the expenses (though I would soo not want to lol). Your math is correct and you have given me a few additional questions to mull over. I think my burning desire to finally acquire a property was outweighing the numbers and it was also minimizing the risk (betting on appreciation) which is a risk that shouldn't be minimized.


     Hey I get it, sometimes we get excited about a deal and let our emotions take over. Remember you’re an investor now and your decisions need to based off numbers not emotions. Trust your gut I’m sure you knew the true answer to your question and you just came to BP hoping we would agree with your heart instead of your gut lol


     Hahaha yes, totally, knew it all along. Thanks, man. 

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Quintin “Q” Grant:

     You are the master of understatement my friend....!

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    4y

    I just sold a deal like this with SF recently, but it was an 11-unit. Buyers payments are interest only (vs principal only, which is weird) and for 10 years vs 5yrs. 

    Very little down and the buyer will have neg cf for a couple years while he raises rents, does improvements and cuts expenses like adding rubs for water. 

    The difference is he has a known ARV and NOI and finish line to the neg cf. If you don't have those, I'd flinch and hope it's just a motorcycle that rides over your foot.

    2Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    @Steve Vaughan The OP is counting on appreciation which is a maybe right now. IMO

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    4y

    I’d run from this deal.

    1Reply
  • Kevin Boyd
    Slidell, LA · Member since 2017 · 20 posts · 8 votes
    4y

    @Colby Burt

    I would run as fast as I can away from this deal

    1Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @Kevin Boyd:

    @Colby Burt

    I would run as fast as I can away from this deal

    Understood. Thanks. 
    0Reply
  • Colby Burt
    OP
    Member since 2022 · 62 posts · 16 votes
    4y
    Quote from @John Morgan:

    I’d run from this deal.


     Understood, thank you. 

    0Reply
  • Zander Kempf
    Developer · Honolulu, HI · Member since 2018 · 111 posts · 93 votes
    4y

    @Colby Burt weird coincidence, I'm doing a deal right now with a similar structure. You can think of it like a retirement plan or like a deferred down payment plan. Of course we never want long term negative cash flow, but this is a bit different due to the artificially short amortization. If you look at how much equity you are paying off the note every month, you will see you are building a significant amount. At the end of the term you should be able to refinance, potentially with some cash out, and end up with a cash flowing property that you invested relatively little cash to own. Best of luck!

    0Reply
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