Creative FInancing - 2 for 1 Deal?

Question

Hi All - New to BiggerPockets and love these forums, so hoping I may get some ideas here.  My wife and I are in the process of renovating a STR to hit AirBnb in the next month. While cruising listings I came across a guy who is selling 2 off-campus student houses for about ~330k each that he has been running for about 10-15 years and wants to cash out. I'd like to try to find some more creative ways to knock this out. Any ideas or suggestion?

Remington Lyman · Answer

@Stephanie P. Off-campus housing for Akron and Kent state does not compare to Off-campus housing for The Ohio State University. Drive around the 3 universities and you will see what I am talking about. I also implore you to compare the population growth/decline in the different cities.

Clark Kirkpatrick · Answer

First, try for seller financing. Explain to the seller what it is, then ask if they're interested. When they say "no", you ask "why?" and they tell you what they don't like about it. Then you find a way to solve the problem that they brought up and get seller financing on win-win terms.

Second, if that doesn't work, try to find a partner who can bring the capital if you bring the deal and do the work.

Third, you could buy it with conventional financing and use a creative way to get the down payment and closing costs: a HELOC, personal line of credit, loan from a family member, etc.

Account Closed · Answer

Ask him if he's willing to seller finance. Offer a down-payment just like a normal loan, anywhere from 0-20% down, a 0-5 year balloon and and monthly payment amortized over 30 years at ~4-10%. The reason those numbers are variable is because it's ultimately up to the seller what you offer. If they want a higher down payment you can offer more on that but increase the balloon period and lower the interest. If they're looking for more cash flow you can offer a lower down payment with a higher interest rate.

Biggest thing is to try to find out why the seller is selling and what their needs are with a deal. Podcast episode 344 goes over this in great detail.

Ola Dantis · Answer

@John Flanders Welcome to BP!

The first thing that came to mind was what @Stephanie P. said: $330k sound a little high for one property in Columbus, OH; however, I don't know many rooms are there in the student housing.

Assuming that the $66,000 downpayment generates the $1,000/month Cash Flow/month ($12k Annualized [less mortgage payment]) gives you about 18% CoCR in a year. Now, that is pretty good considering the initial capital outlay.

What I'd say is you must be conscious of the dynamics of student housing [a different beast], the somewhat unpredictable CapEx during turnovers and several other factors unbeknownst to you guys now.

After you've done your Due Diligence and the Seller is willing to Seller Finance [SF], I think you might be able to make something happen.

SF DETAILS (I have a good SF spreadsheet that Sellers like):

Start with 20% Down = $66k

Finance the reminder: 264k at 5% Amortized over 30 years

Monthly P+I Mortgage: $1,417.21

Have a clause to be able to refinance from Year 2 and a Balloon Payment can be paid then or you can hold on to Year 5 to give him out of the deal.

Hope it works out for you both on you Airbnb and this other deal if you go with it.

Goodluck...

Stephanie P. · Answer

Debt coverage of 1.3 is minimum.

I'm saying the value of the property may be high for Columbus.  We closed some off campus properties in Akron and Kent (for university of Akron and Kent state students) last year and they were no where near that value.  I could be wrong because I'm not seeing the appraisal, but I would think more  around 150K would net you better results.

John Flanders · Answer

It's off-campus housing by Ohio State.  With traditional financing and 20% down could net about $800-1000 per mo per property.  What type of cash flow do you typically look for on a 330k property?

Stephanie P. · Answer

@John Flanders

330K sounds really high for Columbus.

David Yoder · Answer

@John Flanders. I own some rentals near OSU campus (as does Remington).

If you want me to do a free full analysis on them then PM me.

They should be viewed more like a commercial building based on the actual rents (and expenses aka get that Schedule E) and the cap rate.

Stephanie P. · Answer

I was going to leave this thread alone.

I did some research because I don't like to be wrong (and I'm not) and in truth and to your point, it's not really a different beast than multiple other markets on the east coast.

Off campus housing in Akron and Kent are pulling in 22-2500 per month for a 4 or 5 bedroom townhouse.  My numbers are not wrong.  I know because I saw the leases and closed 10 of them last year.  Are there houses out there that would be suitable for student housing in the $330K range in Columbus; absolutely yes.  Could you find something that was cheaper and pull in the same money; my research says also absolutely yes.

To be succinct, $330K is high for the area and student housing, but people can buy what they want, it's their money.

Stephanie

Jerry Padilla · Answer

@John Flanders

Since you are almost finished remodeling your current rental, why not start the process of a cash out refinance? The appraisal can wait until the work is complete, since it will be done in the next month. You can use the proceeds from this cash out to finance the down payments of these two purchases.

If these are Single family residence purchases, you may be able to get away with just 15% down but would have to pay mortgage insurance.

If these are multi-family properties than 25% would be required to put down.

Creative FInancing - 2 for 1 Deal?

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