Creative FInancing - 2 for 1 Deal?

13 Replies

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?

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.

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. 
 

Originally posted by @Stephanie P. :


@John Flanders

330K sounds really high for Columbus.  

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?

Originally posted by @John Flanders :
Originally posted by @Stephanie P.:


@John Flanders

330K sounds really high for Columbus.  

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?

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.

@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.

Could approach them and see if they'll hold back a second mortgage.  I've done deals where seller holds back a 20% note, 20 year amort, 5 year balloon; but you'll need to find a willing lender in this scenario as well as they usually like to see skin in the game...but not all require it.  You also need to have an idea how you're going to refinance out of the seller note or pay it off as well.  Or if he's looking for long term payments without the hastle, if you have some cash try and see if he'd finance 90% with a 10% down payment and you could play with the interest rate.  

@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...

Originally posted by @Remington Lyman :

@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.

I guess it depends on exactly where you're talking and what type of house you're talking about there in Columbus.  I just did a cursory search and found some really cool looking duplexes in the 150K range.  It also depends on who you talk to or what data you're looking at.  Some websites have Columbus' median home price at 157K, Akron's at 67K and Kent at 143800.  Others are higher or lower by 10's of thousands for any of the cities.  330K was out there, but so were many other houses.  I guess location is a key in this instance because I don't have an appraisal to sway my opinion on style, condition or any internal or external obsolescence

Either way, I could be wrong and the OP may have strong comps to support that value.  It just feels high because of the 10 loans I closed in Ohio last year and (like I said earlier) the cursory search I did just a few minutes ago.

@Stephanie P. Off campus housing is a different beast in Columbus. I know people that are getting $2000 a month for a piece of crap 4 bed. Off campus housing is like gold in Columbus and your going to pay for it

@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. 

Originally posted by @Kevin Miller :

@Stephanie P. Off campus housing is a different beast in Columbus. I know people that are getting $2000 a month for a piece of crap 4 bed. Off campus housing is like gold in Columbus and your going to pay for it

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

@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.