is this cash on cash figured right?

Question

im looking at a good shape 3br/1b house for 22k. I contacted owner about possible owner financing and she said it was possible, if I could wait until after holidays where she had time to work up a contract. I'm just running some numbers myself to have an idea what I want before we meet to discuss terms. House is already rented @450 with a 4 or 5 year tenant. So here are my numbers I've been playing with:

2k down, carry 20k for 15yrs @ 5% for 158.16/m

So that's 225(50% rule)-158.16=66.84 then x 12=802.08 then /2k= 40% COC

4K down, carry 18k for 15@3% for 123.30

225-124.30=100.70*12=1208.4/4000= 30% CPC

4k carry 18 for 10yrs @ 3% for 173.81

225-173.81=51.19*12=614.28/4000=15% cCPC

Did I figure that right and are those do-able?

Daniel Warren · Answer

@Andrew Hearn

thanks for the advice. you may be right, she might not want to go that long. I'm just trying to make sure I'm figuring what i need to figure right and playing around with the kind of numbers that make it work best for me. i know it rents for 450, so i know what i gotta have to make it work for me. for 5 years, that's more down payment money i have to come up with to make it work. I'm still kicking around trying to find my first deal. I'm still piecing together the financial situation. all i know now is they owned a small business in town, and i think its closed now and they have left town.

@Ned Carey

Thanks for your post Ned. i am still trying to put together my first deal, and any investment is a risk, but i have to get in the game to get the ball rolling. Right now I'm looking at being able to scrape up about 8k to get started in this, and that's partially why i wanted to go a little longer and not put the whole 8k down. I could get a coc that works, and have some reserve to get me through. i also would like to use it to get into two deals.

here is the exact details of it so maybe you guys can give me some 8k advice. she has the place they lived for sale. a nice 16x80 with a built on room addition that makes it 4br/2b. It is very nice as they have done remodeling on inside. They want 15k for it.

The other is a 3br/2b house close by in the same neighborhood that is also a nice little house. They had it as a rental property and it is currently rented. Tenant has been there for 4-5 years and she has had no problems with them. Asking 22k for it.

Like I said guys, I'm trying to get into my first deal, and I'm not depending on this for my income, so as long as it at least pays for itself, I will be gaining ground in the asset column that currently has zero items. I appreciate all the advice guys, keep it coming.

Ned Carey · Answer

Yes your calculations appear correct.

The Cash on Cash returns look good but your margin is small. This increases your risk.  Only $800 to $1200 a year is not much. One unexpected expense can wipe out a years return. DO you have cash reserves to cover such an event?

Good luck - Ned

Andrew Hearn · Answer

Most sellers are not going to want to hold the financing for 10-15 years.  I have dealt with a lot of sellers that will only financing for a couple years.  I structure most of my financing in the 3-5 year range depending on what the buyer can afford to pay monthly.  I would be prepared with numbers for a 5 year deal at 5% which would amount to monthly payments of $377.42 with a $2K downpayment.  It helps to understand their financial situation, why they are selling and if the need a certain amount of cash for an immediate need.  You should try to get a good sense of the sellers position before presenting the numbers.

Daniel Warren · Answer

i don't know if she will or not, I just want to have some figures to throw out when we talk. I'm just trying to run some numbers that make sure I'm cash flowing. She is semi motivated and who knows she might agree. If I can get 3% I'll sure take it lol.  I'll just pitch the lower interest for the larger down payment. I would like to show up to the meet with three figures worked up and contracts already printed out for each figure. Maybe that will give me a more serious look and put a little pressure for them to deal. They might shoot it down but I don't wanna walk in empty handed. Thinking I can help keep the ball in my court by looking like a professional and I know what I'm doing!

Edward Burns · Answer

Your calculations appear correct, but I would question your interest rate.  Banks charge 3.75% for a 15 year mortgage currently, so why would the seller accept 3%.  I would figure at least 5-6% interest.