I wish I could find the 1% in my local CA market! :)
The property is OOS- in Tennessee.
Who cares if it doesn't pass the 1% rule. That ridiculous rule has sunk, never to be seen again...or should have. Forget percentages as a guild/rule when making decisions. They tell you nothing of value, and lie to you while doing so. Look at the numbers that matter, the ones with $$$$$ in front, and base all of your decisions on those numbers...ONLY.
Investor · Indianapolis, IN · Member since 2018 · 86 posts · 84 votes
5y
@James B. - so a few things on how I underwrite my deals.
#1 - The 1% rule. Doesn't meet it at all. $995/mo rent I wouldn't purchase for anything more than $99,500
#2 - 12 cap. I don't buy anything that isn't a 12 cap. $995 * 12 * .6 = $7164/year NOI. 12 cap would be $59,700 purchase price so the 12 cap is a "no-go" as well.
#3 - "All-in" for 75% of ARV. From what I can tell on the numbers you gave me you would be "all-in" at $134,800. That is 75% of an ARV around $180K. You didn't mention what the ARV would look like. But I'd make sure it would appraise for at least $180K once all is said and done. If not? I'd walk.
#4 - Cashflow at least $200/mo+ with debt service. I have the monthly NOI at around $591/mo. So whatever debt service you would end up with after a cash-out refi ... I would make sure you aren't paying Principal & Interest more than $391/mo. IF you end up being able to cash out your "all-in" at $134,800 ... then the payment principal and interest would be $730.26. So it would not cashflow anywhere near $200/mo.
Rental Property Investor · Twain Harte, CA · Member since 2019 · 20 posts · 20 votes
5y
@James B.
@James B.
I’d be interested to see what this place looks like and where it is. Didn’t know there was still a property left in CA that was under 200k, let alone 110k in one of the most desirable areas in our state. I can maybe see a place more inland in the Monterey area or in Salinas, Watsonville, etc. And with your projected low rent that is most likely the case.
You will find it challenging to meet the 1% rule in Cali and some of the other criteria that many investors use for evaluation of a property. Do these numbers exist in CA? Of course they do, but they are few and far between so it’s up to you how much you want to count on the insane Cali appreciation potential.
Your question was related to financing though. I’ll just add that in addition to negotiating price, down payment (many owners want at least 10% down), etc, don’t forget that you can get creative with interest rate. On our fourplex we purchased seller fi, owner was solid on price, DP, term (30 yr amortization due in 10), so I negotiated a lower interest rate for the first two years to “get us going”. Saved us $250/month. Then it converted to the higher rate he initially wanted. However, were able to refi no prob in two years and get dialed in with conventional loan. Saved us quite a bit. Just something to think about. Good luck.
I appreciate all of your responses, I'm just looking to creatively finance deals. Although, I have been mostly buying TK OOS SFR's and have been pleased, because my return on time is so high with them (I work a demanding job).
I'm now to the point that I'm refinancing all of my original down payment out of the ones I bought a few years ago. I even found a solid lender that does an unlimited number of 30 year, fixed rate loans.
The idea of creating deals through seller financing, subject 2, and other ways does appeal to me, though :)
I wish I could find the 1% in my local CA market! :)
The property is OOS- in Tennessee.
Who cares if it doesn't pass the 1% rule. That ridiculous rule has sunk, never to be seen again...or should have. Forget percentages as a guild/rule when making decisions. They tell you nothing of value, and lie to you while doing so. Look at the numbers that matter, the ones with $$$$$ in front, and base all of your decisions on those numbers...ONLY.
Lender · Long Beach, CA · Member since 2013 · 496 posts · 296 votes
5y
Great podcast to listen to for creative financing. The guys go over real world examples, dos and don't. Worth the time if you are interested in seller financing.
Lender · Lakeland, FL · Member since 2020 · 59 posts · 23 votes
5y
I would start off with a low downpayment so you can give yourself some wiggle room if they counter back! So for example, don't right away offer 20% down because their could've been a chance the seller would take 8% down and that's a significant difference in terms of cash out of your pocket! I think with this personally my offer would be initially 8% down, 4.5% interest rate for 25 year amortization. If they want to do short term financing then something like 10% down, 5% interest only payments for 2-3 years with cash out refinance if they want more cash up front to feel more secure! Personally I feel like either of these offers would be appealing on either side. Just depends on what your seller is really wanting!
Investor · Indianapolis, IN · Member since 2018 · 86 posts · 84 votes
5y
To each their own.
I have been wildly successful using my formula above which has yield a large robust portfolio that is cash flowing more than $7000 /mo with little to none of my own money.
I am most focused on percentages. Specifically %ROI. I think people are wasting their money if they are not considering the % return on their investment and are instead just focusing on the $$$$$.
Developer · Rochester, NY · Member since 2016 · 403 posts · 338 votes
5y
@James B. Remember seller financing is advantageous to the seller. Since this deal is owned free and clear there is probably a fair amount of capital gains and depreciation recapture the seller has exposure to.
So, the less you put down the less capital gains tax, seller has day one. They incur capital gains on whatever payments you are making them towards the price of the house. The longer the amortization the further they push out capital gains tax paid on principal payments.
In terms of interest rate, I usually get a couple of term sheets from some bank lenders I work with and show them to the seller and offer them either the same rate or maybe a point higher if they insist on it. Right now even junk bonds are only paying 4% on average, so where is the seller going to get better yield elsewhere on a fixed income instrument that is collateralized by an asset they know and understand with an operator (you) that they know, like and trust?
The further out the term, the further they can kick the can down the road on their capital gains liability.
This is just an assumption that the property is in a great location. If it’s not, keep walking. I’ve talked myself into seller financed deals even though it was a bad location. Big, incurable mistake!