Exit strategies for my property?

Question

Hey guys!

So I own this property near Downtown Fort Worth in Texas.  C class neighborhood decent appreciation, 1998 brick build.

I was just thinking about what I should do when my ARM adjusts in 5 years.  Here are the details:---------------------------------------------------------------

Purchase price: 58kLoan from bank: 5 ARM, 55K, 5.25% interest, 15 year amort.I have my initial 3k cash invested, plus 6k in repairs.Appraised value: $105k.What i think it will sell for right now in our market: $115kI currently have a renter in it for $1100/month ($380/month cashflow)

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Exit 1: Sell the home in 5 years on the market.Exit 2: Bring on a friend and cash out refinance into 30 year fixed.

Exit 3: Seller Finance.... So i really want to do something like this and want to know your thoughts.  I figure by year 5 my loan will be at $40k.  I can save my cashflow which will be $22800 and use it to pay off my lien alongside the buyers down payment.

Loan balance in 5 years: $40k

Cashflow saved in 5 years: $22k.

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Sale price $125k
Buyers down payment $10k
My interest rate: i am not sure
My Amortization: Not sure either
Prepayment penalty: maybe have this a high number to keep the buyer from refi'ing??

So I just want to know if it will be viable to seller finance this home, of course i will have to put some more cash into the deal to pay off my original loan.  But it shouldnt be a problem.

Glenn McCrorey · Answer

@Sipo Thao  Your bio says your goal is to be a millionaire but not how you plan to get there.  I would consider refinancing this property.  You can probably get a loan for 80% of the 115K which is 92K.  That put 34K in your pocket after paying off the 58K mortgage.  You could probably buy two more rentals with that.  Just a thought.  5 years from now you will have 3 houses that have appreciated.  I invest for cash flow not appreciation and you don't have to be a millionaire to quit your day job if your cash flow is sufficient.

Shane Hakala · Answer

My questions to you are "Who is your renter?" "Do they like the place?" "Would they want to buy it off you?"

If you say yes then a lease option would work great. Ft Worth values are going up about 20% a year. Take and figure out what the place will be worth is 5 years vs now. See if they will buy it off you for that much or a little less. Take a 5 to 10% option consideration "fee" (not a down) from them. Set the payment around $1400 a month. Offer $100.00 a month back upon close of the sale in 5 years.

You said the sale price could be $125k. That would be $12,500 cash to you up front, $680 monthly cash flow ($40,800 after 5 years), plus the cost difference you owe versus how much you sell for. Your example would be $125,000 - $40,000 = $85,000.

By offering them an amount back at the end would go towards their closing. They would have an easier time showing a bank that they can afford the payments because they paid you on time for 5 years.

So over the whole 5 year time frame you would make $132,300. Keep in mind, this is just an example and will vary depending on the actual numbers you work with, but carrying the financing and keeping that tenant in there with a lease option would be a great exit. Again, it just depends on your tenants situation and if they are motivated to stay there and purchase it someday.

Another option would be to sell. Sounds like you are into the property for $67k. Since it appraises for 105k, you would be able to walk away with $38k minus closing which is a little more or about the same as if you were to rent it out for the 5 year terms.

There are other things you can do for exits, but those 2 would be your best options.

Sipo Thao · Answer

@glenn yes i picked up 4 houses last year and a 4plex. combined appraisals of them are 635k. with 316k in loans against them.  i was just thinking of what my option are in the future. i will probably cash out refi on them because it fits my strategy

@Glenn McCroreyundefined

Sipo Thao · Answer

Wow great advice. Thanks Shane