Creative Financing Idea: Looking for Advice

3 Replies

I'm new to real estate, and I have my first property under contract in St. Louis. This one is tying up almost all of my money right now, but I just found another potential property in St. Louis that could provide a very good cash-on-cash return. My first thought was that there's no way I could make it work because I don't have enough money for a down payment. Then I switched to thinking about how I could make it work, and I came up with a potential creative finance offer that I think I could make work. Being relatively new to this, though, I don't know whether it would actually be a good deal for me (the current owner likely wouldn't accept it either, but I'd potentially be willing to try making an offer if my idea sounds reasonable). I'm looking for any advice you may have about my idea for structuring it, and I'm open to any other ideas you may have. I'd like to build up my creative financing skills whether this one works out or not.

The house last sold in 1995 for $34,000. If the owner hasn't refinanced, I calculated that they'd likely still owe around $13000 on the loan if they had a 30 year mortgage and they made the regular payments each month.

I started with the conventional financing route. Here are the number for that:

List Price: 59,000

Market Value: ~$61,000

Repairs/make ready: $10,000

3 bed/1 bath

Taxes: ~$38/month

Down Payment at 20% (no creative financing): 11,980

Mortgage at 5.5% interest: $272/month

Replacement reserve: $75/month

Cap X: $75/month

Utilities: 0 (paid by tenant)

Property management: 9% of rent plus 1 month rent for tenant placement

Estimated rent: $950/month

Monthly Income after expenses: $169/month

Cash on Cash Return: 9.2%

This would fit my investment criteria in terms of what I'm looking for, but as I mentioned above, I don't have the money for a down payment or the repairs right now. So here's what I came up with as a potential offer:

Seller financing at 8% interest only for 2 years with balloon payment. Then refinance out using a conventional loan and pay the seller.

It would take me ~6 months to built up all of the money I would need for the repairs. Based on my calculations, I would lose around $2172 the first year because of the time needed to build up the money for repairs and then make those fixes. I could consider a personal loan for that money as well, which would let me rent out the unit faster but would require larger monthly payments.

During the second year of interest only, the unit would be rented (accounting for up to 1 month of vacancy), and I would make $496 that year.

At the end of the second year, I would refinance, and if the value of the house appreciated at ~2%, I would owe the seller around $10,000 after the refinance. I would have enough money at that time to pay that amount. Starting in this third year, after the refinance, I would make $2032 a year after all expenses, which would amount to ~20% ROI based on the $10,000 paid to the seller and ~9.2% ROI based on the full $22,000 put in (including repairs and money lost in the first year). By that time, I'd have saved more than that amount, so I'd have no trouble making this payment.

I'm very interested to hear your thoughts about this structure. I'd be happy to provide more information about how I got to these numbers if that would be helpful.

Thanks in advance for your advice!


To preserve cash I would look for deals that let you execute the BRRRR strategy and refinance after repairs to get your money out and do it again. With the list price being basically market value this wouldn't work for that.

Also, not having the money to do the repairs right away would be a little risky for me. What if something happens and the car breaks down. Then you have to pay for the car and have to wait longer to do repairs. I would make sure I had the money to finish the house and get it rented as soon as possible before buying.

@David Light Thanks for your reply. What you said about the BRRRR strategy makes a lot of sense. I have thought about trying to go that route. In 6-12 months I'll have saved enough again for a downpayment/repairs, so maybe I should just wait until then and find a property that I could BRRRR. Like you said, that way I also wouldn't risk something happening in life that would suck up money and prevent me from finishing the repairs.