Need advice. 20k deal. tenants live free 10 yrs

Contractor · Ridley Park, PA · Member since 2016 · 3 posts · 0 votes

I was offered to purchase a single house for 20k. It’s worth about $160k. However the tenants are elderly, desperate and want to live rent free for ten years. Taxes are about $4k. Needs some minor improvements that I can do myself. It would be my first time buying. I’m on the ropes and need some solid advice. Thanks in advanced for anyone to that replies

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Andrew SyriosPro Member

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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

It sounds like a good (albeit very messy) deal, but it would only work if you're 1) willing to have a lot of red in cash flow and 2) This is truly a very long-term hold. I ran the numbers in the CCIM calculator assuming the market rent is $1000/month. At that rate, the cost of missing 120 payments for $1000 over the next ten years (assuming you want a 10% rate of return on your money) is $75,671.16.

You would still have $64,328.84 of "equity" ($140,000 - $75,671). It's a bit closer for $1500/month,

Then the cost is $113,506.75 in present dollars to not collect any rent for 10 years. In which case you would have a positive $26,493 to begin with. Again, all of this assumes you seek a 10% rate of return, which is pretty decent.

Again, I would only consider this if you are comfortable with a very long term hold. You should also make it clear that in 10 years, you will start charging rent again no matter what. These types of things can easily be forgotten and create a big mess down the line. I would be nervous about it, but I would certainly consider it.

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James Galla
Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes
7y
@Steve Miller
Sounds like a cool deal - cash advance via equity. You ought to account for capital expenditures, rental rates, and other factors to see if that purchase price is worth it.
Essentially, you'd be stuck at a fixed rental rate, depending on your purchase price and would be subject to interest charges if you leveraged the property to pull out the equity.
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Gabriel GraumannPro Member
Real Estate Broker · Phoenix, AZ · Member since 2019 · 165 posts · 100 votes
7y
@Steve Miller I've seen a couple deals like this before, though closed on one myself that provided a 10+ year hold requirement, which is an awesome opportunity of the property/house itself is solid. You're basically buying an annuity that returns all of your principle plus $100K after expenses + appreciation + tax depreciation value/write-offs. Assuming you are purchasing with cash, you'd have no debt service. Perform your due diligence of course, confirm the seller has no debt lingering on the property, and more simply have an attorney review and draft a custom agreement to protect your rights and interest in the property. You'll still want to treat it like any other investment property, creating an inspection and maintenance schedule as the occupants will likely not address much following the sale, especially if health is a concern. And perhaps one of the biggest questions is what happens if they want to remain beyond 10 years? Start with the end in mind and formulate a plan, and I'm sure you'll do fine. If you have more questions lets connect.
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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
7y
You’re getting $140k value minus $40k in taxes (plus increases, they may skyrocket as non-owner occupied.) minus $20k down. So $100k in rent for 10 years or $10k per year or $800/mo to cover insurance and repairs. As long as that’s at least close to fair rent, it’s a newer house, and you have plenty of cash to replace roof (if it’s asphalt plan on buying one), water heater, ac/furnace.

I’d get a serious real estate lawyer involved, what happens after 10 years if they want to stay can’t/won’t move, what happens if you don’t fix something fast enough, landscaping, snow removal? Etc etc etc.

if they are over 65 and have living relatives I’d have them sign off on the deal so you aren’t accused of elder abuse in 10 years.

could be a great deal, no realtor fees for them, no loan origination or interest for you. (Now that I think of it you may have to talk to a cpa or lawyer about what amount you have to declare al income, what they have to declare as interest income, etc.
ps. What happens if they die in 5 years, do you have to let it sit empty for 5 years or pay them $50k? Or?
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Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
7y
It sounds like a good (albeit very messy) deal, but it would only work if you're 1) willing to have a lot of red in cash flow and 2) This is truly a very long-term hold. I ran the numbers in the CCIM calculator assuming the market rent is $1000/month. At that rate, the cost of missing 120 payments for $1000 over the next ten years (assuming you want a 10% rate of return on your money) is $75,671.16.
You would still have $64,328.84 of "equity" ($140,000 - $75,671). It's a bit closer for $1500/month,
Then the cost is $113,506.75 in present dollars to not collect any rent for 10 years. In which case you would have a positive $26,493 to begin with. Again, all of this assumes you seek a 10% rate of return, which is pretty decent.
Again, I would only consider this if you are comfortable with a very long term hold. You should also make it clear that in 10 years, you will start charging rent again no matter what. These types of things can easily be forgotten and create a big mess down the line. I would be nervous about it, but I would certainly consider it.
Podcast Guest on Show #121
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Steve Miller
OP
Contractor · Ridley Park, PA · Member since 2016 · 3 posts · 0 votes
7y
@James Galla Thank you so much for responding, and yes the main reason I would do this purchase is to refi and invest in an income producing property
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Steve Miller
OP
Contractor · Ridley Park, PA · Member since 2016 · 3 posts · 0 votes
7y
@Steve Miller and thank you to everyone else for your response it’s greatly appreciated!! I am bran new to all of this still have a lot of studying and learning to do. Thank you again
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