Should I take this owner financing house hack deal?

Question

Hello BP community,

I have been searching for a house hack opportunity in the New Orleans/Metairie area for around 7 months now and have come up empty. Nothing that has come on the market seems to meet my criteria, and I would ultimately end up paying around the same per month as I am paying in rent right now if I bought something,which defeats the purpose.

My landlord, whom I have a good relationship with, offered to sell me the duplex I live in now with owner financing. It is 3 br on one side and 2 br on the other. I would live in the 3 bedroom with my wife and daughter, and rent out the 2 bedroom for $1300-1400. The landlord just put a new roof on and installed new AC units in both units. She payed $350k for it a couple months ago, but said she would probably want $375k for the owner financing deal. With a 4% down payment of $15k, 3.25% interest rate, at a $375k purchase price, my monthly note to her would be $1560. Taxes run around $300/month and insurance is around $260/month. No PMI since owner financed.

Basically If i rented out the 2 bedroom unit for $1400, I would be coming out of pocket every month around $720. This is better than my $1300/month I am paying in rent now, but should I wait and see if something else comes on the market where I only have to come out of pocket $200-300/month?

Please let me know your thoughts.

Jeff Copeland · Answer

This is one of those questions that only you can answer.

From strictly a rental property analysis standpoint, $2600/mi in potential gross income for $375k is roughly a 4% cap rate - That's not incredibly exciting, but also not terrible (it's also very market-specific...it would be great in some areas, terrible in others, and I know nothing about the Metairie LA market).

That being said, we aren't talking about a strict rental property analysis, we're talking about opportunity cost:

1. If you take this deal, are you passing up on other, better opportunities? It would appear not, since you have found nothing else in the past 7 months.

2. If you take this deal, you it's an opportunity to save $500/mo compared to your current situation - What does that extra $500/mo do for you in terms of your long term investing goals?

3. If you don't take this deal, what's the opportunity cost of maintaining the status quo and paying $1300 towards your landlord's mortgage every month?

These are just some things to think about. There is obviously a ton of uncertainly baked into the economy and the real estate market right now, making it risky to pay top dollar for anything. But there's always a risk to doing nothing as well - and only you can decide which (and how much) risk makes sense for you, your financial situation, and your long term goals.

Nathan Gesner · Answer

I haven't had coffee yet and I'm not checking your numbers, but it sounds like an opportunity if everything is correct. The best part is that you're not required to put down a large payment or pay higher interest and you're not dealing with a bank.

My only concern would be what happens if you decide not to live there. It only works as long as you occupy it.

Greg Jeanfreau · Answer

@Steve Vaughan  In Louisiana, we do not have land contracts as far as I am aware of. We have bond for deed or traditional owner financing. Bond for deed is essentially a glorified lease purchase or similar to a wrap. Traditional owner financing is when the title actually transfers and the seller becomes the bank. My point was that the seller cannot truly finance and transfer title if there is an existing mortgage on the property. So, if the seller has a mortgage, then the only option would be a bond for deed unless they pay off the existing mortgage. I hope this makes sense.

Steve Vaughan · Answer

As long as seller financing means you will actually own it with a note and mortgage.

The numbers don't matter if you don't own it i.e. with a Land Contract.

What does 'owner financing ' mean in this situation,  Mason?

Mason Mccullough · Answer

An extra $500/month in my pocket would definitely help accelerate my investing career, but also know that there were 4-5 deals that came on the market last year before I was ready to buy that wouldve allowed me to save atleast $800-900. The question is, how long will it take for these opportunities to arise again and what are my opportunity costs, as you said. The good news is that I am in a great house and great location now, and still able to build my savings every month, so I am not in desperation mode, but still want to get the ball rolling on my investment career.

Mason Mccullough · Answer

@Greg Jeanfreau yes you are correct.

Greg Jeanfreau · Answer

@Mason Mccullough Is the street the name of a parish and the owner a Realtor originally from a place with REALLY nice weather?

Greg Jeanfreau · Answer

@Mason Mccullough Lakeview is solid for tenant base and resale. I think I know the house and your landlord (because New Orleans is the smallest place on Earth)

Steve Vaughan · Answer

Say what?   Whether there is a mortgage on the property or not will determine whether it has to be a wrap or not, but does not answer the question of HOW he will own it (or not in the case of a land contract).

The OP doesn't seem to care so I don't either, but saying debt will determine the difference is just incorrect. But carry on.

Mason Mccullough · Answer

Thanks Stephen, I never thought about it that way. If I did the owner financing deal this summer, I could easily build up my savings for the down payment on a better deal if it came along later on in the year.

Should I take this owner financing house hack deal?

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