Buy and Hold Deal with Two Buddies...Opinions Please!

[Daniel Miller]

I found this deal at a local REIA meeting. A realtor/wholesaler/investor had a single-family, 725 square foot, asbestos-siding, wood frame, house in a C/C- area four houses down from a major intersection that probably sees upwards of 60,000 cars a day. It would probably not be difficult to rent. It is a very convenient, lit-intersection, location in the county.

I think it will rent for $750

We are going to put $6500 into the house to clean it up. The $6500 is in materials. We are going to do all the work ourselves. Many people say "pay yourself for your time" but in this particular renovation my friends and I are rehabbing for experience and passive income. We view our time invested as part of the initial down payment (and property management as a continued investment in the maintenance of our initial capital investment).

Purchase Price: $47,500

Down Payment: $3,500

Taxes: $775

Insurance (Liability): $600

Maintenance (significantly decreased after the initial capital investment) $1,000

Mortgage: Seller will hold the note for 15 years at a 5.5% interest rate

Monthly Mortgage Payments $375

My two friends will put in $3791.66 and I will put in $3416.66 (I am a commercial sales agent. I found the house and handled the negotiations. I would not normally do this deal without more compensation, but these are two of my buddies I played baseball with)

This gives us a total of $11,000. We will purchase the property ($3,500 plus half of closing costs; roughly $1,000). We will then have $6,500 left to implement our plan.

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$750/month = $9,000/year - 10% Vac Loss = $8,100

Expenses = $2375 Annual Debt Service = $4,500

Total Profit = $1,275 + Principal Reduction (Appx. $1,500 first year) = $2,775

$2,775/3 = $925/$3,791.66 = 24.4% Cash on Cash Return for my buddies and a little bit better for myself (not taking into account our time invested, which as I said before will be just as accurately identified as experience)

It is not much, but we all wanted to do something and we thought this would be a good learning experience and a safe test to try Single Family rentals. The terms are fantastic.

Please give me some criticism! Thanks

[Brian Mathews]

The only ship that won't sail is a partnership. I'd get a lot of things in writing outlining everything. Like what happens when one of your wives thinks the other 2 aren't pulling their own weight. Stuff like this ruins friendships when one's perception of their own worth exceeds what it really is.