What do you think about this deal?
This property is well below market price because I am buying from a wholesaler. It is right in Greenville, 5 minutes from downtown. The property has new construction homes all around it and is in a very desirable area. They are offering seller finance.
Purchase Price: 155,000
Downpayment: 30,000
Interest rate: 7%
Length of Balloon: 10 years
Length of Amoritized: 25 years.
Below are my calculations.
"Monthly Payment $883.48
Balloon Payment Amount $99,174.21
Loan Amount $125,000.00
Total Interest $79,308.33
Total Paid $204,308.33
Payoff Time 10 Yrs"
2/1(Under 900 sqft)
Repairs(If I decide its worth it, its not needed): 30,000
ARV: It could easily go for 250,000 after a general rehab, probably more. I think it could sell as is for around 200,000.
Market rent: As is I think it would rent out quickly for 1300(Currently 1100). After Rehab I would estimate 1500-1800(Again, it depends on the repairs)
Taxes should be under 1,000
I estimated insurance around 1,000
What am I missing? This could be a good opportunity to get my foot in the door with sellers finance. I see the real opportunity as the chance to hold this property and cash flow a little bit along the way, or rehab, refinance(If I can find a better interest rate), then rent it out for an even better cash flow. Either way I see holding as the best move.
Hi Zach
I haven't done seller financing myself, so I don't know the ins-and-outs.
That being said, I do have some thoughts for you:
-using the numbers you provided without rehab, you manage the property, $1500/yr in maintenance, and you have 0% vacancy, you're looking at $125/mo positive cash flow. That's pretty tight to me -- if you go one month without a renter, you're break even on the year; if the HVAC goes out, you're in a negative cash flow for several years.
-if the title is transferred on the deal and the sale is recorded at $155k, the taxes will reset on the property this year or next. Being a rental property (as opposed to owner-occupied), property taxes are about 2.5x the rate compared to an owner occupied property. I'd expect your annual tax bill to go to over $3k -- now you're in a negative cash flow property. That's assuming the sale is recorded and taxes reset. Maybe you're structuring the deal such that the current owner holds title until loan payoff and you pay the existing tax bill each year. That would be much cheaper.
For me personally, I'd never get into a property that's negative cash flow from the start unless you play to turn it around quickly in the first year or so.
What I would do myself -- flip the house. You could probably turn a $20k profit with no rehab with a sale price $200k, or around $30k profit with $30k rehab at a sale price of $250k. No rehab route is obviously much quicker and easier. I'd probably try and do a very minimal rehab like basic landscaping and basic paint to spruce the place up. You should probably work with a good real estate agent to get good estimates on the ARV for each case.
You can do a construction loan / hard money to cover around 75% -- you can find many banks that will do this based on the deal (not on your personal financial situation). If you don't have the other 25%, look for a private lender to cover that part. This is exactly how I did my first flip.
another thought - perhaps if you were able to take title upfront with seller financing, then rehab the house, then sell, that would cover most of the financing except the rehab, a few mortgage payments and utilities. Then maybe you can find a private lender to cover the rehab costs. That route would probably save you at least $5k in financing costs compared to hard money, and would be wayyy more simple and quick since you've already secured the deal!
Quote from @Zach Fulton:
This property is well below market price because I am buying from a wholesaler. It is right in Greenville, 5 minutes from downtown. The property has new construction homes all around it and is in a very desirable area. They are offering seller finance.
Purchase Price: 155,000
Downpayment: 30,000
Interest rate: 7%
Length of Balloon: 10 years
Length of Amoritized: 25 years.
Below are my calculations.
"Monthly Payment $883.48
Balloon Payment Amount $99,174.21
Loan Amount $125,000.00
Total Interest $79,308.33
Total Paid $204,308.33
Payoff Time 10 Yrs"2/1(Under 900 sqft)
Repairs(If I decide its worth it, its not needed): 30,000
ARV: It could easily go for 250,000 after a general rehab, probably more. I think it could sell as is for around 200,000.
Market rent: As is I think it would rent out quickly for 1300(Currently 1100). After Rehab I would estimate 1500-1800(Again, it depends on the repairs)
Taxes should be under 1,000
I estimated insurance around 1,000
What am I missing? This could be a good opportunity to get my foot in the door with sellers finance. I see the real opportunity as the chance to hold this property and cash flow a little bit along the way, or rehab, refinance(If I can find a better interest rate), then rent it out for an even better cash flow. Either way I see holding as the best move.
I always encourage people to hold whenever possible because that's where the wealth comes from as opposed to just the riches
To me, this seems like you'd be better off flipping it than holding with the current numbers given. It would be a great learning experience and will hopefully help you snowball into the next deal that might be more lucrative.
Just my 2 pennies
Thanks for the feedback Mack!
Thanks for the feedback @Ross Gortney. This is helpful
@Zach Fulton If you are planning to buy and hold this then believe you have underestimated your taxes. For an investment property (one in which you are not living in and don't qualify for homestead rate, you would expect to pay close to 2% of value in property tax. So that would be $3k/yr and not $1k/yr. The rule of thumb in SC for investment property tax is you'll pay ~3X the resident/homestead rate. Does this make sense to you?
Quote from @Dan Rowley:
@Zach Fulton If you are planning to buy and hold this then believe you have underestimated your taxes. For an investment property (one in which you are not living in and don't qualify for homestead rate, you would expect to pay close to 2% of value in property tax. So that would be $3k/yr and not $1k/yr. The rule of thumb in SC for investment property tax is you'll pay ~3X the resident/homestead rate. Does this make sense to you?
This does make sense and is very helpful, Thanks Dan!
What neighborhood? Might work as an STR or MTR, especially if it's close to the hospitals. My STR is near the West Village and Brandon Mill and does better than your estimates as a 2/1. If you can at least break even and hold I think the appreciation will pay off- the town is booming!
For an LTR I would pass on the rehab and it would probably be fine (serious issues permitting).
5 minutes from DT, I would look at STR for sure, furnished, much better returns. I'd be curious to know the location. I also know a guy that is very knowledgeable and creative in this area, he could be a good resource. Keep us updated!
Hey Zach- Ross made some solid points there. It does seem a bit tight on cash flow, but u got options. Flippin the house like Ross mentioned could be a good move, especially if u can spruce it up on the cheap. If you're set on holdin it, just make sure you're prepared for any unexpected expenses that could eat into your cash flow.
One thing to consider is property management. Are you gonna manage it yourself or hire a property manager? If you hire one, remember to factor in their fees into your calculations. Also, I'd double check your tax and insurance estimates, just to be on the safe side.
Here's a good article on seller financing that might help you out: https://www.biggerpockets.com/blog/seller-financing-real-estate
Quote from @Joshua Goodnough:
5 minutes from DT, I would look at STR for sure, furnished, much better returns. I'd be curious to know the location. I also know a guy that is very knowledgeable and creative in this area, he could be a good resource. Keep us updated!
This is a good point -- I actually turned my previous residence into a STR in Greenville. It's only 1 mile from downtown, and it's typically booked about 80% of the time for the past year and half. People love an Airbnb house super close to downtown. I recently decided to switch it to mid-term (30 day min) to comply with the Greenville law and also to make my life a lot easier managing the Airbnb, mainly because I moved to GA. It's my first STR, and I spent quite a lot of time the first year getting everything working well with communication, systems and getting the right team in place for cleaning, maintenance, repairs. You can make double the net rent with STR vs LTR in this market so long as occupancy stays up over 80%, but it is a lot more work. In Jan/Feb this year, my occupancy dropped to 40-50%, and that made me nervous. Supply of STRs has increased a lot in the past 6 months, so the demand can be impacted accordingly. About management, I like managing myself so I know much better what's going on with the property, and also not spending 10-15% of gross rents to pay another manager.
Also keep in mind that if you do STR/MTR, you're going to have to furnish the place, which costs money and time. I spent about $15k to furnish my 3 bedroom/2 bath house for STR. It can certainly be done a lot cheaper if you look for deals and/or buy used furniture and decorations.