5-Plex Seller Finance Deal Analysis

Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes

Is there a value-add opportunity? As a yield play, I would pass but, if there's a route to performing some capex and increasing rents 25%+ over the next 3 years, I would be interested. Since they are deadset on the price, I would try lowering the down payment (if you are doing capex). Tell them you will be doing work to the property in the first 90 days, which will add value to the property, and further secure the loan.

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James Atkinson

Realtor · Tulsa, OK · Member since 2018 · 13 posts · 4 votes

3y

Hey Tim! From an outside perspective the question is whether cash flow early or long term equity is more important to you. With only 12k down it would be hard to get great cashflow right away. I'd be trying to figure out if there are ways you can improve the property in that 3 year timespan to increase rent or reduce expenses. You could look around at similar properties in the area as a starting point. If the property apraised for higher than the seller is asking and the income can be improved over time to at least 1.25 times the debt service, you'd be in good shape! Just my opinion.

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Ethan Gidcumb

Lender · San Diego, CA · Member since 2022 · 130 posts · 75 votes

3y

Hey Tim! Since you already have experience with other properties and, I'm assuming, the market, I think you have to decide whether $100/month is worth the amount of risk that comes along with the property. I would not take that deal with so little cash flow because if something went wrong, there is very little room to make your money back.

If there is a way to negotiate into better cashflow, I would take that approach.

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Arif Sheikh

Investor · Baltimore · Member since 2023 · 21 posts · 11 votes

3y

Quote from @Tim Nethers:

I have a decent relationship with the owner of a 5-plex in a small town in Indiana. The 5-plex is fully occupied, and professionally managed, pulling in $657/unit. The owner is willing to sell it to me with seller finance with $12k down, 5.75% for 3 years (22 mo amort.), $1000 in closing costs; but the price is higher than what I'd like to pay. I'd like to be at $185k (7.25% capex), the seller is asking $203k - non-negotiable.

Expenses are $1,987/mo, including $475/mo in utilities, before P&I. When accounting for vacancy, management, capex, utilities, repair expenses and the financing, its cash flow would be roughly -$100-140/mo at that asking price (not factoring depreciation, appreciation and debt pay down).

I love the idea of adding a 5-unit, but I wanted some other eyes on the deal with more experience to assist in whether its a good idea to take it on for the appreciation/long term hold strategy - with such little skin in the game and with it being potentially negative cash flowing. I've historically bought single family and small multifamily, and never bought anything that isn't cash flowing.

Knowing that I'd probably be subject to higher rates after the 3 year seller financing, and the asking price leaves it cash-flow slightly negative, I'm wondering if I still go-in knowing that it appraised at $250k last year, and when you consider the debt paydown, depreciation and appreciation factors are a huge upside versus the amount of funds I'd have in the deal. Would you buy or pass?

Hello Tim,

It's great to see you considering this 5-plex opportunity and reaching out for advice. Let's break down some key aspects of the deal:

Positive Aspects:

Seller Financing: The fact that the owner is willing to provide seller financing with a relatively low down payment is a significant advantage. It allows you to acquire the property with limited initial capital.
Fully Occupied: The 5-plex is fully occupied and professionally managed. This means you have immediate rental income without the stress of finding and screening tenants.
Appreciation Potential: The property appraised at $250k last year, indicating potential for appreciation. Considering this, along with debt paydown and depreciation benefits, could provide significant long-term value.

Concerns:

Negative Cash Flow: It's essential to consider the negative cash flow aspect of the deal. While negative cash flow can be manageable if you have a strong long-term strategy, it's crucial to have a clear plan for covering these short-term losses, especially as the seller financing terms change.
Future Financing: As you've mentioned, higher rates after the 3-year seller financing term could impact your cash flow further. Be prepared for potential adjustments in your financial plan.
Price Negotiation: The seller's non-negotiable asking price is higher than your preferred price. While this can be a challenge, consider the local market conditions and recent comparable sales to determine if the asking price is reasonable.

Strategies to Consider:

Seller Negotiation: Although the seller states the price is non-negotiable, it's worth having a conversation to see if there's any flexibility. Be prepared to present your case for why your offer aligns with market conditions.
Cash Flow Management: Develop a clear strategy to address the negative cash flow. Explore options like rent increases, expense reductions, or leveraging other income sources to cover the shortfall.
Long-Term Vision: Consider your long-term investment goals carefully. If the property offers strong appreciation potential and aligns with your portfolio objectives, it might still be a worthwhile investment despite the initial negative cash flow.
Exit Strategy: Think about your exit strategy. Are you planning to hold the property for a certain period, then sell for potential profit? Or are you looking for a long-term hold? Clarifying your strategy can help you determine if this deal aligns with your goals.

In summary, while the negative cash flow is a concern, it's not necessarily a deal-breaker if you have a solid long-term plan and are prepared to address the challenges. Engaging in open communication with the seller and conducting thorough due diligence on the property and local market conditions are critical steps. Ultimately, the decision should align with your investment objectives and risk tolerance.

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5-Plex Seller Finance Deal Analysis

5-Plex Seller Finance Deal Analysis

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