Seller-finance 50% down payment?

Question

Need advice. I’m considering putting an offer in on a triplex listed for $220k.  Current rents are a bit below market, $2475 total, 3bd 2ba, 2bd 1ba and 1bd 1ba.  I was thinking possibly doing $200k, 20% down and seller finance 50% of down payment at 7-8% over 5 years.  The numbers I’m running show that it will still cash flow around $150/mo.  If I raise the rents for example $25 each, cash flow is now $327/mo. I’m playing the long game so cash flow is not a huge deal in the near future.  Is this a little crazy?  Offers are due Sunday so I’m wondering if this is an attractive offer or just crazy lol.  Thanks!

Briana Cialkowski · Answer

I increased the maintenance and Capex for a combined 20% ($5,832 anually), vacancy 8%.  At the asking price $220k, 20% down at 7% for 30 years, current rent of $2,430, cash flow came out to $84/mo. It is an older house built in 1893.Definitely re-thinking. Thank you for the feedback, I appreciate it!

Nicholas L. · Answer

@Briana Cialkowski

OK - just to set aside the offer for a second, yes, you're not running the numbers accurately.  you have $200 a month for repairs and capex.

repairs: $75 a month is probably low for a triplex.  that's only $300 a year per unit.  that's basically 1 repair per unit per year.

capex: since you're looking at an actual property, you need to look at what it actually needs.  furnace, roof, appliances, etc.  if the roof only has 8 years left, and the furnace (or since this is a triplex, maybe there are 3 furnaces!) only has 2 years left, then $124 a month is deeply insufficient.  3 kitchens, 3 or more bathrooms, etc.

Briana Cialkowski · Answer

Tenants pay for utilities, so for expenses I have vacancy 8% ($198), taxes $395, insurance $85, maintenance 3% ($74), CapX 5% ($124).

I figured it would be a gamble but with the seller still receiving monthly cash flow, I think that maybe it would be intriguing.

My main concern is that I am not running the numbers as accurately as I should be, or if it’s just too much of a stretch.

Nicholas L. · Answer

@Briana Cialkowski

two reactions:

1. can you post the numbers that you're using for expenses?  if there is deferred maintenance it will eat up all cash flow for years and years.

2. if "offers are due Sunday" it sounds like this is a multiple offer situation, in which it seems extremely unlikely they'd accept an offer below asking... in multiple offer situations the price typically goes above asking.  and if the seller is not familiar with seller finance they or their agent will simply dismiss it