Should I assume this loan?

Question

Its a 3 BR/1 BA SFR 1100 SQ FT.  With detached garage and mother in law suite detached.  The loan is at $110,000 with $20,000 in equity. He is renting it out to a friend for $900 but after researching 3 BR homes, the market rent is for $1050.  I definitely think I can get $1100 or more since there is a detached mother in law suite.

The house has a new roof, updated plumbing, and new water heater and he is willing to throw in $3000 for new floors and interior paint; plus fix any minor things during home inspection.

I know this isn't the best deals, but it appeals to me because its nearly nothing out of pocket.  What do you think?

Mark Maire · Answer

I might have to refinance because the PITI is at $900, but there is 20 years left on the loan.  At $1100 I would be breaking even on CF assuming 8% vacancy($88) and 10% maintnance($110).

Mark Maire · Answer

I think I am going to decide against it.  If I was going to live in it I would probably do it since I could rent the mother in law suite to someone.  If he were to give me $10,000 I would do it.

Bill Jacobsen · Answer

You did not mention management costs so I assume that you will manage yourself.  I like to include the cost in my analysis no matter what my decision on management is.  If I assume 10% of rent then you have negative cash flow and the mortgage paydown is about the same amount.

As an investment you will be making the potential appreciation and that is all.  That sounds about right given that you are investing very little.

Good Luck.

Bill

Winston D. · Answer

It seems like you have done some homework on the property, its market value and rent but I would make sure those numbers work for you.  My typical rule of thumb is that my rents have to be at least 1% of the property value and my cash flow has to be at least $300.

Also, you should make sure you have a good idea on the condition of the property.  An inspection should be included as part of your contingency/terms.

Next thing is the mortgage.  Speak with the seller and find out what the note terms are and what the penalties are.  Most loans have a due on sale clause for a specific period while others are limited.  If the loan is not assumable, the best way i to buy it subject-to the existing financing in place but in addition to that my practice is usually to buy the property into a land trust.  Also, check to see if the mortgage has balloon.