Would you do this deal? It doesn't have the cashflow I like, but its on 100% financing.
50K house (3/2/2). 22K needed in repairs. ARV of 90k. Rent at $950. 100% financing, including repairs at prime with a floor at 4% and no ceiling. 15 year note. I will only own 50% of the house/business, but I found the property, will oversee the remodel, will find the tenant, and deal with many of the on going maintenance. Partner brings the financing and book keeping.
I usually don't use the 50% rule when I do a major remodel. This one I figure taxes, insurance, CAPEX and vacancy will be about 40%.
Leaves a total of $60 a month in cashflow and aprox $290 in equity pay down to be shared. Again, no money down for me.
If I add management cost back to your numbers I get a cap rate of about 7.2%. I like my cap rate to be at least 3 percentage points above my cost of money so if the cost is 4% this property meets the criteria as a hold.
The scary part i the cost of money can change if prime moves. I dont anticipate needing management. I self manage my own properties and my partner is willing to help with that... I just know him enough to know I will carry 80% of the management load. :)
I like to evaluate the property separate from the rest of the deal. For instance I have a potential buy and fix-up that I would not buy at the current price. But, because I have some one who wants to buy on a lease option it becomes favorable to me.
You have a property that wouldn't make a good flip but is an adequate buy and hold. The financing is good with a low rate and no money down. If I were to go to the bank I would have to pay for a loan, have a down payment, and probably a higher interest rate. But, if I go to the bank I only pay for the money. The bank is not my partner in the equity. You are giving up 50% of your profit for the loan with favorable terms and 20% of the management chores. Be sure that is what you want to do.
@Bill Jacobsen You make some good points. Im exploring this house as a test of the potential long term partnership. I know this deal will be profitable and we will orchestrate a buy out if it doesn't. I guess I felt like sometimes you just have to try things with a mindset of what is the worst that could happen. In this case, I work hard and only earn a little.
My reasoning for doing this is that personally Im tapped on the capitol I have available. After having our first kid, my wife has been staying home, so we need our cashflow from our other properties to live. Therefore, Im really not creating more capitol to do a future deal. I see this as my avenue to expanding, even if it means a smaller reward. Does it make a little more sense now, or do you still see me selling myself short?
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