Good day all...
I have a package deal of 5 SFR that I can purchase via owner financing with 0 down, 6% on 30 year amortization and 5 year balloon. Cash flow will be about $1,363.00 per month after all expenses. The properties are in average (no major repairs needed) condition but the area is a little rough. All properties are rented and current. The seller is motivated and no longer wants to be a landlord.
I have never deviated from my 30% ARV equity rule on purchase. My purchase price on this deal at this point puts me closer to the 20% ARV equity mark. These properties will get very little appreciation since the area is just not that great. Not to mention I never buy based on appreciation either, it's just a bonus to me.
My question is this... Would you buy these properties with good cash flow if they didn't hit your equity target? Meaning you are paying closer to the actual appraised value of the property.
My thoughts are a couple big repairs, issues or eviction and I can dip even deeper into the loss of equity.
Couple positive notes. I have known this seller for a long time and I trust his disclosure on condition of these properties and 0 down with instant cash flow isn't bad either.
If I plan to buy and hold I buy the property based on cash flow. I don't want to have negative equity but I don't look for a certain % of equity. If my cap rate is market or better I should not have negative equity. Most houses are valued above their rental value so I don't usually have to worry.
If I am buying a flip I want to make 20% on the purchase, holding costs, and rehab cost. That determines my buy price.
Normally, I want 3 percentage points above my cost of money. If I am borrowing at 6% I will want a cap rate of at least 9%.
Seems like a great deal to me if you are looking for buy and hold. Your Return On Cash is great. I would take 1/2 of the $1363 net to pay down the mortgages faster to build up your equity.
Thanks for the feedback. I agree that it seems like a good deal I've just always stuck to my 30% ARV rule and it has never failed me. That said after doing a little more research in the area I think this is a good deal and the return on cash is great as Tim Cooper pointed out. I plan on meeting the seller to discuss the deal later this week. I will update the post after our meeting.
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