Four Duplex Property With Seller Assisted Zero Down Financing

2 Replies

This is my first post on the forum. I've been listening to the podcast for the last several months, and snooping around the forums. REI is something I have been interested in for several years, but I have always hesitated to pull the trigger. I generally suffer from a big case of analysis paralysis in most areas of my life. A year and a half ago I pulled the trigger on going back to school for an accounting degree. I quickly landed a solid Corporate accounting gig, which has provided a steady income and a base for investing. I'm a couple months from finishing the CPA exam, and now seems like the right time to pull the trigger on investing.

I'm interested in buy and hold rentals and I originally thought our (my wife and I) first deal would be a live in duplex in our home town. However, a property with four duplexes ( for $399,000) popped up on my radar. The idea of not just starting my portfolio but kicking it into high gear was attractive to me.  I checked the local assessor's website and it turned out I knew the owner from high school. I found him on Facebook and we started talking about the property and my interest in investing. That gives you some of my back ground. Now on to the property details: 

Price: 399,000

Details: 4 Duplexes - 8 units with 2 bedroom, 1 bath 1 car garage ~900 sq/ft built in the 80's. All electric. Heated with electric base board heaters. AC is window units built in to the wall (probably my least favorite part about the units). Exterior is brick front with vinyl siding. The units are on a well and each building has it's own septic system. The units are a little out dated, but otherwise appear to be in decent shape. 

Location: The edge of the city limits of a town of 15,000 people three houses down from a junk yard and across the street from the municipal golf course. The town has a solid working class, but I'm not counting on the town growing particularly quickly, so I'm not counting on appreciation. The units are a 10 minute drive from my office. I would plan to manage, but I have a 6% management fee baked in to my analysis for conservatism. Not the best location, but could be worse. 

Numbers: 

The current owner has agreed to finance the down payment and what ever rate the bank settles on for 10 year fixed. The owner has discussed this with his current banker who has agreed to the financing deal. The seller told me he looks at it as a partnership. I created the following spreadsheet after reading Jay Scott's post about Multi-family deal analysis. I tried to be fairly conservative with my numbers:

https://docs.google.com/spreadsheets/d/1YJzV_LzfZN...

Price - $399,000

Downpayment 0

Improvements $5,000

Finance Amount  100%

Interest Rate  4.50%

Closing Costs (Including Setup LLC and draft promissory note) 2500

Upfront Investment - $7,500

Revenues                                                       Monthly            Year 1

Rental Income                             550             4,400                52,800

Vacancy Rate15%                                         (660.00)             (7,920.00)

Net Rental Income                                         3,740                  44,880

Other Income                                                                                  00

Gross Income                                               $3,740                 $44,880

Expenses

Property Taxes (annual)                                                              3,700

Insurance (annual) 1,036 per unit * 4 units                                  4,144

Property Management (% Rent)   6%                                         3,168

Maintenance & Repairs (Annual)                                                  4,000

Advertising (Annual)                                                                        300

Utilities (Annual)                                                                                00

Total Expenses                                                                         ($15,312)

NOI $29,568

Financing

1st Mortgage                                                                             $319,200

Term (years)                                                                                     30

Interest Rate                                                                                    4.50%

Payment (Monthly)            -$1,617.34                                        -$19,408.07

2nd Mortgage                                                                          79,800

Term (years)                                                                                     10

Interest Rate                                                                                  4.50%

Payment                                -$827.03                                       -$9,924.41

Cash Flow                                 $20                                                $236

Investment Basis                                                                         $7,500

ROI (cashflow/basis) 3.14%

Cap Rate (NOI/Property Price) 7.41%

My primary concern with the property at the list price is exit strategy. The property has been on the market for over 100 days now, and I'm concerned that I might have a hard time selling it after 5 or 10 years if I decided to upgrade.399,000 is the list price. Although I'm not putting money down I have about $10,000 in reserve cash, access to credit cards, and equity in my primary residence. My gut feeling is that this could be a deal for around $325,000, which with my current assumptions would put the cap rate at 9.1%, and about $5,600/year in cash flow.

So, what do you think about the numbers? What price range would you consider this deal workable? How much of a premium does 100% financing give a deal like this? 

Your spreadsheet says $20/mo cashflow, and you mentioned that appreciation is not expected.  Based on those two data points there is no deal.

Understandably you are anxious to get in the game, and may have even jumped in without the resources of BP, but you cannot work the property and risk the loss of capital, for the reward of $20/month.  Looks like the deal needs to be renegotiated to 325k.  The owner may be getting his fair market value from the loan and a little extra gravy with the owner financed portion.

Originally posted by @Dooreuhn Cee :

Your spreadsheet says $20/mo cashflow, and you mentioned that appreciation is not expected.  Based on those two data points there is no deal.

Understandably you are anxious to get in the game, and may have even jumped in without the resources of BP, but you cannot work the property and risk the loss of capital, for the reward of $20/month.  Looks like the deal needs to be renegotiated to 325k.  The owner may be getting his fair market value from the loan and a little extra gravy with the owner financed portion.

 Hi, I was just cruising around and saw your comment. I'm looking at a 4-unit property with $2000/mo coming in, current owner has $800/mo mortgage payments = which makes it around $1200 positive cash-flow. The property is worth about 160K and can be negotiated down to 130K(assumption, though). My question is that, say, if the seller is motivated and has some equity to the property; can the seller finance the down payment? If yes, would it be better to get the loan at a market value or higher than that? 

I am hoping to see if you or another user can maybe comment on my question... :) Thanks in advance.