I would like some feedback on a potential opportunity that has been presented to me.
A bit of context: I live overseas and have a very demanding job that I enjoy and so I don't have an interest in taking time to chase real estate deals. I invest in Provo and Salt Lake City Utah remotely and have a team there on the ground that take care of things incredibly well. I currently carry two mortgages on investment properties and don't want to carry another mortgage at the moment. I have a fair amount of money to invest in properties and so I am willing to give up a bit in terms of return on investment in exchange for minimal hassle and to not have to think about my investments that much.
Here's the opportunity: I have a friend who owns a triplex with his partner and the partner needs out and is interested in selling his 50% ownership in the property. The mortgage is in the partner's name and he is willing to continue to carry the mortgage by maintaining a .5% share in the llc with no ownership rights (It goes without saying that there is a lot of trust between the three of us).
Here are the details:
Location: Provo, UT, C+ neighborhood.
Asking price: 273k
Amount left on the loan: 124k
Asking price for me to take over ownership: $68,950 (essentially ask price-mortgage + some negotiation around avoidance of realtor fees/closing costs,etc). This will be paid over a year in four installments, with no interest incurred.
Mortgage payment: $730/month
Property management and lawn care: $85/month (property manager is my current manager for the other properties I own)
Utilities not paid by renters: $45/month
vacancy rate: they have only had one month of vacancy for all three apartments in 5 years, so not a big deal.
repairs: minimal. The current owners have done all that is needed at the moment.
capex: $180 (assuming 10% of rent)
Thus, total monthly expenses are ~$1040
Revenue from rent:
Monthly cash flow: $785/2= $392.5
I would appreciate any feedback on what you think of the investment as well as any advice on this fairly idiosyncratic arrangement.
Many thanks in advance.
Is there a contradiction there? "Asking price for me to take over ownership: $68,950" vs "I have a friend who owns a triplex with his partner and the partner needs out and is interested in selling his 50% ownership in the property"?
There is no mention of your Friend giving up his half ownership? Is he? Or would ALL those revenues and expenses be split 50-50?
Why would a loan of $124k require mortgage payments of $730/m? ie. why so high? There are other questions I have about utilities and repairs, but I probably haven't got a good grasp of what you are saying yet(?)
My theory is that your friends partner, who has a theoretical equity of about $75k, is hoping that you will carry the 50% bag for him for the "mere" sum of $68k, then you and your friend will have to squabble over the rest. Can you see the problem with that? (Especially since as an investment, who would pay $273k for a property that only generates 0.66% gross rent per month)! Please enlighten me...
Hi @Brandon Lee . All creative partnering aside, I would never 'pay' $273k for a C+ that only generates $1825/mo. If you actually get 50% ownership for $68k total, that may be doable for someone not looking to hit a home run on cashflow at $392/mo. That's IF everything goes the 1 way it can work and not the 58,000 ways it can go wrong. With any partnership, make sure the Ds are spelled out in writing! What happens in the case of death, divorce, drug use, default, disinterest, etc. How is title held? If it were me, I would invest in paper securities that yield more than this without the problems of partners, tenants or toilets.
Oops - I see it's held in an LLC. Does the operating agreement address the issues of death, divorce, default, drug use...?
Brent and Steve: Thanks for the punch in the face--I needed it.
Brent: Thanks for your response and let me clarify.
The seller is asking me to pay $68950 to own 50% of the property--so my friend is not giving up his 50% of the property. All revenues and expenses would be split 50-50.
Regarding the mortgage: they have 124k left on a 30 yr fixed mortgage at 4%. I need to understand more about that.
Finally, your point on gross rent/month is well taken. The asking price is too high.
Steve: Thanks for your input--those are important considerations that I need to raise with the seller and the potential partner.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing