40 year note at 5% with no prepayment. Should I do it?

[Justin James]

I have the opportunity to purchase a Four-Plex for roughly $440,000. The units are all 2 bed 1.5 bath 1,000 sq ft. Rents are $850/unit with tenants paying all utilities except water, which totals approx. $300/month. Taxes are about $2300/year and insurance about $800. 

The seller wants to do/is offering seller financing as follows: $40,000 down with a 40 year term at 5%, with no prepayment. The note would be assignable. 

It is the no prepayment that gives me some pause, but I am planning on pulling the trigger.  This would be my first seller financing deal, but my 7th-10th doors.  Anyone have words of encouragement/discouragement?

[Jerry W.]

@Justin James, don't let the owner finance distract you from a good deal versus a bad deal. Your rate of return even with a 40 year note is not great. Total rents are only $3,400 per month but your payments are $1930, then $260 for taxes and insurance, plus $300 for water, for a total of $2,490 per month. This leaves you with $910 per month. Take out $340 for maintenance, $170 for Capex, then $272 for vacancies, and you have $128 left over as profit for managing a 4 plex, plus you have some loan origination fees and closing costs. While owner financing is nice it cannot make up for a bad deal. You need a place that cash flows a lot better. Your payments would be $3163 per month if you finance for 15 years not 40. Do not do the deal for a such a slim margin on a 40 year note.