Investor · Omaha, NE · Member since 2015 · 366 posts · 184 votes
Hi there.
I'm just wanting to know if this is something that other investors might pursue. I have been using the BRRRR method this year with good success so far. Once refinanced, I have at least 20% equity in my 3 properties I have acquired this year.
I have the opportunity to pick up two duplexes, side by side, with zero dollars out of pocket. The bank I use for my commercial loans will finance these at 80% of the purchase price and the owner will finance the 20% downpayment. After running numbers, I have figured that I will still cash flow approximately $350 per duplex, after debt pay down, 10% capex, 10% PM (even though I do this myself), taxes and insurance. I also believe I will be able to raise the combined rents from $2500 to $3000 within the next quarter.
The numbers aren't great, but I would get into them for no money down, which would enable me to use my available cash to find more deals.
I would love to see if others would pursue something like this or if having no equity would be considered too risky. I'm in the Omaha, NE area too, which is pretty stable.
Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
9y
Kyle, assuming these properties are not in the hood and in terrible condition, I would do this all day long. Acquire a cashflowing asset in a decent area with zero money down? Yes please! You are going to get infinite returns with the cashflow, your debt will turn into equity as the tenants pay off the notes, you get to depreciate the assets to save money on taxes, you have the potential opportunity to boost your NOI by 20%, plus you keep your powder dry for other deals. If you have some reserves set aside for contingencies/repairs/vacancies, it's a no brainer.
Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
9y
I would probably do it as well, but check with the terms to make sure you can meet any reserve requirements.
Once you establish your business relationships, getting more advanced loans based on past record is not as difficult as one would think. I know of several investors in my area who were able to get six figure lines of credit based simply on their holdings... and they don't have a lot of properties.
That gives them tremendous leverage. Offering all cash and then refinancing in six to 12 months is a great way to big up properties below current value, especially with a motivated seller.
Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
9y
Question: When the sellers say they will finance the 25%, do they pay the bank that 25% and let you pay them back or is there some sort of note to the bank that the seller & you pay back?
Also, how do you write this stuff up in contracts and such?
I'm now really curious about how this all works. Great post OP!
New York City, NY · Member since 2016 · 470 posts · 348 votes
9y
@Jonathan Johnson@Daniel Cuevas Neither the buyer nor the seller front any cash - only the bank does. Here's how it would work if the purchase price is $100k:
- Bank writes a check for $80k to sellers
- Buyer has a loan of $80k owed to the bank (with monthly pymts due)
- Buyer has a loan of $20k owed to the sellers (with monthly pymts due)
Sellers benefit bc they get $80k in cash & future cashflow (until the $20k loan owed to them is paid off)
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
I would look at this deal from the perspective of "Would I do the deal without being able to finance the 20% downpayment?" If the answer is yes, then the 20% financing (while still cash-flowing) is even better. If it's not, then you might be overpaying for the property. You did mention "the numbers aren't great" so the seller may be in the position is either taking 20% less for the property(s) or financing the 20% downpayment.
Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
9y
People in this thread have been asking how this kind of deal is found. They are normally found in the following way...
1) Find a seller that has not listed the property.
2) Offer 110% of what they want to ask for the property if they hold 20% as a second.
3) Find a bank that will go for the owner holding the second.
So it works like this... say the owner is considering listing the property at $100,000.
If the property is listed the seller hopes to get $94,000 at best at closing.
If they go with the plan mentioned above they get $88,000 at closing a 2nd mortgage for $22,000. They can instantly flip that 2nd in the secondary market for more than $6,000.
Appraisal is the normal hang up. But if it will cash flow that will not be a problem.
I should have called myself a guru and charged $35,000 for that explanation.
Investor · Oceanside, CA · Member since 2016 · 91 posts · 38 votes
9y
@Kyle Godbout What kind of loan terms did you manage to get from the seller and bank? Sounds like a great opportunity if the terms don't give you any challenges.
Investor · Papillion, NE · Member since 2016 · 22 posts · 31 votes
9y
@Kyle Godbout - those numbers sound solid to me, and the acquisition would help you get closer to your goal of 40 units by age 40.
One question for you and @Owen Dashner , @Matt Morgan , @Sterling Anderson is about the Benson area. Generally, I try to stay south of Dodge, but hear from some that Benson is up and coming, while others have concerns about crime, schools, etc.
Have you had luck finding and retaining strong tenants in that area?
Investor · Omaha, NE · Member since 2015 · 115 posts · 13 votes
9y
Beson is a great area. Many of my buyers request Benson. It's a great rental and fix/Flip area so you have the best of both worlds there. Crime is everywhere, Benson is not as bad as other parts. The northern part of the Benson area can be a problem spot
Investor · Omaha, NE · Member since 2015 · 366 posts · 184 votes
9y
I have had great luck with Benson over the past 6 years. I have never had to evict a tenant that I screened (knock on wood). I stay west of 50th and South of Ames.
Investor · Papillion, NE · Member since 2014 · 197 posts · 74 votes
9y
a lot of young professionals like the benson area. I have not personally invested there so I'm not up to date on how the town is trending and where it's headed in 3 or 4 years from now. From my limited knowledge, I would say benson would be a strong place to have a rental.
Absolutely. Leverage is your best friend, 100% leverage is like a best friend with benefits.
Don't worry if the property drops in value on a long term hold, you have zero equity to lose. In fact as the mortgage is paid down keep pulling the equity out to reinvest. No point in allowing it to lie dead and languish in a leveraged cash flow property.
When you say "In fact as the mortgage is paid down keep pulling the equity out to reinvest"
how do you go about doing that? To my understanding doing a cash out re-fi costs about $5,000 to get to your money. Is that what you're suggesting? That's never seemed very cost effective to me.
Or are your suggesting putting a lien on the property as a down payment?
Rental Property Investor · Shawnee Mission, KS · Member since 2014 · 205 posts · 136 votes
9y
If you are not paying well over market value, this sounds like a GREAT DEAL. One thing I would mention is to be sure you have conservatively calculated the cash flow. I don't know if you meant for your list of inclusions to be complete, but you did not include Maintenance (this should not be the same account as CapEx) or Vacancy categories. What does each unit rent for?
I guess I am the only one who would not do this. I feel if someone can't afford a reasonable down they shouldn't buy. I am extra cautious and have always been. I don't ever want to own anything I can't sell tomorrow and keep cash in my pocket. In 2007 and 2008 many friends laughed at me as they borrowed and bought. They all lost everything and I never worried one bit. To each his own. Good luck!