This is my first seller finance deal, so I’m not really sure how to evaluate it. It is located in Norfolk Virginia, in a nice neighborhood, 4 minuets from the beach, right across the street from another rental of mine. My neighbor is attempting to sell it. It has been on the market for some time now and is not selling. I approached him about selling it to me and holding the note. He is interested. Now I’m trying to figure out how much to offer. He is asking $270k and owes $225. The house would be a buy and hold for me. Market rents are about 1700-1800 a moth. His P/I payment is $1112. Taxes run $2700 a year. The house needs about $1500 to be rent ready. What should I offer?
I can only afford a small down payment right now, approximately 5k. I was thinking 75-100 a month over his P/I a month and then buy him out with a refi after 4-5 years with a conventional loan?
Again, This is my first seller finance and evaluating it has really stumped me.
Thanks for any input!
Is this a single family home? Are you going to manage it yourself? Does that mortgage payment include escrow? Whats the age of the property's capital expenditures? I think with that high of a mortgage payment it doesn't give you much room after vacancy/maintenance/CapEx. Some of that depending on it's age of course. Just some things I think about when reading your situation.
If and only if the mortgage listed includes insurance and taxes then I would have some interest.
Hope this helps!
Have you used the PB calculators? If not you gotta run these numbers in there, figure out where you must be and then finalize your offer. I’d like to learn how you approached the owner...was it a mailer? Or a knock on the door? Best of luck!
I missed the part about being your neighbor!
@Christian Drake it’s a single family Home. It was rebuilt about 5 years ago so hopefully low capex and maintenance for the first few years. And no the taxes are not escrowed, it’s 1112 for P/I then 225 a month for taxes then approx $75 a month for insurance, etc.
My only idea, because the house is a 4/3 I could rent it out to 4 military persons and get a higher rent, but I’m not sure the rules on that in my area.
@Nick Leboeuf You could probably get a 500-550 dollar rent (maybe more if you can find the right person) out of some Navy folks because they despise living on the ship. Definitely take a look into the calculators Cliff is talking about. I'm not sure about the max tenant per single family rules are myself but I do know people do this type of deal in Hampton Roads.
Problem: If you split these rooms and rent to the type of military that's looking for just a room your attracting young fresh out of high school kids with little to no credit history. The property is likely to be used as a party house which will create excessive wear and tear a long the way. Also, renting to Navy is high turnover. A sailor transfers commands at least every four years. This doesn't mean they will leave the area but they will most likely do so. Some people join because they want to travel.
Solution: A positive about these young kids is that they have a guaranteed income as long as they're in the service. A strong lease can take care of the problems as long as you get the service-members command contact information (make this a requirement in your lease anytime you rent to military). When they don't pay rent or mess your place up you can put the fire to them through the command. If you're a good landlord with an attractive location you will have endless referrals which can immediately cure the vacancy. You will have so many referrals you will be trying to figure out how to screen them.
Financially 1112 + 225 + 75 = 1412. Lets say you get 2000 for gross rents. They pay all utilities which is the norm in the area. Let's be generous and say vacancy, capex, and maintenance are at 250 all together. Your cash flow is 338. CoC ROI = 6.76% with a 5% down payment on that mortgage. This is assuming the property is turnkey and requires no renovation and you manage yourself. I would imagine 0 reno is unlikely but you did say it was rebuilt recently so it could be 0. Ultra best case you're in the deal at 5000 and you get 2400 in rents per month. That creates a 738 cash flow and your ROI jumps to 14.76%. That ROI is much more attractive with that kind of equity already in play. Also puts you at 184 a door which is favorable. You're essentially turning this into a quad with shared living/kitchen space.
I understand you want to cash him out in 4 to 5 years and collect that chunk of equity. That's possible and I do think the value of real estate in that area will go up over the next 5 years. However, I do feel like that's a bit of a risk because you could be put in a bad spot. Worst case scenario a hurricane comes and you have flood damage or a roof needs major repair or both. You have some reserves via the stash you should allocate for capex/maintenance. The question I would have is does that cover or get you close to your insurance policy. The vacancy until repairs are complete could also be a factor. Just thinking here.
I didn't intend for this to be this long and if you read all of this kudos to you. I'm not trying to sway you either way at all into going or not going for this deal. I typed all of this up to give you an idea of the type of situation I've seen and what you could be getting into. A little back story on me, I grew up here, served in the Navy for five years with two years being in Norfolk. I have a pretty good idea of how Navy types think. I really hope his helps you and If you have any questions I will answer them or point you in the right direction. Best of luck!!!