Property type: Two duplexes side by side
Owner Financing Purchase price: $220,000($110k each)
Loan amount: $205,000
Loan Term: 15 year
Monthly Principal and Interest: $1,730
2019 proposed taxes: $2,369($197.42 monthly)
Current rents: $2,460($615 per unit)
So with principal, interest, taxes and insurance, the total expense comes out to: $2,127.42 monthly.
Current rents are $615 * 4 units = $2,460.
$2,460 - $2,127.42 leaves a monthly cash flow of $332.68 without setting aside monies for vacancy or repairs.
Owner mentioned a scheduled increase in all units Jan 2020 to $665 * 4 units = $2,660
$2,660 - $2,127.42 leaves a monthly cash flow of $532.58 without setting aside monies for vacancy or repairs.
Another caveat is, market rents are around $700-$800 for this area. So my question is, do you think this is a good deal or not? I sill would need to do an inspection but based on the numbers, does it make sense?
Why owner financing, if it were me I'd get a lower rate from the bank.
@Aaron K. - Because of the downpayment. Banks want at least 20% down. So on 110K that comes to $22K just for one duplex. Thats the one big reasoning we were considering owner financing.
Unless there was an appreciation upside (or value add), I would probably pass. Not enough cash flow to maintain 4 units...nor to deal with 4 tenants. You mentioned market rents being higher. If you're confident on those numbers, are the duplexes (as they sit now) in a condition to warrant that rent right now? Or do you have to spend $ rehabbing to make them worth that amount? Just food for thought.
@CJ M. That’s a good question. I would need to go and conduct an inspection. From the outside they don’t look too bad but I need an inspection. Then after, I would have more support on raising rent.
Your attraction is the increase in rent on Jan 2020. Until then, you're living on the edge. What I would do is renegotiate the terms of the seller financing so that your payments up to that point are $200/month less.
You're absolutely correct in paying a higher interest rate for a lower down payment. As long as you have positive CF, the only cost to you is what comes out of pocket...which is the DP. Your profit starts once you recover all of your cost. This means that keeping your current agreement in place, you will recover all of your cost (DP) in 2.5 years...and will be all profit from that point forward.
This is a good deal, that can be made better if you can negotiate those first 2 months down with the seller due to the lower rents.
I would say it’s marginal . That being said It could pan out to be a great investment . Would I be happy with the cash flow ? Nope but one could make the argument your getting in and control it cheap and it’s four units . I would try to lengthen the loan or find a way to lessen that payment each month to buffer you from the expenses your going to get which you haven’t accounted for .
The real questions for me is where is it located and the condition? What zip code?
If you were do hold a 30 year note the P&I would drop to $1229. A swing of $500 a month.
Rent multiplier is over 1%a month and it will take very little cash to get in.
As long as I had a good w2 or alternate source of income and would own it during the payment period, I would do it (provided price is verified by comps).
15 yr loans build equity fast. Mine pay down thousands per month and are not cashflow plays.
But what kind of seller financing? Will you own it or is it a Land Contract / CFD? Very important but often overlooked.
Yes I would
What repairs/rehab is needed? Why is insurance that expensive? What are the lease terms like? Why is there an auto renewal to $650 a month? Can you write into purchase agreement no new leases will be executed? Who pays for utilities?
Can you ask seller to purchase a 12 month home owners warranty so you have a year to build up reserves in case a large repair is needed? Can you negotiate to 25 year amort with maybe a 5 year balloon? If not, how about a lower interest rate? Make sure there’s no prepayment penalty in agreement in case you get that 20% equity and want to refinance at a lower interest rate.
It’s an ok deal in today’s dollars. But could require high costs if repairs get High.
Yes I would. Didn't read, just saw owner financing.
Okay read. I'd still do it. It'll be tight but catching up with market rates and this will be a good one. Once you hit 20% equity, I'd refi with a bank and improve your interest rate and cash flow numbers by blowing out the repayment period to wherever you like the monthly payment.
@Joe Villeneuve - I'm trying to renegotiate the terms with the seller financing as you've mentioned. Yeah, I definitely think it's a win/win for both sides. 2.5 years to recover the DP isn't bad at all. I just wanted more cash flow for repairs which was a little low making me sweat some. Appreciate it!
@Dennis M. - I debated that same logic of not having a huge cashflow but, would be in control of an asset that paid for itself. Yep, definitely trying to lengthen the loan or reduce the downpayment percentage. Knowing what I know now, uncalled expenses are definitely a pain in the a$$ which is why i'm trying to work on the deal some more. Appreciate it!
@Lesley Resnick - It's in 32210. But with a 30 year note at this point, banks want at least $44K downpayment. Not something I have at the moment. However, once I have enough equity, I definitely will be going for that 30 year fixed rate! Appreciate it!
@Steve Vaughan - I thought about the same thing. My W2 is pretty good so I could possibly go that route as well. Oh wow! So you did the same thing too. Interesting. I haven't got that far yet(still working on the seller financing) but the goal would be to definitely own it. Appreciate it!
@Frank Romine - Roger that! Appreciate it!
@Anthony Wick - No sure on the repairs. Haven't done an inspection yet. I conservatively used $200($100 per duplex) for insurance when running numbers. The rental increase is actually $665 and the seller didn't go into much details. Could you explain the reason for 'no new leases will be executed?' Will have to check about utilities to confirm. I will definitely use some of the options you mentioned and see if it works!! Appreciate the options! Yes, it would all depend on the property inspection on whether this deal makes sense.
@Todd Rasmussen - I said the same thing about it being tight in the beginning. But like you mentioned, once refinanced, it can definitely be a great deal! Appreciate it!
I always write no new leases to be executed. If a lease ends before close, or if the seller wants to do somebody a favor, you may find yourself stuck with long term leases at lousy terms. You always want to get inherited tenants under your lease terms and price as quickly as possible, or get the inherited tenants out.
In my last purchase I stated one of the tenants needed to be out before close. He kept the place in shambles and was late on rent. Make the seller take care of the headaches before they become your headaches. Ideally, all leases would be month-to-month at close. Then you pick and choose who stays, who gets higher rent, who needs to go so you can rehab the unit and raise rents.
Inherited tenants will always be your worst tenants !
@Anthony Wick I understand. Makes alot of sense now and like that strategy! I'll have to put this in my bag of tools.
I would do it. But I'm not yet 30 years old and am OK taking a longer route/future equity position in my portfolio at the moment.
A couple different options you can look into:
- Maybe look at increasing the amortized term to 25 years with a balloon.
- Negotiate an interest only period—say 5 years with no prepayment penalty.
- Decrease the interest rate
- Subordinate the nite and collateralize the debt on another property that can support the payments
I believe this depends on your situation financially. Currently I would do this deal. After 2 years you would have paid 20k off the seller financed loan. You could do a rate and term refinance at that time with a traditional bank and put it into 2 - 30 year loans if you needed to and have a much lower payment with increased rents at that time. As long as market doesn’t implode and house would appraise for higher than you are currently buying it for you should be ok.
Realistically though it depends on your financial backing to ensure you won’t lose your shirt.
Good luck in your decision!
Depending on condition of units and amount of money to rehab I’d say go for it. I really like a cash positive, seller finance deal.
@Mitchlyn D. I didn’t read all the reply’s to see if this has been said, but i would offer 25 year amortization and 15 year balloon, promise the remaining balance for that time, but refi soon as you can. Unless you have a large cash reserve to handle the risk of the small cash flow.
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