Would you do this deal?

Real Estate Deal Analysis & Advice

Would you do this deal?

Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes

Hi all!

Would YOU do this deal?

$1,000,000 for 3, 3 families.

Total GROSS rent $10,600/month

Owner financed $1,000,000 at 3-4% over 15-20 years.

Seems like a no brainer. Let me know your thoughts please.

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Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Bud Gaffney:

Hi all!

Would YOU do this deal?

$1,000,000 for 3, 3 families.

Total GROSS rent $10,600/month

Owner financed $1,000,000 at 3-4% over 15-20 years.

Seems like a no brainer. Let me know your thoughts please.

Bud,

I own about 1,000 apartment units (and have acquired way more than that - I sold a significant portion of my portfolio over the years). Some of my best deals are owner financed deals.

To answer your question...without any other information, I will have to make some assumptions. I've been investing since 1999 and actually made more money during the Great Recession of 2008-2009 because I am very conservative with my numbers...so I will make some conversative assumptions.

Assuming, this a C area, I would assume your expense ratio is 50%. Expense ratio is the operating expenses as a percentage (or ratio) of your gross collected rents.

Also, you gave a range of interest rate and range of amortization period. Let's assume the worst case - 4% interest and 15-yr amo. That means your monthly P&I payment is $7,396.87 or $88,762.44/yr

If you gross $10,600/mo that's $127,200/yr

x (1- 50% expense ratio)

= $63,600/yr Net operating income (after all the expenses like taxes, insurance, repairs, replacement reserves, vacancies, etc)

You deduct your mortgage payment and you get a NEGATIVE CASFHLOW property (-$25,162.44/yr)

So, the answer: NO, it's not a GOOD deal and I wouldn't do it.

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
Most likely yes, depends on location and condition obviously, but with that kind of price/rent ratio and owner financing at sub 4% it sounds like a winner.
1 Reply
Hunter Plescia
Real Estate Broker · CA · Member since 2019 · 5 posts · 9 votes
6y
If I understood correctly, you would be getting 100% owner financing with a 15-20 yr. term. If this is the case, your cashflow will be slim due to your monthly PITI. So, if you lose a tenant or need to pay for some major repair you will go red for a while. Once thing that would help would be for the seller to amortize the loan over 30 years which would lower your payment. You could have a fixed period or ballon for 5 years, and then refinance out to an institutional lender which would also be at 30 years.

7 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Hunter Plescia Such GREAT advice. Thank you Hunter. If I could get it to a 30 year loan and have to go up to 4.5% what are your thoughts?
0 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Aaron K. Thank you Aaron! It’s in Taunton, MA. These are well below market value. Also, with access to Boston coming soon via train, the prices should sky rocket. Thanks for the comment, it is greatly appreciated!
0 Reply
David BarnettPro Member
Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
6y
@Bud Gaffney Have you checked out the neighborhoods where the properties are in Taunton? I'd be careful in Taunton; there are a lot of rough spots in Taunton, and the values lead me to believe these aren't in a good part...
0 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@David Barnett Thanks David! They are in good areas. Real estate in Taunton is at a high point for sure. Thanks a lot for your insight!
0 Reply
Hunter Plescia
Real Estate Broker · CA · Member since 2019 · 5 posts · 9 votes
6y
Bud, I would take a 4.5% for a 30 yr. mortgage all day. That is a solid rate for an investment property even if you were putting 25% down. If there are no other disqualifying factors, your scenario sounds like a good deal. Best of luck.
2 Reply
Lien VuongBusiness Member
Real Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
6y
Not enough metrics. You need to evaluate the deals independently. Dont just get take the properties and group it as one portfolio. How much would they trade for individually as opposed to collectively? What the value added? Are rents maximized? Any additional upsides of that area?
Apart from your savings with the seller financing portion, would this sell on the market? If it's off market and seller financing there's usually a caveat so make sure you do the due diligence before signing the papers for this.
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8 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Lien Vuong Thank you, Lien!
0 Reply
Joe Meares
Member since 2018 · 21 posts · 7 votes
6y
@Bud Gaffney
Hey Bud, hope you had a nice Thanksgiving.
My first question is, what is your estimate of NOI out of the gate? I would use this to inform you what your annual FCF is going to be. I like to look at deals in terms of nominal FCF, and cash on cash returns...in your case the latter would be infinite assuming the properties cash flow positively since this is no money down...nice!
Then I’d ask these questions:
Do the properties need work? Ie how much cash will you actually need to get the deal done right, and if it does need work, what do you think ARV is in the event you want to pull cash out of the deal?
Are utilities individually metered?
Are they 100% occupied?
Are the tenants month to month or annual leases?
Do you have the ability to add to the topline of the properties through laundry or parking spaces?
Do you have the ability to cut costs on the property via reducing expenses such as utilities or trash removal etc?
My only concern with the numbers you showed are that ~$111k per unit is more than I like to spend, but that’s more of a personal preference.
Hope this helps, good luck man!!
3 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Joe Meares Incredibly helpful, Joe! What area do you invest in?
0 Reply
Joe Meares
Member since 2018 · 21 posts · 7 votes
6y
@Bud Gaffney
Happy to help!
I invest in single family homes in the Midwest outside of Indianapolis, but working on expanding into multi-family so your question landed at the right time :)
1 Reply
Pierre Butler
Flipper/Rehabber · Chicago, IL · Member since 2019 · 11 posts · 5 votes
6y
Looks like a great deal. My only concern would be the stability of the tenants, and the condition of the property. Hoping there will be no major repairs. Also location and school’s. If those line up this would definitely work in your favor long term. @Bud Gaffney
3 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Pierre Butler Thanks for the insight, Pierre!
1 Reply
Pierre Butler
Flipper/Rehabber · Chicago, IL · Member since 2019 · 11 posts · 5 votes
6y
Spot on Joe, good stuff. @Joe Meares
0 Reply
Joe Meares
Member since 2018 · 21 posts · 7 votes
6y
@Pierre Butler
Thanks bro! Good point about location/schools
1 Reply
Michael Ealy
Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
6y
Originally posted by @Bud Gaffney:
Hi all!
Would YOU do this deal?
$1,000,000 for 3, 3 families.
Total GROSS rent $10,600/month
Owner financed $1,000,000 at 3-4% over 15-20 years.
Seems like a no brainer. Let me know your thoughts please.

Bud,
I own about 1,000 apartment units (and have acquired way more than that - I sold a significant portion of my portfolio over the years). Some of my best deals are owner financed deals.
To answer your question...without any other information, I will have to make some assumptions. I've been investing since 1999 and actually made more money during the Great Recession of 2008-2009 because I am very conservative with my numbers...so I will make some conversative assumptions.
Assuming, this a C area, I would assume your expense ratio is 50%. Expense ratio is the operating expenses as a percentage (or ratio) of your gross collected rents.
Also, you gave a range of interest rate and range of amortization period. Let's assume the worst case - 4% interest and 15-yr amo. That means your monthly P&I payment is $7,396.87 or $88,762.44/yr
If you gross $10,600/mo that's $127,200/yr
x (1- 50% expense ratio)
= $63,600/yr Net operating income (after all the expenses like taxes, insurance, repairs, replacement reserves, vacancies, etc)
You deduct your mortgage payment and you get a NEGATIVE CASFHLOW property (-$25,162.44/yr)
So, the answer: NO, it's not a GOOD deal and I wouldn't do it.
13 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Michael Ealy Thank you very much for the insight! It is very helpful. What if I could get 30 year at 5%?
Would that change your answer?
0 Reply
Michael Ealy
Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
6y
Originally posted by @Bud Gaffney:
@Michael Ealy Thank you very much for the insight! It is very helpful. What if I could get 30 year at 5%?
Would that change your answer?

Nope - 5%, 30 yr amo at $1M loan gives you $64,418.52 in Principal & interest payments still giving you a negative cashflow deal (although almost break even). By the way, you can access the Mortgage Payment calculator in the TOOLS section of BP (not sure though if that's for PRO members only but if it is, you can google "Mortgage calculators" and you can get free calculators online).
For this deal to work, if I am evaluating it for me to buy, is to negotiate down the PRICE to $900,000, put $100,000 down (hence, have an owner finance deal at $800,000) and 5% interest only.
That puts your mortgage payments to $40,000 a year giving you a $23,600 a year positive cashflow. That is a 23.6% cash on cash return on the $100,000 investment.
You should be able to find a private investor willing to put up the $100K and partner with you for 50% of your cashflow (because for that private investor, that's almost an 11% yield).
Also, the seller will like a deal like that because he/she can see you have skin in the game ($100K downpayment).
And most of all, you get more than $11,000/yr cashflow in your pocket.
WIN-WIN-WIN
11 Reply
Ryan AllisonPro Member
Investor · Connecticut / Massachusetts · Member since 2019 · 65 posts · 38 votes
6y
Bud, I agree with the others especially @Michael Ealy, I would definitely do this deal with owner financing, 10-15% downpayment, interest only payments and a balloon payment at the end of 15-20 years.

Sometimes investors in other parts of the county are shocked when they find out the cash on cash returns that we get here in the Northeast. The deal you proposed would NOT make sense if you want cash flow.
If you're looking for appreciation in the Taunton market, obviously that's a gamble. I personally still think there's more appreciation potential in Taunton from those seeking elsewhere from Boston, but that's obviously somewhat out of your control.
I got lucky on a property in Mass as it looks awful compared to other parts of the country from a cash flow standpoint but I got lucky as it appreciated like crazy, probably the best investment I've ever made in my life. Obviously this could happen with this deal too but I wouldn't bank on it.
If you do the downpayment with interest only, you can refinance right before the balloon payment is due and hopefully get all the appreication you want towards a traditional loan.
1 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Michael Ealy Thank you!
0 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Ryan Allison Thanks a million Ryan! No pun intended ;)
I greatly appreciate the insight.
0 Reply
Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Bud Gaffney never, ( but I am spoiled ) 120k GROSS on 1 mill, taxes , ins, vacancy , maintenance, ( water ? ) net 45- 55K ? Thats about 5- 6% net why bother ? , again I would not touch it. I ONLY keep deals that NET me 20% ,,, if this is a no brainier you need to look outside your market.
Good Luck
0 Reply
Nick Rutkowski
Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Bud Gaffney
Yes, as long as there are no structural issues, tax liens, code violations, meth labs, and non paying tenants. If there are as long as they are addressed and solved then again, yes!
1 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Bob Prisco Hi Bob, a lot of reasons I say yes on this deal. Loan pay down, appreciation in a market that will be getting railroad access to Boston soon, depreciation on taxes, and cash flow.
I’m not sure about your calculations, but I certainly appreciate your insight. Thanks!
0 Reply

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