Investor · Rocky Hill, CT · Member since 2013 · 373 posts · 299 votes
A unique property in a nearby market where it is 2 separate houses with 3 units on 1 piece of land. So this would be an approximately $250,000 deal with no money in. 2 x 2br 1 ba units and 1x 4 brx 1ba house free standing. So as near as I can figure it would be 1000x 2+ 1400/ month. Taxes are @6600/year. Due to the unique nature it has been on the market for a long time and there is a potential of doing a complete owner finance deal.
With no cash in does that tip the balance on the price not being in line with 50% rule?
William Collins I love your enthusiasm, and I have done 2 deals like you are doing now but you have some serious problems you need to account for before you buy. There is NO WAY you will never have to replace a faucet or hot water heater, or never call a plumber for a plugged line. At least 1 big item like furnace, or roof will go in 30 years. You might even have to dig up sewer or water line that broke for an unknown reason. How much cash do you have on hand if one of these events happen? Never put nothing in maintenance cost. Will you be managing these yourself or using a pm? Also explain your 100% finace deal please. Is owner financing everything for you for 30 years? Doesnt seem likely. Bank is not doing it. Are you financing 80% with bank and 20% with owner?(I have done 2 of these) Any balloons? Fixed or variable interest rate? Lots of info we need to really help you evaluate this deal.
Use my own metrics to determine if it will cash flow after all expenses including vacancy, maintenance, etc. Don't really care if it's no money or regular down - does it cash flow... Plus - if it didn't sell for the current owner, it's not likely to sell well for you so you better get all your equity benefit up front.
Deborah B. thank you for the feedback! It would cashflow, and from what I can see well (200-300/unit). It is in a solid neighborhood town in a good area, just a situation which appears to be a widow who does not want to deal with renting. This would be a solution for her to solve her needs. I think in the future it would be dividable into two separate properties which individually would sell. As this would be property #1, in a buy an hold long term strategy- its main value would be cashflow/equity build.
Ok, you sucked me in :-). You haven't shared your other expenses or interest rate so I'm going to do the math as if it were in my community...
Taxes - $6600 (550.00/mo), Insurance, about 1.5% of purchase price so $3750.00 ($313.00mo), Maintenance 10%, lawn and water combined another 10%. Vacancy - for multi's I figure 10%, my SFH run 5% - we'll be generous and call it 5%. Mortgage term? Any balloon? Dunno so we'll wing it.
Monthly Expenses before mortgage =
Taxes - $550
Ins $313
Maint $340
Lwn/Wt$340
Vac $170. = $1713 without manager
Deborah B. wow I have a spreadsheet up with the numbers and I didn't paste them in. The operating assumptions would be 30yr x6%, 10% maintenance- but the houses were just refreshed. There is a shortage of rentals in the town due to a superior school district- so the 5% is about right. Here is what I figured per Brandon's calculator.
Section 3: Buy and Hold Cashflow and ROI Calculator
Purchase price (from B23) $250,000.00
Purchase Closing costs $2,500.00
Repairs $0.00
Holding Costs $2,000.00
All Personal Contributions (down payment) $0.00
Total Investment $254,500.00
Total Loan Amount $254,500.00
Number of units 3
Average Rent per unit $1,150.00
Total Loan Amount $254,500.00
Interest Rate 6.00%
Term Length of Loan ( in Months) 360
Interest Rate per month 0.005
Total monthly mortgage payment $1,525.86
Monthly Insurance $150.00
Monthly Property Taxes $600.00
Other Monthly Expenses (HOA, Utilities, Maintenance, Etc) $0.00
Total Monthly Expenses (not with mortgage) $750.00
Total Monthly Expenses (with mortgage) $2,275.86
Other Monthly Income 0
Total Gross Monthly Income (Rent) $3,450.00
Total Annual Expenses (not mortgage) $9,000.00
Total Gross (Most Possible) Annual Income $41,400.00
Net Operating Income ($ left to pay mortgage) $32,400.00
Cap Rate (for multifamily/commercial) 10.00%
VALUE BASED ON CAP RATE $324,000.00
Cashflow per month $1,174.14
Annual cashflow average $14,089.73
Now I know there is no maintenance or vacancy expense in there with that cash flow of $1174/month, but if we subtracted $517 for that 15% it would still be @ $600/month cashflow.
Deborah B. Lawn would be a sweat thing (it is 10 minute from personal residence), utilities are divided already. I have a couple friends who are insurance brokers, and the cost would be that for the first 2/3 years.
William Collins I love your enthusiasm, and I have done 2 deals like you are doing now but you have some serious problems you need to account for before you buy. There is NO WAY you will never have to replace a faucet or hot water heater, or never call a plumber for a plugged line. At least 1 big item like furnace, or roof will go in 30 years. You might even have to dig up sewer or water line that broke for an unknown reason. How much cash do you have on hand if one of these events happen? Never put nothing in maintenance cost. Will you be managing these yourself or using a pm? Also explain your 100% finace deal please. Is owner financing everything for you for 30 years? Doesnt seem likely. Bank is not doing it. Are you financing 80% with bank and 20% with owner?(I have done 2 of these) Any balloons? Fixed or variable interest rate? Lots of info we need to really help you evaluate this deal.
The road to landlord failure is paved with underestimated expenses; that's why the veteran landlords here on BP are encouraging you to be more realistic in your expenses. That 50% rule has some real-life statistics to support it - I encourage you to read up on that before you find yourself financially overwhelmed ...
Here is a specific post with those links to the stats, and I suggest you read that entire thread:
I'd say thats a fantastic deal for no money down.
Say you want about the rule. The fact is that based on what his numbers are showing above, I'm seeing a $400 a month profit before vacancy and repairs.
Thats a good deal. Thats a great deal - at least in terms of cash flow.
If anybody is doing better than that on their deals, well good for them. But I don't know of a whole lot better you can do than that these days. And the fact that he's doing it with no money down is an absolute steal.
Here's what I understood are the numbers. Please correct me if I'm wrong.
Mortg payment per unit: $500/mo
Taxes per unit: $200/mo
Insurance per unit: $50/mo
Total expenses (before vac/repairs): $750/mo
Rent per unit: $1150/mo
Total before maintenance and vacancies: $400/month per unit.
Thats a deal and I'd say a great deal. Again, its assuming all the numbers I was able to pull from your post including the fact that you're suggesting it needs $0 in rehab. Thats the only one I'd question.
But if you have a cushion of $400 a month before vacancy/repairs, you will do just fine on your investing.
It might not hurt to try to get them to come down on the interest rate a bit. If you got them down to 5% that would save you about $250 a month. But honestly, at 6% and no money down, just grab that deal and be thankful.
Here's one other question though. What do you think the property is actually worth? Are you going to be able to refinance with a bank at any point in the future? That would be my one concern with that. If the widow passes during the loan, who do you make your payments to?
My only fear is that you may not be able to finance that spaghetti and will be stuck with a private loan forever. And may never be able to sell it either given the oddity of it.
But, at the end of the day, when you start talking about chunking in cash flow - which is what most of us are in real estate to do in the first place - and doing it with little to no outlay of reserves, thats a quality deal.
Thats correct on the numbers Mike H. it is an early retirement widow, who can't keep up with such a big property. My thoughts were if I could solve the need of keeping the vision and upkeep her family had and getting here a steady cash stream it would be a win win.
Thank you Steve Babiak and Jerry W. I was exploring if no money down trumped expense rules or not. I will be adjusting my model to the assumptions.
I'm not William or Steve, but no, no money in means it's leveraged or it was given to you. I've kept properties for cash flow and taxes, when the taxes`wear thin and the cash flow alone lacks luster considering the hassel I'd dump them for the appreciation and finance them in most cases. To say a property is a deal without money in it is usually a good thing, emphsis on "deal" I've past up many no money in it transactions and even free properties due to the liabilities and lack luster expected performance or possibilities of them. But, first it has to be a deal! :)
I agree. No money down does not a deal make.
But in this case, he's going to have cash flow of $400 per month per unit before repairs/vacancies.
To me, based on what I've seen over the last few years, thats a good deal. If you were to put money down on a house and be at $400 per month cash flow before vacancies/repairs for a house that rents out at 1150 per month, I'd say thats a decent deal.
The fact that he's able to do it with no money out pocket AND with a private loan that won't tie up one of his conventional spots and the house is in a good area too. This is a great deal.
I'd still take a shot at getting the rate down a bit (it can never hurt to ask). But if they balk, this is a good deal and I would definitely take it down in heartbeat.
Lets be very, very clear here: No money down or in does NOT trump expenses.
Your figures show you have only calculated 22% for expenses. That is impossible in every area and with every property in the US. While you can self manage, self repair, and self advertise, unless you like to work for free, you still have to account for materials costs, capital expenses, etc. I know my time is more valuable than free. Plan on much closer to 40% expenses assuming you self manage. That makes this deal a loser on a cash flow standpoint and in order to cash flow ANY property, you must buy at a great price. So with seller financing, you still have to negotiate a deal that makes sense at purchase!
I was a flipper in a past lifetime, and am only a new believer in long term buy-and-hold. This go 'round, I am only buying newer properties, aiming to minimize those maintenance expenses. Kudos to the more experienced folks above for putting the numbers together and reminding us all about those pesky maintenance costs. That said, if I were flipping, I'd have loved a no-money down deal while I rehab and sell again.
Leverage is a great thing so long as it is used responsibly. No matter if the leverage is owner funding, OPM, or bank funding, any time you have 100% financing, you are at a high risk of the problems associated with over-leveraged RE.
Sorry, didn't do any brain damage on all the figures, but glanced and Will is correct with expenses.
Usually, a seller willing to do 100% is doing nothing more than making you think you're getting a great deal. They know what expenses are and will be and they may sell to get out of a flat lined property with very little appreciation and looming expenses for the note income. They may be looking at it as a management expense and future savings as they walk away with a note. If you fail, they rinse and repeat. Many owners make up fake books to sell, never use thier numbers unless verified.
BTW, a seller financed foreclosure will hit you credit, it's public knowledge and it can be reported from the filings as evidence since the note holder is not a credit reporting entity. :)
That is coming from the seller's point of view. Another take on this from the buyer's point of view is that a good negotiator could arrange 100% financing from a seller who is desperate to get rid of their problem, and still get a good deal at acquisition. In other words, a homerun for the buyer, built in financing plus a good deal!
At least in my area. If I turned down deals that would have profits of 400 per month per house with no money down (regardless if its seller financing or thru hard money buying), I would only have about 3 or 4 houses instead of 19.
That is my exact target number for a good deal.
And I typically have to finance the thing twice to do it (hard money and then the perm loan).
The fact is if you're allocating more than 400 a month per house toward vacancies and repairs, then you're going to have a real tough time ever getting into investing in the real world.
And the fact that he's picking up 3 in one fell swoop is even better. With just one, that may be a bit of an issue. A new A/C would eat up 5 months of profit on just one house. But with 3 going a new A/C is only going to eat up about 6 or 7 weeks of his profits.
He can almost cover a vacancy out of profits without having to dip into reserves. If he could find a second deal just like this, then he actually could.
Again, I know this board lives and dies by that 50% rule and I'm sure there is some significant basis to it. But the reality of the numbers and the area suggest that you have to pay market rate for the area you're in. And I would bet that the deal he's getting at 400 a month is about as good as he's going to find anytime soon. And the fact that he's doing it with no money down and without using up one of his conventional spots to do it adds that much more value to the deal.
Maybe some of you have no problems getting all the financing you can handle. But for the rest of little guys, its always an effort to get every single end loan we get - at least once you get over 4.
I just can't see how anybody can think this is not an absolute great deal. The cash flow is there. And the no money down is a huge sweetener. Given he's getting 3 of them, its that much better. At some point, it makes it much easier to handle the big ticket repairs when you have enough total profit coming in from all your rentals. I haven't had to dip into my reserves for quite some time now - for vacancies or big ticket repairs. Not even close.
And my houses are averaging a little under $400 per month before repairs/vacancies.