All Forum Posts by: Andrew Kiel

Owner financing is a great way to buy a property, it should be one of many tools you have available.  That said, check your math on the loan.  $650k at 0% interest is $1805 (for 30 years).  8% interest is $4769.47 (for 30 years).  Now, if you can work with the seller to get that 0% rate (and yes, it's totally possible), you have something great.

@Sakib J. - as for price appreciation I'll share a link pulled from our MLS data for single family homes that fit our model:

https://mlssaz.stats.showingtime.com/infoserv/s-v1/Ajcy-gk8

We specifically do a lease with a long term option model where our typical resident is a small business owner or self-employed person or someone who otherwise can't get traditional financing.  I have a few zip codes I prefer (85730, 85710, 85711), but again, that's mainly due to proximity to my own home and office.

@Sakib J. - I think the best definition of a B class neighborhood I've seen is a single family home within about 20% of the median for an area (usually a zip code).  We prefer the East and South sides of Tucson, mainly due to proximity to our own home and office.  Our ideal house is a 1300-1600 s.f. 3 or 4 bedroom 1 3/4 bath house built in the 50's, 60's or 70's.

We still meet the 1% rule on many of our homes, and I admit it's getting more difficult. With rates where they are, it's not nearly as important. For example, we just purchased several homes for under $200k and a few of the lower priced ones will meet the 1% rule (where we bought around $150k). A few that we purchased around $190k are getting ~$1500-$1700 per month but our PITI is around $800-$900 per month - numbers I'm very happy with.

I can't help but ask, why Phoenix when you live in Tucson?  Phoenix is a great market and I have many friends that live and invest there.  I could even see doing that if you found a great deal there.  That said, Tucson is also a great market.  Appreciation has been very strong, prices are lower than Phoenix and rents are strong.  I'm curious why you would want to go that far when you could invest in your own backyard?  You may have a great reason, I'm not necessarily knocking the idea, I'm genuinely curious to your thoughts.  

Some numbers here might help a bit, like payment you're trying to cover and amount you're asking for a room.
For example, you may be asking just a little bit too much for a room or it could just be a minor tweak in marketing that is needed.  In the short term, how much do you need to take in to cover the payment?  What about a back up plan (such as renting the entire unit, selling with owner financing, etc).  There are almost always alternatives, especially if you (hopefully) were able to utilize your amazing VA financing on the purchase.

@Han T.-Again, the answer is it depends, based on your state.  They attorney will be able to provide that kind of guidance. 

Get a great accountant, as @Cara Powers and @Basit Siddiqi state.  Bonus depreciation alone was worth a staggering amount of money to myself and my partners last year.  @Basit Siddiqi gives you some great questions to ask of any potential accountant - interview them, ask for referrals from other real estate investors, etc.  A great accountant is well worth it, but make sure you find a great one.  

I fully agree with @Terrence Evans above. What you do depends greatly on what state you're doing business in. Is it an attorney state or a title state, should you use a mortgage with a note or a deed of trust with a note? (confused yet? I hope I'm making my point). Also, when investing with family & friends, you may wish to use a JV agreement or some other document? Please, get an attorney for this, it's well worth the slight extra expense.

Generally speaking, for single family homes, the best use is for an owner occupant new buyer.  If you try to sell the home with a non paying tenant in place you'll be limiting your buyer pool to only the few investors out there that are willing and able to weather the storm of your bad tenant.  For that, they will expect a discount, and probably a deep discount.

So a couple of thoughts:
1. wait it out, apply for any assistance programs your city and state may offer, try and get your tenant to apply for any assistance programs, etc.
2. See if you can pay your tenant to move.  If you can pay them $500-$3000 (perhaps even more if absolutely necessary) you will get a far higher return by having the home vacant (and the ability to spruce it up a bit too).  One of the most painful things I ever do is offer a "cash for keys" program because I hate rewarding bad behavior, but it's a prudent business decision.

For your last question about a 1031 exchange, that is best left to your CPA and a very personal decision.  If you don't have immediate need for the funds (IE: to pay down high interest debt), the 1031 exchange is a fantastic way to defer taxes.

You are absolutely thinking about this the right way - the sellers concern is capital gains and you are trying to make this a win-win by addressing the issue.  There are as many ways to structure a deal like this as you can imagine and I'll just throw out a couple of thoughts.

1. Make an offer of $450,000; $1500 per month, payments for 300 months.  (No interest or down payment).  You could also do a balloon payment after a certain time period but that is often problematic and I really don't like balloons as they can get you into trouble.  

2. Offer $395,000 with 20% down and offer the seller "the interest the bank would make on his house". IE - $1418.98 payments at 3.5% interest for 30 years.

Both options give the seller the ability to defer some of the capital gains.

As I mentioned above, I try to avoid balloon payments at all costs - I wouldn't suggest it to a seller unless they bring it up, and then still try not to do that.  We've done 30 year loans with many older sellers that know full well the loan will outlive them.  They want their children to inherit a monthly payment, not a lump sum of cash.  If you do end up with a balloon payment and sell the property prior to that, there would not be a "prepayment penalty" unless you negotiate it in (don't).

Be careful with this transaction, as well.  Personally, I'm a big believer that you should never buy a property with negative cash flow -and you could be dangerously close to doing that.  Structuring the deal properly is key.  If you do it right, you can make some monthly cash flow, solve the seller's issue and make it a win-win for both of you.