Quote from @Christopher Bell:
I might be crazy but…..would you?
Scenario:
Have a chance to assume a loan that has 28 years remaining, 5% interest, and in a very quickly growing suburb of Raleigh NC.
The townhouse would lose approximately $300/mo. Total payment is $2150/mo and market rent is $1850-$1900/mo.
Loan assumption Is essentially at market value $298k, but the $0 down outside of closing cost on loan assumption are what’s hooking me. I can put 25% down and get a $300k Townhome to cashflow near 0.
Also, the family is looking to buy a SFH and would be using my wife (realtor) to buy. Therefore, we would make about $8000-$12000 in commissions from the purchase.
Am I crazy to be considering this?
All improved real estate properties have long term “depreciation”, not in the accounting sense but in the real sense that systems wear out and need replacing (HVAC, roof, flooring), the property requires updating to be competitive, etc. While it may be in ten years time that the roof needs to be replaced, the roofing component of the property is using 10% of it life every year and hence the true cost of this depreciation should be borne each year, not all at once in 10 years. If not recognized as a yearly expense, the owner will be unpleasantly surprised when they go to sell and the offers are $20,000 under what a property with a newer roof would bring.
Hence, thinking that mortgage payments which even if they include tax and insurance escrows are the only expenses is incorrect. Overall, property depreciation average at LEAST 2% of value on an annual basis. So the real expenses associated with owning a $300k property is about $6,000 in “depreciation” in addition to all other expenses.
Further, unless the property is rented long term to a credit tenant these will (probably) be tenant turnover. A landlord would.d have to be very lucky indeed to own a property long term and never have a tenant do more damage than the security deposit amount. But even so, wear and tear items are not covered by a security deposit. If a tenant has been in a property any significant amount of time, it’s more than likely painting will be needed to make the property competitive with other rentals and to obtain the maximum rental amount. In all but the hottest rental markets it’s also likely that there will be times when the property is vacant. Therefore vacancy expense should also be calculated.
Depreciation is sometimes disguised by inflationary increase or other increase in property values. But the two should be considered separately. In the given subject property, the $300 monthly “loss” (should be somewhat modified for the amortization amount of the payment) would actually be closer to $1,000 when depreciation and vacancy loss is taken into account.
Offsetting this is property price appreciation. This is an area where hindsight is 20/20 and everything is obvious only after it occurs. And while IN GENERAL real estate prices have appreciated for the last 80 years, a friend of mine told me that his family home in Detroit purchased by his parent in 1961 for $20,000 was sold for $3,000 in 2010.
The second “offset” is rental rate increases. Obviously if rental rates were to double over the next 10 years the profitability of this investment would look very different.
Here’s the bottom line. The purchase price of this property is not at investor pricing; it’s paying retail for the benefit of “nothing down”. But two years of negative cash flow, especially if repairs are needed, maintenance is accounted for, or should vacancy occur, and the investor would be “in it” for the down payment amount anyway.
Btw, do you mean you would actually assume the loan; with qualifying with the lender and accepting personal liability? Or do you mean doing a “subject to” deal?
