@Mitch Franklin We have several properties in those markets and I think you are going to have issues getting the numbers to work right now.
Typical property price is @ 85k right now and that will likely need some love to be rent ready / sale ready. Taxes will run 2k a year and insurance will run another $75 a month.
If you sell this on a 15 year note, even at 85k at 5% your payment is going to run $672 a month. Add in $241 for escrows and your payment becomes $913 a month. This is a breakeven sale price with a below market rate on what is essentially a subprime loan, you could buy Verizon stock and likely get a better return with way more liquidity and less risk.. To get this profitable you are going to have to increase the rate and the term likely driving the payment to be more than rent. you then miss out on appreciation. Also keep in mind that when you resell, depending on the municipality, you may get to experience the joy of POS again.
If you are thinking you will sell the note most investors are going to want to see an LTV of <65% meaning you can get out 55k of your sale price, and they are going to want that discounted to bring the yield up closer to 10%.
@Bob E.E.
Thanks for the detailed reply.
This strategy would require getting the property at a discount from either a distressed seller or wholesaler. Let's say you acquire the home at a 12.5% discount for all cash - $74,375 (Purchase $)
Turn around and sell it with owner financing for $90,000 and create 2 notes. 1 note to flip in 6 months and 1 to hold for cashflow.
Buyer down payment 10% - $9,000
Note 1 - 80% of loan - $72,000 - TERMS: 9% for 15 years - (I will sell this in 6 months after seasoning) Monthly Payment - $730.27 (Principal is $536 [6 mo. avg] Interest is $194.27 [6 mo. avg]
Note 2 - 10% of loan - $9,000 - TERMS: 9% for 15 years - (I will keep this for cash flow) Monthly Payment - $91.28 (PI)
Acquisition / Holding / Selling Costs - $10,000
Taxes - $116 / Insurance - $40 / Loan Servicing Fee - $20 (I pulled taxes and insurance off a Redfin listing for $89k.
Total monthly for home buyer- 730.27 + 91.28 + 116 + 40 + 20= $997.55
Sell Note 1 in 6 months at a 10% discount: 6 months of principal paid is $3,216 (536 x 6)
---Note 1 Balance in 6 months: $68,784 >>> 95% of note value = $65,344.80
Total Cash Invested (TCI) - $84,375 - $9,000 (down payment) - $8,854.61 (value of note 2 at 6 months) = $66,520.39
RETURN: 65,344.80 - 66,520.39 = -$1,175.59
+ $4,381.62 (730.27 x 6 months of Note 1 payments)
+ $547.68 (91.28 x 6 months of Note 2 payments)
= $3,753.71 PROFIT + 174 payments (14.5 years) for Note 2 at $91.28 >>> Payments of $15,882.72
ROI: 3,753.71 / 84,375 = 4.44% in 6 months >>> 8.88% Annualized and you're cash flowing $91.28 for 174 more payments.
I would suspect you can get costs (acquisition / holding / closing) down below $10k. I haven't dug in yet on those details but please let me know where I may be off on my numbers. I would appreciate the input.
I feel the note 1 buyer is in a good position as the balance of the note is only 75% of the market value of the house. 68,784 (owed on note 1 in month 6) / 85,000 (market value of house)
As for POS, since I will have just bought the house, it appears the POS inspection and correction would be performed by the seller I just bought the house from. I realize that a distressed seller may not be able to pay for these, but you could back it out along with the repairs from the offer price.
Interested to hear your comments Bob as well as anyone else in this forum. Thanks in advance.
