Can anyone help me to analyze this seller financing deal, please?

Question

Hello everyone, I am still learning here, and recently found a potential seller financing single family home opportunity here in Kalama Valley on Oahu. Can anyone help me to analyze this seller financing deal, please?

Sales price: $1,160,000

Down payment: $200,000 (using 5 year HELOC, 200K is the limit, 3.6% interest rate)

Balance $960,000 at 5.5% Monthly interest only payment: $4,400

Property taxes: ~$252

Homeowners' insurance:~$168

10 years balance is due

Potential monthly rent: $5,300

I currently have a $500K mortgage, am planning pay off the single family home by paying little by little during the 10 years, and using cash out refi or apply a new HELOC at the end of the contract.

Do I need more information to analyze the deal? I am thinking to negotiate a lower sales price, and/or monthly interest so the monthly payment can be decreased. What should I pay attention on when dealing with seller financing? More importantly, how can I make it a better deal? Greatly appreciate for any input.

Thank you,

Kwok

Joe Villeneuve · Answer

Yes, you do need more info.  You need to find a different property to buy.  This is a loser on every front.

You have negative CF (when you include the payments on the HELOC), you're not building any equity (interest only payments), and in 10 years you will have to come up with the entire cost...with nothing to show for it.

This deal has no potential.  Just because you can get Seller Financing, doesn't mean the seller will give you a deal worth buying the property.

Also, you NEVER want to spend extra money to pay off a mortgage on a rental property.  All you're doing is adding to the cost.

Eliott Elias · Answer

Whats the home worth? Sounds like you're breaking even after taxed and insurance. Any vacancy will kill you

Nathan Gesner · Answer

Using the HELOC is just another way of borrowing 100% of the purchase price. You borrow to borrow. It's over-leveraging and I only recommend it for experienced investors that can pay the HELOC off in under 12 months.

On top of that, you're not calculating cashflow properly. Here's a guide that describes what good cash flow looks like and how to analyze a property.https://www.biggerpockets.com/...

Bryan Vukelich · Answer

@Kwok Wong - just chiming in with a few points based on my own personal experience as an investor.

First, if you have no other options, I don't see a problem using your HELOC if the cash flow from your investment will service your HELOC payment and leave you some cash to spare.  But highly recommend you have a plan B for making your HELOC payment if you run into a problem with your investment.

Secondly, perhaps consider partnering with another investor if you find a quality opportunity.  If you are able to find a great opportunity and need cash and are willing to partner with somebody, contact me or other BP members.  If it is an attractive deal, you can negotiate an ownership stake with no money down for simply being the "deal finder."  A small stake in an investment is better than nothing.

Thirdly, a couple thoughts on the opportunity you mentioned.  Based on current inflation and rates, if that 5.5% rate is fixed for the 10 years, that rate is quite favorable.  Also, over the past 37 years, residential real estate on O'ahu appreciates on average about 5.07%.  So seems like the only way the deal could work would be as an "appreciation" play.  But even then, once you factor in all of your carrying costs, and if the house sits vacant for a bit . . .  if you are patient, you'll find better opportunities.

Lastly, I'm not a property manager but I used to rent a house in Hawaii Kai. That $5300/mo rent for a $1.1M home in Kalama Valley seems high - unless the home is comprised of multiple units.

Take care and contact me anytime if I can be of value.

Joel Bongco · Answer

@Kwok Wong -  Kudos to you for trying to do this on your own.  Like the others have stated, this is not a good deal. Please PM me and I can show you the math on how it works especially here in Hawaii -  the market is a little wacky.  Real estate sales is  pretty slow across the islands, however, there are pockets where inventory is still moving, Hawaii Kai being one of them.

Joe Villeneuve · Answer

I would never use a HELOC for a down payment to begin with.  If you do, it should be paid for with the rent.  Never use your W-3 to pay anything on a property.  Equity is built the same way regardless of how you buy it...through appreciation.

Kwok Wong · Answer

Hi Joe,

Thanks for you input. Your advice is really helpful. More questions if you don't mind.

So when using HELOC, do you recommend paying it off with cash flow? Should I use my w2 income as well?

How do I build up my equity when using seller financing?

Thank you

Can anyone help me to analyze this seller financing deal, please?

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