Opportunity to purchase with $0 down, owner financing

[George Elchaar]

Hello everyone & thank you for having me as a member of the forum.  I hope to contribute to this forum in some type of capacity to show gratitude for the knowledge shared with me.

I have been a property & casualty insurance agent for the past 5years.  Throughout my career I have come across numerous investors in all different types.  I have a few family members who are investors as well.  Needless to say, I'm familiar with the challenges of being a landlord and I am prepared to handle it. 

I always seek the best advice so I have turned to this forum (not family or clients) for help in making a good decision. 

A client of mine is looking to retire and sell 9 town homes (in a cul de sac on same street).  Instead of paying capital gains taxes on the full purchase price, he is looking to "hold the note."  

His offer is as follows: 40 year term & 4% interest & $0 down.  I am responsible to pay both sides of the transfer tax and whatever closing costs involved.  (Totals approx $45,000- depending on the pre-payment of property & school taxes).

The total purchase price is above market value but that is to be expected given the characteristics of the offer.  I'm currently in process of doing my due diligence.  I will have homes inspected. Rents verified.  Will even seek a realtor to complete fair market value for property & rents- this is for additional peace of mind.  $1.3 million for 9 homes built in 1989- 1300 sq feet, built in garage, 3 bedrooms, 1.5 baths. New roofs and new heat pumps,  and new siding.

Rent per unit is approx $1300. Some units are currently rented under market value and will need to be increased.  

My cash flow will be approximately $4300/month assuming all units are rented at 1300/month.  Cash flow is my only positive in this deal. at least that is what I think.  I don't believe I will have opportunities to refinance since the purchase price is above market value.

If everything is as it appears to be; I believe I will make the deal happen.  I only need to come out of pocket for $45,000.   In two years, I will have made 1.5 times my investment (barring anything major).   If I decide I want to give the properties back to the original owner, I can without any significant financial impact

Is my logic correct?  I know I will be overpaying for the properties but is this something I should not be overly concerned with?  Does the cash flow trump the purchase price. 

Your perspective is greatly appreciated. 

Thank you. 

[Wayne Brooks]

Let's see:

Gross potential rents                                                       $11,700/mo.

50% rule for expenses-capex, vacancies, repairs               5,850/mo

taxes, ins., management, etc

NOI 5,850

P&I on $1.3M 4% 40 years                                                   5,433    

Cash Flow                                                                          $    417/mo.

If you use only 40%  expenses (self manage)                   $   1,587/mo.

There WIIL BE monthly expenses, as well as major replacements (are all the AC's, heating, roofs 25 years old?)

Loan balance at the end of 5 years--$1,227,079