How Hard and Fast is the 1% Rule if You Get Seller FInancing

Question

I have a lead from a landlord who is currently looking to offload some properties. Long story short, desirable neighborhood, nice home, free and clear.

It'll rent for $2,200-$2,300 per month with no problem, but is going to cost me probably $325,000 to get.

Is this worth it? With nothing down and giving him 5%, I'm looking at $1,880 per month PITI.

Bill Gulley · Answer

Looks to me like a commercial lease to you, passing off maintenance and allowing no more on his guaranteed income allowing about a 10% management fee, pretty good deal for the owner! :)

No, this is no deal. And, be very careful about adding value to any deal due to seller financing, a seller providing financing does not add any value to the property. :)

Brooks Rembert · Answer

@Mike H. and everyone else. Thank you for the input. In our town and our present situation, it's definitely something worth taking a closer look at. It is in a desirable neighborhood, it is most likely going to appreciate more than the surrounding area, and it is worth it to us to grab a house like this for our portfolio, particularly if the seller is willing to give us the financing.

I'll keep everyone posted on how things go tomorrow. I've told him I won't be prepared to talk numbers tomorrow, but will get as much more information from him as I can.

Mike H. · Answer

I guess before I would answer that, I would like to know what the rest of your portfolio looks like and how difficult it is to find good deals in your area today.

Lets say you had no other properties, then I would not recommend buying one of these deals. They don't make money or make very little.  But if you had 10 other properties in maybe the low to mid end range that are cash flowing pretty well, then I don't see why you wouldn't take a shot to grab this one.

Based on the numbers and assuming you'll self manage, you'll likely break even. But you should get some pretty good appreciation based on historicals of homes in that range and you should get principal paydown (I'm assuming your payments are amortized).

Not only that but rents should go up over time too so you should eventually start making money on that house. And, I always remind myself. In 20 to 25 years, when that house is paid off and the value of it has doubled, what is that house going to be worth then? What is it going to cash flow then?

I'm a big believer in real estate. But only because I like the fact that it lets me make money off it today while I'm young enough to enjoy it - AND it pays me even MORE money later on in the future as rents rise and houses get paid off/down.

But I'm not sure I'd be too keen on telling anyone that their first or even their 3rd or 4th deal be one that has no cash flow.  Because on the months that you have no rent coming in, its going to hurt.... especially at that price range.

For someone with a few more and that has some decent cash flow, I think it might be worth considering as a way to get a property you otherwise might not be able to add to your portfolio any other way.

That still doesn't mean I wouldn't ask for a bit more of a discount from this seller. Tell him you really need to get this for about 10% less to make the numbers work.  At 30k off, that would save you somewhere around $160/mo in payments (assuming its an amortizing loan).  And that might be the difference to pocketing $100 a month or not.

So while I know the numbers don't really work as well as you'd like, there is something to be said for 100% financing and getting control of a house in that upper price range.

What is your return if you make NO money at all during the next 10 years but the house appreciates at 3% a year. 100k with no money down? Thats not bad.

And don't forget, if the house breaks even, then you'll have a loss on paper when you figure in depreciation (10k in depreciation every year?) which is technically worth 20% or so - i.e. 2k cash in your pocket?

Just saying. Never be too quick to dismiss these types of deals. There can be some really nice value to them given no money down and that nice of a home.   But I also believe you have to have some other rental income coming in to offset a deal like this too. Because if you have to pay 1800 out of your pocket when the place isn't getting rent, thats going to be tough - at least it would be for me.

Cal C. · Answer

If you are looking at it as a cash flow play then it is not going to work, but if you have done your DD and believe it will appreciate substantially over the next year or two then it might be a deal, but you should have some reserves because you're not going to cash flow.

Patrick L. · Answer

There's a reason why you need to be able to rent the property for a certain percentage of the purchase price.  In your example after expenses, vacancy and management you will be losing money every month you own it.  Even if you self manage and work for free those numbers still don't work.

Andrew S. · Answer

No way to make that work with those numbers unless you speculate on massive appreciation potential.  Maintenance, CapEx, management, etc will more than eat up the $400 you are left with after PITI.

Jesse T. · Answer

Factoring in just management fees of 10%(no vacancy or repairs) would put you at just $100/month best case cash flow.

Even if it mean putting in a hefty down payment, I would try to get the purchase price down to 90% of market value or less.  This gives you a solid exit strategy - list with broker if it doesn't work out as a rental.  In terms of principal and interest payment I would be shooting for 1100/month as my max.  I would use a combination of interest rate reduction, price reduction and down payment to get there.

If you overpay for the first property, it will make it harder to buy more of his portfolio.

If this is better as a flip you need to shoot lower on the purchase price.  On the other hand a successful flip could give you cash to quickly expand your portfolio.

How Hard and Fast is the 1% Rule if You Get Seller FInancing

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