1st Deal Analysis

[Todd Witt]

Hey everyone, I am looking for some help in putting together my first buy and hold purchase. In my area, multi-family units do not typically go on the MLS, so my partner and I started a small direct mail campaign targeted at duplex owners in a neighborhood where we want to invest. Our second response was from a guy who owns 4 properties (7 units total) that is looking to get out of the rental business. He is willing to owner finance (there are no liens on the properties) and provided us with the follow information for his properties.

Total price he paid = $531,000 (we estimate the properties are currently worth $560,000)

Annual Insurance = $4,700

Annual Taxes = $5,350

Total Monthly Rent = $5,290

He gave the initial offer of $550,000 with a $50,000 down payment (his CPA told him 50k was the max down payment he should accept), 5.5% interest with a 15 year term on the loan. However, he is willing to negotiate.

With our calculations including 5% monthly maintenance, 8% vacancy, 5% capital expenses, 10% property management (which we will be doing ourselves) his offer will give us a negative cash flow.

We are planning to counter offer with $490,000 with a 5% down payment, 5% interest amortized over 30 years with a 10 year balloon payment. This offer would allow us to cash flow $470 per month after the maintenance, vacancy, etc.  are factored into the equation, while still getting him his cash in the relatively near future.

Before we submitted the counteroffer, I wanted to throw it out on the board to see what more experienced investors thought of the situation and if our offer sounds reasonable.

[Brent Coombs]

My good-investment Sensor-Wand has not beeped. Something about: where is the balloon payment coming from in 10 years time (given that there has been no provable appreciation so far!)? I don't know how my Sensor-Wand works - so if it is wrong, blame it. Cheers...