Help with No Money down deal

[Mark W.]

I have been approach by a person who knows that some of my investments are in C-D class areas and that I am familiar with Section 8 properties. He is leaving the area and selling off his properties. He has offered for me to take over the loans and there is 25%-30% equity in the houses. I have a meeting with the bank this week to discuss the deal. The idea is that there will be little to no money down as the required equity is already there for loan. Here are the numbers:

5 Houses

Price: $420,000

Total rent: $4950.00

One of the houses has no loan on it and was stated it is the only one that can be negotiated on.

What I am trying to get my arms around, is the pros and cons of the deal.

Cons

1. The rents are definitely lower returns than I am use to

2. In an area that has very little chance for appreciation

Pros

1. No/very little money down

2. Collectively there is around $500-$600 of rent increase that could be made.

3. Should be able cut the price of the 1 house by 25-30k.

It is the No money down that has messed with my emotions on this.  Even though the returns are lower than I am use to, I could sign some documents, pay closing cost and start cash flowing +/-$2000 a month (not including maintenance cost).

[Wendell De Guzman]

Mark,

If you are used to and have the infrastructure (people and systems) and the guts to handle C-D properties, then by all means get the deal as this sounds like an awesome opportunity.

I was able to get 2 buildings - a 36-unit and a 24-unit with no money down - exactly taking over the mortgage payments of the seller. I wholesaled the 24-units and kept the 36-unit but found out later I was not cut out for that. The 36-unit is in an "F" area and I lost my shirt. You can listen to my podcast at http://Biggerpockets.com/show65 about this.

No money down can be appealing but if it's in the war zone, it may not be as profitable as you might think. Instead of factoring in 10% vacancy and 10% for maintenance and repairs for example, factor in 20% for vacancy and 20% for repairs and another 10% for reserves. See if the deal still cashflows. 

Also, on your deal, what is the possibility of really increasing the rents? Sometimes sellers tell you rents are below market but what they don't tell you is that their tenants are not willing to pay the higher rent and they have "professional bad tenants" - or tenants who know the system and they are staying in the properties rent free and they are using every legal loopholes to do so.