Seller Financing -- In Need of Creative Advice

Buying & Selling Real Estate
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Seller Financing -- In Need of Creative Advice

Matt Speer
Rental Property Investor · Indianapolis, IN · Member since 2015 · 108 posts · 66 votes

Situation: 
Imagine a property in Fishers, IN (recently awarded safest place to live in US), a suburb of Indianapolis, IN that is surveyed as 3 lots and has two properties on the lot. One property is about 2,200 sq. feet and has a 3 bed/2 bath on the top floor and a MASSIVE "4-car garage" on the bottom --I'd put some money into it and make it a duplex with a studio. The other house is a 2 bed/1 bath that has been well maintained. 

The current landlord is 70+ and has been renting the property since he built it over 30 years ago. He rents the top of the "duplex" for $1000/mo and the 2 bed/1 bath for $800/mo. The previous tenant for the $1000/mo had been there for 16 years before recently leaving. 

I spoke with him and he mentioned that he would be open to seller financing of the property. He mentioned wanting $25k down and wants a ballon payment after 5 years (remember he's old and wants money relatively soon). He mentioned "4-5%" interest which I thought was low. 

My Take: 
He mentioned wanting at least $300k for the properties. I work in the office building that was recently built that is a 30 second walk from the house. The area is BOOMING. There's so much construction that it's hard to even get in a routine as you drive to work. I know you're not supposed to plan on appreciation but I believe that this property could have some serious upside with appreciation. If I could cash flow a several hundred a month and wait for this appreciation I believe it could be a gold mine. It also has a lot of potential to market to developers/commercial investors due to it's location. 

QUESTION: 
Does anyone see an opportunity here? Is there an ability to get creative with financing in order to take advantage of the owner's unique situation? 

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  • Scott DeMichele
    Rental Property Investor · Greenwood, IN · Member since 2014 · 22 posts · 8 votes
    11y

    A 30 year note at 5% for $275k will be $1476.  Taxes and Insurance will eat up another $200.  Then there's maint, vacancies, mgmt, capex.  I don't see any positive cashflow at all.  Very likely to be negative cashflow along with some sore bumps over time.  You would have to make this a bet on appreciation, be it a hot market (I agree that Fishers is booming again) or some sort of added value.  With that, time will not be on your side and you don't want to be swimming in red ink waiting for the property to appreciate enough to cover everything you have had to put into it.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    11y

    You did not provide an estimate of the cost to convert the garage to a duplex unit and I am unfamiliar with the IN market (or anywhere outside So Cal).  Also you did not indicate if you expect this conversion to cause the equity to appreciate more than the conversion cost.

    Assuming the new duplex unit can rent for $1200 (it is newer than the one getting $1000) you would have $3K in rent ($1200 + $1000 + $800).  At 5% rate you would need to do the conversion for not much money to have decent positive cash flow.  At 4% the numbers look better.  At 5% you would definitely be hoping for an equity gain via the conversion and appreciation as the cash flow alone would not be worth the effort/money.

    In my area (home prices are going up here and I think will continue to go up) I think this would be profitable enough at 4% and possibly 5% as the conversion here would result in more equity than the cost to convert a garage to a unit.  The rents would provide a positive cash flow (obviously more positive at 4% than at 5%).  I would get the equity gain from the conversion, equity gain from appreciation of all properties (the appreciation not related to the conversion), and have the tenants pay the mortgage and some of the rent be in excess of the mortgage (monthly profit).

    So I think it all comes down to the Fishers, IN market and what else you can do with your capital/efforts (is this the best you can do? - In So Cal I think it would be a pretty tempting purchase especially at 4%).

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    11y

    I did not take into account the Studio rent in my calculations which would increase the cash flow more.  You would have a 2/1, a duplex (3/2 on top, maybe a 2/1 on bottom), and a studio.  I think even if the conversion cost $70K- $90K you would have good cash flow.

    If I could find this in my market I believe I would purchase it (but my market has most properties with minimal cash flow and properties with opportunities to improve the property to substantially increase equity are not easy to find).

    Same summary: depends on Fishers IN market and what other opportunities there are for investing you capital and efforts.

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  • Shawn Holsapple
    Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 1k+ posts · 557 votes
    10y

    Yes, it's a good area but I don't see how you're going to make this cash flow.

    Don't forget taxes will be around $500 PER month [if it's accessed at $300k, you will pay 2% non owner occ rate].

    Unless you go with a FHA loan in the future, most banks will only do a 15 or 20 year amortization - which will kill even more of the cash flow.

    Also, is it zoned properly for all of this??  

    For $3k gross rent - IMHO, I'd rather have 4, $65k homes that rent for $800 in a solid blue collar neighborhood...

    Otherwise, you need to look at this as a flip and not a rental. Fishers should easily be able to support a strong ARV. The down side is the other home - this may have a negative effect on the value of the main house.

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