Purchasing Over Valued Property but GREAT cash flow

[EDWARD M.]

It sounds odd, because it is. The seller's agent showed us the home, with much emphasis on the basement/ground level floor. In the Hudson County, NJ area, basement level is illegal to live in. The property is priced as if the basement were a 3 bedroom apartment. However, even if I purchase at this price, I could "live" in the basement and live COMPLETELY rent free. After I move, my brother and his friend would rent the space out for a place to work during the day providing me with a potential 300 - 500 in monthly cash flow assuming a 30% expense rate. I would use the extra cash to make extra payments and if my calculations serve me well, I would get rid of PMI (another 450 or so a month) in about 6 - 7 years.

Another issue is I intend to put 5% down. Apparently the house was previously under contract but the buyer was purchasing through FHA. Obviously, the appraisal came in almost 19% below the sale price so the loan did not go through. I'm figuring if I offer near the asking price, I would be in a similar situation (considering I'm only putting 1.5% more down. I need help!