15 year term @ 6% what do you think?

Question

We are purchasing a seasonal retirement community from current owners with owner financing. 385,000 for 15 years @6%. NOI is 50k We do not plan on buying any other investment property. We have the means to pay it off early. Should we use some of our own money to pay it off early and save on interest or just let the place pay for itself?

Kyle Hipp · Answer

It does not appear you have figured in vacancy expense nor capital improvements. If you are looking for an investment this is probably not it. However if you are looking for a place to through some money nd to work for the next 15 years until you loan is paid off then it is not the worst as your motive is not to make money but spend it on something you enjoy

Account Closed · Answer

@J Berk Why are you only interested in the property only paying for itself? With purchases today my pro forma is even more conservative than it would be a less expensive market, because I'm factoring in a buffer for future reduction in NOI due to economic changes. Breaking even today means you're surviving during the good times... what's going to happen to your investment during the bad? Furthermore, you should never put 30% on the table for a seller financed deal. If the seller is funding the deal I would seek to provide 10% down. The rate is tolerable if you're not in for so much of your own cash.... but then again at 10% down the property doesn't perform well enough to cover the debt safely. Commercial loans from a local bank I work with in my market (they hold their own paper) with have been proposed at 30% downpayment, 5.25% interest, 20 year amortization with 5 year reassessments. This is actually a better loan than the seller is giving you... why wouldn't you go secure a bank loan? Will banks lend to you on this deal? If not, that is a big warning sign. In the current market your top priority should be not getting burned. Be extra conservative. Now I'm investing in different property types than you (small multifamily, hopefully larger soon)... but my mortgage payments are half of my NOI, so I can weather the storms to come.

Mark Gallagher · Answer

@J BerkAre you posting a new thread so you can leave out the other important details of your deal?! You're seemingly too emotionally attached to this deal and are looking for someone to just scream BUY IT! Then in 3-5 years when you're hating the deal, you'll say "man I hate those people on BiggerPockets, they made me do it!"The rate offered is fine. But the underlying colleteral and purchase price is not!

George Taylor · Answer

Mr Berk, Honesty, I would suggest getting a hard money loan on it. If you have the means to pay off early then more than likely you have the ability to put a decent amount down on the loan. This will allow for a quick purchase, no prepayment penalties and the ability to refinance with with a local bank or credit union at a lower and more comfortable interest rate more than likely well under 6%. Also you can wrap a rehab budget in there as well if needed where as under owner financing more than likely you are buying as is. Feel free to message me if you would like to discuss more in depth.. Thanks..George

Account Closed · Answer

Sounds reasonable to me - I recently passed on a 5 year 7% owner finance deal. 6% is very reasonable from a loan perspective

Karen O. · Answer

Your math is off. 550k less 155k is 395k. Not 385k. IMO there's little wiggle room if only 8k+/yr net after expenses & debt service. But this seems more a labor of love than an investment for you. So, good luck.

Kyle Hipp · Answer

It doesn't seem to be a great investment but I don't think that is your goal. The expenses you have from the sellers I imagine have taxes and insurance included. I do not know for sure but the majority of your purchase would be for land so you would not get hardly any tax deductions for depreciation. You would need to set aside money for reserves to account for the possibility of drilling a new well if needed. I would say the price should be closer to $500,000 As it would then be a 1% investment. Being that monthly rent is 1% of sales price. If you have reserves to cover expenses and can raise the rents it should support itself barring any setbacks. I don't count on any appreciation when I analyse a deal so once you pay it off you have a $500,000 property that provides $45,000 a year of cashflow

J Berk · Answer

Kyle Hipp Yes, the cottage owners buy and sell their cottages at their discretion. The current owners provide water from a spring and well and mow the lawn. There has been occasional tree cutting but nothing else. But this seems to be as low maintenance as it gets. Ive been going here since i was a kid and they are looking to sell. Im just trying to keep things going and making a little as well will suffice. There have been no vacancies in 20+ years. They get consistent rent every year. It seems to me i should have a small cashflow each year without raising the rent.

Kyle Hipp · Answer

So would you just own the land and rent the land with owners owning the cottages and selling them at their discretion?

J Berk · Answer

Kyle Hipp If they place will pretty much pay for itself im ok with that. Think it will be able to support itself?