Need advice on possible first deal

[Mary P.]

Hello, I appreciate any input here!

My husband and I looked at a small house today. 

The good - it's 20k and there's a renter in there for $410 per month. Structure of the house looks good. They'd like to keep him in there.

The bad - it's filthy. The area is a little sketchy but not the worst- very near a good area but not a great area either (for that amount, wouldn't expect a great location)

Not sure about - The renter is legally blind, has lived there for over 20 years and gets disability. He's never been late or missed a payment. Owner is selling because he's going into a home (his son is handling the sale) and they want someone who will buy the property and keep the renter in there.  They're going to be doing some cleanup work on the house this week so we will go back and see how it looks. Part of the filth due to a single guy living there who can't see. 

On the surface, it looks like a fabulous ROI - even fits the 2% rule.

Concerns:

I am worried about adopting a person - I need to find out what happens if the renter gets sick, etc. - Does he have people to take care of him or did that fall on the landlord in the past? (Doesn't seem like it did and he's quite independent.)

What if a distant relative of the renter comes in and starts a meth lab?

What if, what if, what if...

Finances - we can pay cash for this property and have no mortgage or interest, etc. Does that seem like the best way to go? Would you pay cash or finance part of it? and why?

Obviously, the best case scenario is we buy it, he pays rent faithfully for the next 5-10 years and then we sell it to someone else who will take him on. I do think he wants to live the rest of his life in this house.

The owner is a good person who has owned a home improvement company for many years. The son said the renter never called him for anything and so he hadn't realized how dirty the house was until he went in to see it to sell it. They intend to do some cleaning and replace carpets and some other things before they sell.

Any thoughts or advice are greatly appreciated!!!

[Ryan Detig]

@Mary P. Man, this is a tricky one. I love the 20 years of never paying late but the 20k price point is a concern. On paper this looks like a no brainer and with getting a loan your looking at around 30-40% ROI (I assumed your taxes and insurance). I don't think your "the bad" is really that bad. The guy has been there 20 years and paid on time. That far outweighs "the bad" in my opinion.

I personally think that the bigger issue here is if you have 20k to invest, why invest in something that brings in 410 a month. Why not use the 20k or 25K as a 25% down payment on a rental that brings in a larger monthly rent? I don't know your market so I don't know what a 100K property can rent out for but, I know if all things were the same in my market I would try to use that 20-25K to buy a property that was renting at 1.2 to 1.7%. To clarify that last sentence I would rather have a 100k property that rents at $1200-$1700 per month than a 20k property that rents for $410 even if the ROI is less. HVAC and hot water heaters etc going bad really cut into the profits of the 20k property and can jeopardize that really nice ROI . I would lean towards using the current cheap leverage (bank loans) to find a property that has higher rents even if the ROI is lower on paper assuming your market has those opportunities.