What investment strategy would you pick? (MOTIVATED SELLER)

Question

Motivated seller selling me a 3/2 SFR but not sure what strategy to use.

Property Details:

Written Appraised Value - 134K

Purchase Price - 90K

Rehab - 15K

Rent - 1,250/mth

Tax Rate - 2.54%

Strategy 1:

20-year mortgage, 4.63% interest, 20% down

Purchase, rehab out of pocket, rent it, pay off the mortgage FASTER but collect LESS passive income.

Strategy 2:

30-year mortgage, 4.75% interest, 20% down

Purchase, rehab out of pocket, rent it, pay off the mortgage SLOWER but collect MORE passive income.

Strategy 3:

25-year, 4.125% interest, 45% down

Assume the current mortgage and pay the owner their profit of 40K. They owe 50K to their lender. This would require the most upfront but get the most passive income.

Strategy 4 (BRRRR):

Purchase the property and rehab with cash out of pocket. Rent and season for 6 months, then cash out refi. This would get me the property essentially free BUT would leave me with almost no passive income (break-even) because the rent is not high enough, the mortgage would be for 134K, the property tax is not helping and I would have to close twice in a short period.

What am I concerned about:

1. Not collecting passive income

2. Tying up my cash, I'd like to purchase with as little as possible

3. Property tax appraisal

4. Taking 30 years to fully own

5. Closing multiple times

WHAT WOULD YOU DO?

Larry Turowski · Answer

@Frank S. It's doesn't sound like a great deal but may be as good as you can find for now. Your strategy will depend on your goals. Other people will have other goals and what they would do may not work for you. For instance, some would flip it and you didn't even mention that.

I will say this. Definitely not #3 because the bank could call the loan and you'd have way too much money down anyway. #2 gives you more flexibility than #1. The interest rate is almost insignificantly higher. You can always pay it off faster if you want. For #4 wouldn't your mortgage be closer to $107K? That is 80% of $134K.

Larry Turowski · Answer

Nice! That moves it into the definitely good deal category.

I'd probably go with #4. But that is because of my own goals. I want to get as much money back out as possible so I can put it to work in another property. I don't feel over leveraged because I have equity. In your case it would be 20%. Your in a cookie cutter situation. You could get all your money back plus a little extra and do it again in 7-8 months. And again. And again. Why would you not want ten of these houses, with 20% equity in each?

Frank S. · Answer

@Larry T.

Forgot to mention that I'm not interested in a flip unless I have to exit because I don't want to pay capital gains.

You are correct it would be 107K not 134K.

I just found out today that the owner will file a claim on her roof and get it repair or replace, saving me 5-10K. That makes the deal a little better, right?

I feel that I'm stuck between strategy 2 and strategy 4... What would you do?

What investment strategy would you pick? (MOTIVATED SELLER)

What investment strategy would you pick? (MOTIVATED SELLER)

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