4x SFH Deals - Will you tell me what you think?

[Derek Scott]

We have one SFH that we've rented out since 2010. It cashflows nicely, even after we refinanced is to a 10 year term at 3.875% just to accelerate paydown (from 5.875%). We have a $35k HELOC there that has 2 years left on the draw period. Not planning on using it for the new deal unless we have to.

We've been looking for smaller SFH deals just to get ramped up.  Ultimately, we might 1031 into some bigger stuff.  Just need to build more equity.

I'd appreciate opinions on the following.

I have a friend from church who is selling off his SFH portfolio. He's got a bunch of lower end stuff. It's not his main thing. He makes his money in much bigger stuff. He's a great guy and a wealth of knowledge. He figured this stuff out years ago. But he's "ignored" these because they aren't that important to him. He's maybe 60 and just doesn't want to leave his wife with any of this. That being said, he has a property manager that only charges 7%.

He's given me a menu of all of his stuff.  We drove around and looked at it.  I narrowed it down to four that I think could work.

Here's the strategy:

He may be willing to finance the deals for me at 100%.  He's done that kind of thing before.  I'm thinking of asking him to hold the mortgage while I rehab them.  I'm thinking something like 20 year am with 5 year balloon.  The properties will cashflow (say $100/month) while I rehab them.  One example is a property that will sell for maybe $40k now and be worth maybe $105k when I'm done.  I estimate rehab at $30k.  So I'm in for $70k and come up with $105k.  These numbers are based on very similar comps on the same street where this thing is happening.  In fact, the whole neighborhood is getting renovated, it seems. 

To pay for the renovation, I'll use an interest only HELOC on our primary residence. In talking to the guy at the bank, I can probably get $90k which should give me some wiggle room for contingency/vacancy. To get that set up will cost maybe $1000 in closing costs (appraisal, attorney, origination) which I don't mind anyway. Variable rate is prime plus nothing. 10 year draw period then 10 year am on whatever balance is a 10 year mark.

Once the rehab is complete, I have a savings and loan that will do cash-out refinance loans (20/80) at 6.3% fixed for 20-year terms. There are a portfolio lender. I consider this worst case as I could maybe do better with the HELOC lender (mentioned above) for 30-year terms. They will do up to 4 Fannie/Freddie because they sell them. May have to put 25% down there. My pro forma calculates cashflow of about $500 after refi.

Shoot holes in the this strategy.  Does this make sense?  What could I be missing?  If you were the seller, what would you make of the deal?  What is a good interest rate?  Is five years for the balloon too long?  If I can do four in a year's time, would that be quick enough for a guy who wants to unload them?

I'm hoping some of your numbers people are up and reading tonight.  Thanks for your time.