Negative cash flow, good deal, caveats - worth it?

Question

Hi everyone,

This is my first post, and I'm in the midst of education, so bear with me here as I explain this complicated deal that lay before me if I choose to accept it.

The deal is $260k for a 1600 sq ft house, and an old manufactured home on 8 acres that I'm currently living in and paying $600 rent, in the country outside of Austin, TX. The home prices here are soaring because of a great school district.

On it's face, those numbers are fantastic, and this is because it's a family-only deal, so the savings are passed on. However, there are caveats.

The current renters (my in-laws) come with the house, and they pay $1300 rent. They cannot be kicked out, and rent can only be raised with inflation.

I cannot sell the land for many many years, let's assume 20.

And, this is a big one, I have to give the in-laws a chance to buy their house within 2 years from the date of purchase and a fair price.

If I go through with the deal, I will own 4 acres and the trailer out-right, but the loan will be on the remaining 4 acres with the house. (This is all because the trailer is so old that you cannot get a loan on it, so you buy it for a $1 and separate the land into 2 parcels.)

My initial monthly payment will be $1600, but i'm expecting tax rates to drastically increase in the first year, bringing me to $1900 or $2000, so a negative cash flow rate of $500-600.

Now, I think with the numbers so far, it's ok for me as a long term investment providing I sell in 20 years. But that means I'm assuming the land will at least hold it's value, and I know I'm not supposed to be trying to predict the future. So it seems to me worst case is I break even. But still, it doesn't look that great to me.

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I do have a couple other options here, I can keep renting, and hope that the in-laws get their debts paid down to buy their house. Then I can buy the 4 acres with the trailer for $70,000. The deal I really wanted initially, so I can snag a discount on land and use the equity for whatever I chose. I do have the ability to pull this off if it happens. But that could be another year or two.

I can also just effectively forget about the deal, and start off investing in other rental homes around the area, getting my feet wet and getting me some positive cash flow.

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I know it's a complicated deal, but I just want to make the smart financial choice for my family. I am open to anything. I'm sure in a way I have some emotional attachment, but all I care about are the numbers at the end of the day.

Thank you for reading this far. Is there a way to tip people for good advice? I could really use it! Thanks guys.

Brent Coombs · Answer

@KYLE WARREN, you "have to give the in-laws a chance to buy their house within 2 years from the date of purchase and a fair price" (to them)? ie. Below market value?

ie. I reckon they'll never pay proper market value! (ie. You'll be emotionally blackmailed to not make a profit out of them). [Or, values might fall!] ie. What's the real point in considering this?

You haven't told us why "on it's face, those (negative cash flow) numbers are fantastic". So, why?

Meantime, imho, a good number for you is: $600/m rent! Welcome to BP. Good luck...

Roy N. · Answer

@KYLE WARREN

Who owns the property at present?   Is your in-laws' tenancy to be written as a condition of the sale or is it simply a verbal request?  Providing your in-laws with an option to purchase at "fair" market value should not be an obstacle, particularly give the expressed doubt in their fiscal ability.

What other (alternate) actions is the Vendor considering: sale to other family members; listing the property on the market, etc.?

Anytime you deal with family or friends it becomes complicated as not everyone - perhaps no one - will be able to compartmentalize the business transaction from the familial relationship.  As a minimum, you want everything written down -in detail - in an agreement and all parties should have their own counsel.   It's usually easier to find an arms-length deal and not get tied-up with family.

Generally, from a business perspective, negative cashflow is a bad thing or, at the very least, suspect.  However if there is a possibility to repurpose the property to a higher and better use in a reasonable time frame (20yrs is far too long), then the upside of the redevelopment may outweigh the negative cashflow.

KYLE W. · Answer

Thank you Aaron! Man, we're getting unanimous around here! I feel like I've been missing the forest for the trees :S

Aaron Taylor · Answer

I've never done a real estate deal with friends or family, but I did do a business with a friend.  My advice is to never get yourself into a situation where a friend or family member has financial or decision making power over you, because you never know when it will go south and ruin your personal relationship.  Like in your case, should the in-laws decide to not pay rent for some reason, what options do you have?  Probably zero.  Or if they start paying late, etc.  It would just be an uncomfortable place to be.

KYLE W. · Answer

Thank you for your inputs Ryan and Redgy!

Redgy Saint-Germain · Answer

@KYLE WARREN

My initial monthly payment will be $1600, but i'm expecting tax rates to drastically increase in the first year, bringing me to $1900 or $2000, so a negative cash flow rate of $500-600.

---This says it all, its not a good deal. Why would you be okay losing money, cashflow is the holy grail of real estate so why would you want to give that away. I can understand if a deal goes bad unexpectedly but going into the deal knowing you're gonna lose money is a bit insane.

KYLE W. · Answer

Awesome response Marc, thank you Sir. You guys are reinforcing my gut feeling here. Thank you so much. I really appreciate hearing other intelligent folks' opinions. Looking forward to posting more on this forum!

Marc Winter · Answer

Well, um, er…  since I've been down this road myself, I speak from experience:  don't do business with friends OR relatives.

These are in-laws.  You are looking 10--20 years ahead.  Stuff happens--good stuff and bad stuff.

While this is an opportunity, does that mean you must take every 'opportunity' that drives by your trailer?  I agree with @Brent Coombs--keep renting, get your original deal, or just keep looking for a better opportunity.

I can tell you (also from experience) that if you look hard, the deal of a lifetime comes along about every month or two.  Don't give up!

Negative cash flow, good deal, caveats - worth it?

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