How to structure first deal

Question

Hello,

This is my first deal on a house I will not live in. I have found an off-market deal that will allow me to gain instant equity and apply the BRRR method. I have a friend who is looking to invest in the deal and an attorney I trust to draw up the paper work. I'd like to leverage my friend's capital, but I'm not confident about the best way to do so. I'm looking to get the contracts finalized ASAP. Here are the details:

After months of research, I found an owner of a house that last appraised at about 105K. The owner is aging and is willing to sell me the house for the price of her remaining mortgage, 37K. She also wants to continue living in the home and taking care of it as her own after I purchase the home for $300/mo under the condition that I pay for a life insurance policy that covers her final expenses and leaves her children a few bucks. This rent is much less than market value, but all things considered it seems fair. She takes immaculate care of the property inside and out, although some cosmetic repairs are needed. The house is three bedrooms and 2.5 bathrooms. With some renovations the basement could be turned into another bed and bath (the bones for both are present). My friend is interested in contributing $10,000 - $15,000 to the deal.

Question:

If I buy the house cash and use a friend's $10,000 in capital for renovations, what is a fair % of cash you might offer out of the refinance money? Are there some other ways you might plan out this deal?

Ashley

Account Closed · Answer

That 300 a month rent is really a killer. She wants to live in it at that rate for the rest of her life?

I would say buy it subject to the existing mortgage and make those mortgage payments to the lender for her. What's the monthly payment? How would you guarantee her residence? Write her a 50 year lease that terminates upon mutual agreement to cancel the lease or death of the lessee? Sounds like you will be in the negative on this property for a while before actually making money. Is that bit of equity worth the lost rents and costs to you? If you paid market value, with a new loan, on a 100k duplex that rents for 1500/mo (just a sample of deals I tend to come across often), would the net cash gain over, lets say 20 years, be a greater amount than the equity position to be gained in this deal?

Ex:

Let's say this deal costs you (hypothetically) a net negative of $500 a month to keep over 20 years including interest, taxes, insurance, repairs & maint, and her life insurance policy. That's 120k in total expense over 20 years to have a presumably paid off property.

Alternate deal at 100k purchase, 80k loan amount nets you $500 a month in positive cash flow and includes debt paydown in addition. Over 20 years you made a net of 120k in cash flow, and in addition got a substantially higher debt paydown than the other property as well.

All of a sudden the deal at market value sounds a lot better.

Zachary Paschke · Answer

Hey @Ashley Oyirifi, this sounds like a rough deal. Is this lady ready to pass any moment? You may not need the capital to fix it up for years. I agree. I’d be real cautious. Depending on age and health you’re probably looking at hundreds of dollars a month for a low value life insurance policy. The closer she is to passing away the more expensive it will be.

How to structure first deal

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