Deal/Investment Analysis - southern Minnesota

[Frank Hinck]

My first Forums post & it's a long one:  Some facts, then options regarding Downpayment & eventual Cash Out 

I'm 31 with our first child due later this month, listened to most of the BP Podcasts and feel like I'm ready to invest. I would like to invest in a Single Family House 3 bed / 2 bath / 2 garage in southern Minnesota with a 15 year Mortgage with traditional bank financing 20% down. I live in the Twin Cities about 90 minutes north but I have friends in the area. SFH 3/2/2 is $63,000 and ready to rent (newer roof & newer water heater), just completed by a local turn-key guy, it currently has a tenant and rents for $800/mnth and cash flows $200/mnth. For the downpayment, I would need 20% and some closing fees, call it $15,000 for the downpayment.

Option A:

Get 4 close friends (not Accredited Investors / I'm not soliciting) each to put in $3,500 each as an Investment offering 8% interest compounding monthly with a balloon payment due in 15 years of $11,575 which is a 70% return over 15 years (you can run this math, it works out) - these are younger guys who live in NYC and could never invest in real estate for that amount.   With the stock market down for likely the next year it makes more sense for them to invest in this option rather than an Index Fund (plus the THRILL of being a real estate investor).    At the end of 15 years I have 100% equity in the home, but owe $46,300 in balloon payments to the 4 investors.  I could sell the home and walk away with $12,000 ($16,700 minus 8% in closing costs on $63,000) therefore making the same $$$ as the 4 investors and personally not having put a dollar into the downpayment, plus $36,000 in cashflow over the 15 years ($200/mnth x 180mnths) minus the inevitable repairs that come along the 15 years.  None of this takes into account ANY APPRECIATION in the home's value, which could be $75k-$80k-$90k therefore driving my $12,000 up).    But then the house is sold, the monthly cash flow is gone.  I've cashed out.  Or I refinance after paying the 4 investors out, keep my equity in it, and continue renting is out. 

Option B:  Similar scenario, same Basic Facts some of the side commentary removed

I put in $7,000 my self (replacing 2 of the investor buddies) and get 2 close friends each to put in $3,500 each as an Investment offering 8% interest compounding monthly with a balloon payment due in 15 years of $11,575 which is a 70% return over 15 years. At the end of 15 years I have 100% equity in the home, but owe $23,150 in balloon payments to the 2 investors. I could sell the home and walk away with $34,810 ($39,850 minus 8% in closing costs on $63,000), plus $36,000 in cashflow over the 15 years ($200/mnth x 180mnths) minus the inevitable repairs that come along the 15 years. None of this takes into account ANY APPRECIATION in the home's value, which could be $75k-$80k-$90k therefore driving my $35k up). But then the house is sold, the monthly cash flow is gone. I think in this scenario I would more likely cash out the 2 buddies & keep my equity in it, and continue renting is out - odds are the appreciation has driven up the home value and I can HELOC and pay the 2 investors out through that.

ANYWAY - if you read all that I owe you a beer if/when you get to the Twin Cities.    Leave some comments, tell me your thoughts on all this, let me know if I'm blindly missing something here, or if you're local to the Twin Cities send me a DM.  Thanks Everyone!