Is no cash triplex deal worth it?

Question

I’ve got cold feet on putting in my first offer on a small multi family.

Triplex $185,000

Rents $1,650 (combined)

$3,000 rehab needed

I have a friend who will loan the down payment at 6% interest only until I can refinance. With current market rents and conservative (high) expense estimates, it will come short of cash flowing. I can’t get a conventional loan because of other projects I’m in the middle of. The seller is open to some creative financing.

My personal hesitation is that it may not be the right time. We are also purchasing 40 acres to rezone and subdivide into acreages, fixing up our current house to sell, and doing an addition and complete gut remodel of a house we are moving into. I’m also working full time. My head is swirling!

My question is, if we decide to go for it, how do you present a creative financing offer with an agent between? Slow conversation on a possibly fast moving house?

Brent Coombs · Answer

@Tim DeFor, why are you even interested? This one only makes sense if the $185k asking price is way below market value. If not, I ask again...

Steve Smith · Answer

Tim, First, sure looks like you have way too much on your plate and there's a thought to pass on this one and catch up and/or delegate some of your responsibilities to others. The "WE" you mention, can the other person do the land deal, and can your partner (wife?) manage the fix up and remodel? I would guess not... but you'd want to be involved. As for the triplex, first, the number aren't really attractive. If it were a single family home, I'd say go for it. As to cash flow and creative financings, ask the seller to be paid interest only at a low rate (like 2 or 3%, which you can explain is more than he'll get in a bank), and remind him that for an installment sale, he'll pay tax when the dollars are received. If he doesn't like 2%, tell him you'll increase the rate later on... perhaps 4% after 5 years.... 6% after 8 years, etc. I don't understand the "downpayment" until refinanced. Sounds like you'll be looking for 100% financing? Pretty hard to do. Why not sell your friend part of the upside for his downpayment?

Tim DeFor · Answer

@Brent Coombs The financing time pay off the seller and down payment investor would’ve a cash out refi after 5 years. If the value holds flat I’ll have $60k in equity on a $200k property. Thanks again.

Tim DeFor · Answer

@Brent Coombs great questions. I think the older guy is interested in seeing me get started. 2 recently rehabbed (flooring and paint) units are vacant. Rents were under market. He’s had them for 20+ years. He’s only getting $400 a month at this time from the basement unit. I’ll keep looking for other deals. I’m taking the weekend to consider an alternative offer that has better numbers. Thank you for the guidance.

Brent Coombs · Answer

@Tim DeFor, it seems weird to me that an "older" seller would forego their preferred "getting out of the game" for a mere 20%(?) deposit, and monthly payments from you that would average less than the three rents he already receives. You said "I would only hold that loan until I refinanced the property to pay off the seller", but, as @Steve Smith queried, wouldn't that still mean you'd be "looking for 100% financing" (to pay off the seller and your friend)? ie. How can you pull that off?Nonetheless, if there is a way to buy such real estate with zero down and next to no monthly outlay, I take back my initial question as to why the interest.So, isn't there other real estate out there that will cash flow with your friend's interest-only loan help? Cheers...

Tim DeFor · Answer

Thank you Steve, I think I'm a little too eager. The loan from a friend for the down payment would be interest only. I would only hold that loan until I refinanced the property to pay off the seller. I like your recommendation of asking the seller to carry a shorter term interest only loan. As an investor, he should understand the need for cashflow and may be willing to postpone receiving some of his cash for a larger overall gain. He is older and is selling to get out of the game, so I don't know how long he would want to carry it. It doesn't hurt to ask. Thanks again.

Tim DeFor · Answer

@Brent Coombs thank you. Low interest seller financing. With little out of pocket in the beginning, maybe up to $5k, even if I don’t cash flow (currently -$25/ month) for years, the pay down and appreciation still continue. Multi-families don’t come available here often. The realtor had difficulty finding comps. Thank you for the warnings. I’ll certainly run the numbers more closely.