Deal From Family, But No Cashflow

[Mark Duhamel]

Hello all,

I am looking for a little insight from some people much smarter than I regarding an opportunity presented to my wife and I.

I am looking into purchasing our first rental property and it is an off-market property from a family member. It’s a 3 family located in MA and market value is probably right about $700k based on comps. Current rents are $5235, but has the potential to be $5700+. The property is currently full and is in good functioning condition with many new updates and no major issues at this time. It does not meet the 1% rule at market price obviously.

This family member has said he is willing to work with us on a deal, but obviously he still deserves fair value of some sort. He is 68yo and looking to downsize/simplify. He has only a small mortgage of about $60k on the property. He has other cash flowing properties and lives a frugal lifestyle so he does not seem too concerned about replacing the income from this property or have much plan for the proceeds of this sale.

It all sounds great but the problem is this: unless we purchase the property for around $500k, it just doesn’t cashflow enough with a conventional mortgage. Here are my expense numbers with various purchase prices:

Expenses: (Mortgage numbers assume 20% down)

700k Purchase: $2609.36 (30yr 3.8%)

650k Purchase: $2422.00 (30yr 3.8%)

600k Purchase: $2236.60 (30yr 3.8%)

500k Purchase: $1863.83 (30yr 3.8%)

Vacancy: (12%) $628.20

Property management: (12%) $628.20 /month

Tax: $584 /month

Cap Ex: (10%): $523.50

Water: $800 quarterly $267 /month

Maintenance: (5%): $261.75 /month

Lawn Care/Snow removal: $200 /month

Home Insurance: $125 /month

*Electricity and Gas are paid for by tenants with separate meters.

So even at the unrealistically low purchase price of $500k the total expense would be $5081.48, a cashflow of under $100 per door at current rents and a really bad CoC Return. I could probably live with that, but even with his desire to help us out I can't imagine him accepting $200k under market value for the property.

However, this does not take into account the instant equity of being able to purchase the property at least some amount below market value. If it’s worth $700k and I hypothetically pay $600k is it worth having slightly negative cashflow in exchange for $100k of instant equity?

Any insights on how to make this deal work for both parties?

My current thought is an owner finance deal would be the only way to do it, I could payoff his remaining mortgage with the down payment and then finance the rest through him with a ballon payment in 3-5 years in hopes that it could cash flow at that point?

Sorry for the novel, but it’s a lot of info and I really need some sound advice!

Thanks in advance for any help/ guidance!