Should I buy this rental property?

Question

Hi everyone,

My name is Michelle, and I'm from SF Bay Area in CA. I'm new to real estate investing and I'm interested in building a rental portfolio. I've been looking to start getting rentals in TX, and I came across this multifamily in Houston, but due to personal reasons, the only way that I could buy this property is with seller financing. According to the listing, the owner is open to seller financing with a "substantial down payment if I qualify", and I thought that was weird. The property is currently fully occupied, but the rents seem lower that what the market rents should be, but I could be wrong.

My question to all of you seasoned investors is should I go for this deal? It's been on the market for 40 days now, and I can tell that the owner is also an investor (I assume he owns the property free and clear because of this), but it makes me wonder why hasn't this guy sold the property already? I'm nervous because I don't want to risk too much on a deal that I don't know much about how I'm going to set up the deal, since I'm by myself with no mentor. Any advice helps. Thank you!

Corby Goade · Answer

It's very common for newer investors to be very concerned with why a property hasn't sold and why the seller wants to sell. The truth is, none of that matters at all if that deal works for YOU.

If the numbers work for you and you've done proper due dilligence- inspections, title searches, you know what market rents should be, etc- and you still think it sounds good, go for it and shut down that other noise.

Best of luck!

Eliott Elias · Answer

Stop thinking about why it hasn't sold and start thinking about what your criteria in a deal is and why it does or doesn't qualify for you to buy it. I would rather go to the bank than put a substantial amount down on owner finance.

Cody L. · Answer

If you're looking to buy property, you should know how to 'crunch the numbers'.  I have no idea what the BP membership costs or what the other 'necessary software' costs, but honestly if the cost of a BP membership is out of range, I'd pump the breaks on buying a multifamily rental property 1/2 way across the country.With that said -- you don't need any fancy software to cruch in the numbers.  There are only 4-5 line items that you need to concern yourself with.   It's simply income - costs = profit.  Does the amount of profit justify the amount of down payment.  Easy.Income is, for the most (99%) part, rent.  So there you go.  You have your top line gross income.

Now subtract your costs.  Property tax (found online), insurance (call to get quotes), debt service (easy to find), utilities (easy to assume based on if it's all bills paid or not), management (get some quotes, or make an assumption of x%), and repairs/maintenance No fancy software needed.   But even if you use fancy software, that's not where the secret sauce is.  The secrete sauce is making sure you have the right numbers to put into the software.   The software can't tell you what the property tax is for example. People totally overthink these things IMO.   You should be able to tell if a property makes sense or if it doesn't within 5 minutes.   And no, a Realtor is not going to be of help.  If they were investors, they'd be investors.  Use a Realtor when you're Bob and Sally who are out to buy their first home for their 2.5 kids and dog.

Mohammed Rahman · Answer

Hey @Michelle Mayfield - I'm not saying it doesn't matter, but what I'm saying is there can be a host of different reasons. Most new investors will think if a property has been on the market for too long then there's something wrong with it. Yes that might be the case, but it could also be a stubborn seller, a buyer that backed out, an unorganized broker, etc. etc.

What matters is your investment goals, if a deal hits your view that fits your goals... then it's ok to start your due diligence process. A good deal to one, is a bad deal to another - that's why I always advise clients to first figure out what they're wanting from their investing strategy before hitting the streets to hunt.

Michelle Mayfield · Answer

@Mohammed Rahman So would this mean that when it comes to rentals, how long that particular property has been on the market doesn't matter as much as if you were doing some other real estate strategy right? Sorry if this seems like a dumb question, but I am genuinely curious. Thank you for your input!

Mohammed Rahman · Answer

Hey @Michelle Mayfield - it's not totally uncommon for occupied properties to take longer to sell on the market. With that in mind, 40 days isn't that much time. The property could have had multiple offers, and maybe a buyer backed out because they lost their job, or XYZ reasons.

If you get into the habit of thinking of why something's for sale, how long it's been for sale, you will take longer to cross the finish line. Am I saying you should completely disregard any red flags? No... do your due diligence, get inspections, crunch your numbers, etc.

When the deal makes sense according to your criteria and goals, and all other factors are in check, then go for it.

You won't know 100% of every detail, that's the risk of investing in real estate in any shape or form.

Michelle Mayfield · Answer

Thank you everyone for your responses! I'll do my best to give an appropriate response to each one of you below:

@Theresa Harris I didn't ask him what the substantial down payment yet. I haven't spoken to him actually, but I would assume it would be that percentage.

@Eliott Elias The reason I'm not doing a bank is because my credit score is bad, so I know I wouldn't qualify for a loan. Plus, I'd rather use cash on a deal anyways, so that things could close faster, but I get what you're saying. I'd rather not put a lot of my own money down on a deal either.

@Corby Goade I would love to crunch my own numbers, but I just don't have the financial means to get the software necessary. I would use BiggerPocket's calculators, but it just costs too much for me at the moment to sign up as a pro member. If there is a software that's free or cheaper that you know that works just as good, please let me know :)

@Taj Akinbode I would love to connect with you if possible! Do you do other markets as well, or just Houston?

@Karl McGarvey Thank you for that answer, and that puts everything in a new perspective. If Houston is a market where the seller can do thorough due diligence on a buyer, then Houston may not be a market for me (because of my bad credit and finances). Are you an agent in the area as well?

@Nicholas L. I'm not investing in my own market because not only of deals being "too expensive", there was a law that was passed not too long ago favoring tenants who couldn't pay rent. It was during Covid, so I'm not 100% sure if this is still in effect or not, but tenants (at least in my area) could stay in their rented homes for a couple of months without paying rent, and that's just not something I'm willing to deal with. I don't know if it's just my area, or all of CA, but I don't want to take the risk.

Nicholas L. · Answer

@Michelle Mayfield

why not invest locally rather than starting with a random property in Texas?  yes, the Bay Area is 'too expensive.'  so pick a market 2 or 3 or 4 hours away.  go there.  go to REIA meetings, network, visit properties, build your Core 4.

Karl McGarvey · Answer

A few things to point out about seller financing in Texas. The seller says "if you qualify" because TX real estate contracts allow the seller who is going to be the lender, to do their due diligence on the buyer by requiring Credit checks, income statements, bank statements etc. Smart sellers are not just going to seller finance to anyone, they want someone who can pay for the loan long term to make them interest on their money. I have seller financed multiple properties in the Houston and Galveston area (closing on a property tomorrow using some creative financing actually!), both on the buyer and seller side, and while it is easier than using a lender, when we sell, we do go into the buyers financials to ensure we are going to get paid.

As a buyer looking for a property, I would be soliciting the help of a realtor (yes I am bias haha), but if the seller has the property on the MLS then their agent is more than likely offering a buyers agent a commission to bring a buyer to the table. With the sellers side offering that commission, that means you are getting help from a professional that speaks the language not only of the Texas regulations and laws, but also of the market. They can also dig to find more information on the property to try to find out why properties might be sitting.

Just a few things that come to mind when I look at your post - there may be a lot more to it that we just don't know since there is only so much you can present on a forum.

Good Luck!

- Karl

Taj Akinbode · Answer

Hi Michelle,

Glad you’re looking into the Houston market. There’s are a lot of opportunities here. It’s very important that you do your due diligence when it comes to seller financing deals especially when you are being asked to put down a substantial amount.

I will advise that you connect with a local investor-friendly agent with a good knowledge of the Houston real estate market who can answer your questions and  dig into various databases to find you information you would normally not have access to.

Happy to connect with you and assist in anyway I can.

Should I buy this rental property?

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