5 Duplex owner finance

[Michael H.]

I am meeting with an 82 yr old lady in a couple days to begin discussions of owner financing her five paid for duplexes. She's had them over 20 years. She's been managing them for the most part for the last 6 years. She does have a tenant that helps collect rent and does some repairs she pays $300 a month. She told me some of the work she has done and sounds like they're in pretty good shape. It would appear rent is low but my only current source for rent comps is Zillow. If Zillow is correct, she's low by $2000 a month on the 10 units.

She thinks they are worth $900,000 - $1,000,000. A 10% cap rate puts the price at $850,000. I am thinking of offering her 8-10% down, maybe a 4.5-5.0% interest rate, on 30 year term. The higher interest rate because limited amount down. The 30 year term allows the cash flow to be $1000 more a month.

With her being 82, what's the exit strategy when she passes? Is it possible to pass those payments on to her 57 and 61 yr old children to maybe avoid some inheritance taxes? I could also offer to refinance in 5-10 years and pay them off.

What advice do you have for me?

Thanks

[Chris Eaker]

@Michael H., have you considered a master lease and option on all the properties? Offer to pay her the current NOI per month and then you get the upside. Get an option for the $900k she wants for five years from now. Master Lease it for 5 years, then exercise your option. I would not depend on the Zestimate for your rents. Use Rentometer, or better yet, buy a rent report from Cozy. If you can raise rent $2,000/month, that's $24k increase in the NOI and a $240k increase in the value of the portfolio. Over 5 years, you should surpass the option price of $900k.