Assuming loan with no cash flow. Good idea?

Question

I have been identifying properties that I can purchase with little money down by assuming the current loan. Multiple markets not just Denver.
The benefit is a small down payment to secure the property and assuming the current loan with a much lower than market rate.
The problem is the sales price is still pretty much market price and the monthly payments are within a few hundred dollars of the rental price. I am looking at mostly turn key newer builds that have sold within the last year or two that loan balance is at market price with the dip we are in. More or less I am able to buy at a 2021 price and terms.

Does it make sense to purchase a property with little money down if it just breaks even or possibly might incur a small loss if counting management/capex/repairs?

example $10-15k to take over a $350k loan. Payment $1900. Rent $2150.

If thinking long term I think it makes sense as rents increase.  Market may also keep going down for a bit which is worrisome. Please let me know your thoughts and poke holes in my idea.

Steve Vaughan · Answer

I'd do it.  You'll also be paying down the principal every month.

Just make sure there are no other liens and it conveys to you with a warranty deed.

Ian Walsh · Answer

I am not a fan of anything that doesn't have the proper cashflow unless you are parking money that is burning a hole in your pocket.

Bob Stevens · Answer

Heck no!! So you have a crystal ball and know the market is going to keep going up? What about vacancies, repairs or a RE correction, then you are screwed. I ALWAYS buy at never more then 70% usually less, of the ARV, with never less than 15%-20% NET cap, based on cash purchase.  By doing your deal you leave zero room for " issues"

All the best

Scott E. · Answer

There are a few things that make this attractive:

1. You get locked into a low interest rate (and if we're talking rates in the 3% range, we may never see rates that low again in our lifetime).

2. Very little money down (if you were to pursue a deal that cash flowed better, you would need to put 25-30% down)

3. You say these are new builds that you're looking at. Meaning no big cap ex expenses anytime soon. And even better, the homes might still be under builder warranty.

Wealth is not made off cash flow. If you really believe in the location, you see upside in the rent, and you're planning to hold long term, I say do it.

Bruce Woodruff · Answer

You'll have a lot of people say no to low cash flow. But I think it's ok sometimes........only if you can pretty much assure really good appreciation pretty soon down the road. Not in 10-20-30 years, but less than 5 I'd say.

Juvenal Zendejo · Answer

What if you did a wrap on all those properties and sold it to a buyer who cannot qualify for a conventional mortgage.  Mark up the purchase price for a larger down payment to cover your entry fee. Also increase the interest rate to your buyer.  Cash flow will be very minimal but you will make money when your buyer moves in and when he sells and moves out, or refinances.

Your example: $10-15k to take over a $350k loan. Payment $1900. Rent $2150

My example: Ask for $20-25K down $375F Price, On a higher interest rate. New payment-$1900 = cashflow.

No maintenance or repair responsibilities. They will all belong to the new buyer you are just the middle man.

Chris Davidson · Answer

@Michael C. If you were planning on putting down 20% or ~70k and you have that money but can hold on to it and be negative for a few years so what. Like @Steve Vaughan mentioned there is principal pay down every month. If this is a newer build your capex should be less especially if you are only holding 10ish years.

Go for it if you have the capital to float it for a few years. It is a pretty low risk option. However be careful if you are assuming it that the terms will be the same and you actually can assume it vs just taking it down subject to.

Best of luck!

Matt M. · Answer

Looking to buy a property with negative cash flow while we are staring at a recession...

Eliott Elias · Answer

Why are you assuming loans and taking hits on your personal DTI? You should be taking over these properties subject to. If it is little out of pocket and breaks even I will take it as long as the balloon is right.

Justin Moy · Answer

I'd dive into the bank and make sure they're ok with it without altering the terms, which can happen. If the property was cash flowing before but now it's not the lender may require some additional safeties for you to put in place such as a higher reserve requirement that would wipe out the primary reason you're looking to assume (low initial investment amount).

Overall I don't think its a terrible idea to break even if you can float the expenses yourself and it won't keep you up at night. In a big primary market like Denver I think you'll see growth and appreciation to outweigh the cash flow of other markets, but just plan on having to actually come out of pocket a few months if your margins are that razor thin.

Assuming loan with no cash flow. Good idea?

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