How can I make 3.875% fixed-rate cash flow?

Question

Buddy is selling his home and open to creative/seller financing with me (buyer). I am not finding a way for this to be a win-win transactions. Am I missing something or is this just not a cashflow opportunity?

His current monthly Payment Breakdown:

- Principal: $314.66- Interest (3.875% rate): $578.779- Escrow: $700.79

-TOTAL monthly payment: $1,594.24

Estimated rental income: $1.2k - $1.6k per month.

Would love to somehow capitalize on the existing fixed rate, but at his current monthly payment and the estimated rent it doesn't seem like a great opportunity for cash flow. Am I missing something?

Home is in move-in condition and no renovations needed.

Bill B. · Answer

You can change the insurance (or he can/should) but you have to figure out what makes up that $700. The mortgage company should be mailing an escrow report every year. Are his property taxes out of whack or the insurance?

Tom S. · Answer

@Brandon Bell Yes, definitely ask for the current mortgage statement which will show the escrow payments and calculations.  There should also be a annual escrow statement showing all disbursements and the calculation for the coming year.

Be careful with the term "assuming the loan".  Only a few loan types are truly assumable.  It sound like you're just taking over the payments, but correct me if I'm wrong.  In that case it may be hard to change the insurance and/or title.

Bill B. · Answer

A payment of around $892/mo is close to a $190k loan balance.

1) Is this home only worth $190k? If it’s worth more you owe him that much money to “buy it” if you really want to keep it “win-win”

2) HOW IN THE WORLD!  Do he have a $700/mo escrow on a $190k home? Property taxes and insurance run $8,400/year? On a $190k home!?! On a $400k home this should be closer to $3,000. MAYBE $3,500. So the escrow should be $250-$300/mo.

Tom S. · Answer

@Brandon Bell  In general, yes if assumed the debt will be removed from the seller and transferred to you.  But have a good real estate attorney review the mortgage.  As mentioned earlier, only a few mortgage types can be truly assumed, mainly FHA and VA loans.

Yes, if you only are making over the payments then the debt stays with the seller and transferring the title to you is more complicated.

In the end, the starting point is making sure the numbers work.  With what's posted above, they really don't.

Bill B. · Answer

The balance won’t be an overpayment. It will be funds collected to pay future insurance and property tax bills. The bank does not pay them and then collect from you. They collect from you and then use those funds to pay the invoice is from the insurance company and the county. That $1,400 is only 2 months of payments. It’s not enough to cover one quarterly tax payment. (If you’re in a quarterly county.)

$1,400 could actually be a shortage, in which case next year the payments will be even higher. (They need to account for both the shortage and the new higher amounts from taxes/insurance.) So your payment will actually go up double the shortage.

Brandon Bell · Answer

@Tom S. The difference there being... If I can assume the loan, then the debt is removed from his name vs. if I make loan payments he is still tied to the debt. Is that correct?Through previous dealings I understand that when getting a loan there is typically a statement indicating whether or not the loan can be "assumed". I am really trying to find a route alternative to that under the impression that loans are not assumable on average.

Brandon Bell · Answer

@Bill B. Currently he has an escrow balance of $1,413.92. This must be overpayment that has collected as a balance. I'm sure he is just overpaying escrow... Wonder if it's possible to refine that to a more accurate amount.I'll have to ask for additional breakdown for more detail.

Brandon Bell · Answer

@Bill B.

1) Home is worth $220k now, principal balance on loan is $179k. I would be willing to pay the gap as a down payment and assume the loan at 3.875%.

2) I agree! Isn't that outrageous? What am I missing? I have a (slightly smaller) home in the same county with good insurance rate and pay $370/mo to escrow. I am very confused how it could be so high. Surely my insurance isn't that much better.

2a) would I be able to change insurance if I assumed the loan? What other changes could I make to possibly refine the monthly payment.

Ty Coutts · Answer

Hey Brandon,

First, thoroughly examine the numbers. Buddy's current $1,594.24 monthly payment consists of principle, 3.875% interest, and escrow. The monthly rental income is projected to be between $1,200 and $1,600. It is imperative that you compute your potential cash flow in light of these numbers. To calculate net operating income, deduct projected operating expenses from estimated rental income, including property taxes, insurance, maintenance, property management fees (if applicable), and any vacancy allowance.

Second, think about working with Buddy to get better terms. In order to increase cash flow, you might suggest a shorter purchase price or a longer-term financing plan because the house is ready to move into and doesn't require any modifications. The profitability of the investment may also be increased by arranging for a balloon payment, extending the repayment time, or negotiating a reduced interest rate.

Thirdly, consider the advantages of purchasing the property using seller financing in the long run. Examine the possibility of future value growth for the property as well as any tax advantages that come with owning rental property. Check to see if this fits with your wealth-building and portfolio diversification goals by taking into account your entire investing strategy and financial ambitions.

Finally, carry out a comprehensive risk analysis. Take into account variables that could affect your cash flow, such as the stability of the market, local tenant demand, and prospective changes in interest rates. Carefully go over the seller financing agreement's conditions to make sure you understand any stipulations or eventualities that might have an impact on your investment.

I am a loan officer and we have over 70 investors here at Aslan, so if your looking for creative financing please hit me up! Also, feel free to reach out directly if you have any other questions or would like to discuss anything.

How can I make 3.875% fixed-rate cash flow?

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