Advice on investment - is this a good deal?

Question

Hello everyone,

I'm just starting out and would like your advice on this investment. Basically, it's going to be owner finance over a period of 18 years.

The property has 2 houses on it and the asking price is roughly 180k.

It will be as follows 180 purchase with 20k down. 160k will be financed at 7% for a monthly payment of $1300. The current rent is about the same, HOWEVER, I am confident that I can rent it for roughly $2500.

What do you think?

Scott M. · Answer

What makes the person just starting out so confident they can raise the rent 1,200/month? Is that at no cost to you? Or in order to raise the rents you will need to do additional investment in the home(s)? If so, how much?

Joe Villeneuve · Answer

So you think it's financially sound to pay:

1 - $20k DP2 - All of the cost of the remod3 - All of the taxes and insurance for a year4 - ...and, $15,600 in payments...

...over the course a year, with NO INCOME at all, on the hope that the remod will allow you to double your rent...which if all works out, and you run all of the numbers, I bet you still don't break even until the year 2031?

...and what if the most likely scenario happens?  You can only raise the rent 50%?  That would put you at break even right around the time you're making your last payment.

Joe Villeneuve · Answer

Scott is right.  I'm thinking this doubling the rents is emotions winning ove logic.  Ain't going to happen.  Even if it did, why are you paying 7% interest anyway?  I'm assuming the current owner has no debt (100% equity), which would man that 7% would be an enormous profit.

Also, if this is 100% equity, this isn't a loan you are getting, which means the seller retains title until the entire amount is paid off.

This sounds like the seller has you by your lower tonsils.

Joe Villeneuve · Answer

Refinancing won't help.  You'll still be negative CF, or so close to it you'll be waiting for it to happen every month.

Seller financing should be used as a way of improving a deal...not making it worse.  I NEVER want to put more than 10% down, and ALWAYS want the longest term possible.  Forget about the interest accumulation...you're not paying it...as long as you have positive CF, the source for the funds to pay the mortgage, and all other monthly expenses is the tenant's rent.

I don't draw a line between CF and equity.  The CF at the start, and all the way through, gives me income while I'm holding the property, and makes it sellable in about 5 years.  The equity is what I'm selling the property for.  I want both, or no deal.

Depending on future events you have no control over, like this property, isn't investing...it's speculating.  Leave that for the stock market.

Sometimes the best deals you make, are the ones you don't.

Scott M. · Answer

So do you plan on keeping rents somewhat steady for a year?  How much will the remodel cost?  What is the market isn't as strong a year from now and you can't raise the rents?

My point isn't to be a jerk, although I have no doubt I am doing a fine job of that.  My point is to push you a bit to think through the numbers and see where this confidence is coming from.  I have been doing this for 20 years and honestly to say you can raise rents ~110% a whole year from now where things are happening at lightning speed, most of which we have zero control over seems a bit idealistic to me.  Or emotional as @Joe Villeneuve said.

I would hate for you to get a year into this project with all of your numbers based on increasing rents 110% only to find out it is far less than that.

Are you not able to get traditional financing?

Matt Lux · Answer

@Scott M. & @Joe Villeneuve Really appreciate the advice and always respect cold hard truth so please feel free to lay it on me. My family has a couple of other properties that are similar in style and space. They are going for roughly 1200-1500 with slightly higher risk tenants (bad credit) since the entire area is the same (good credit ppl live across the river). I've been managing this for the past 3 years so I can only base my XP on this period.This property is under section 8 and the rent is around 1500 combined for both houses(- water & garbage). Our area for section 8 voucher is 1600 for 3bd and 1400 for 2bd but I was not planning to do section 8. In other words, I'm confident that I can get at least 1200 for each house based on the last 3 years. Fixing the property I can imagine I would spend 15k each so 30-40k total. If I were to try to sell the same property as is it would go for a bit more on the open market. Im planning to refinance a year down the road to get a lower rate in the high 3%. At 7% I stand to overpay 120k and at 4% around 50k. The seller obviously wants to make her rental income + selling price so its a tight pickle to negotiate. I will hold the title and the seller will have the mortgage with due on sale.What would you do or what kind of numbers would you look for to make this happen? I know it's aggressive maybe stupid but I hope market will be the same if not better since I really dont know what will come and can only bet on what it is now.

Matthew M. · Answer

@Matt Lux do you know the arv?  If you are confident in the market then it sounds like a classic sfh value add play.   Maybe not a screaming deal depending on the rehab numbers and the fact you are going to be dealing with evictions and turning the units.   Also, is conventional financing not available on this property?  If that is the case it would be another pass from me because it makes it harder to exit.

Matt Lux · Answer

That makes a lot more sense, thanks for adjusting it. Yes, sure looks like a fugly pig. I guess I need to toss some numbers around to see what will work better. My original plan was to refinance to help the situation. If taking refinance into consideration that would drop the monthly payment by $120 and overall interest paid by 70k for a 15y but it would not fix the cash flow. Only a 30 year would help considerably. With a 30y at 4% I can expect the following but still not very attractive.Actual - 18-12.3= 5.7 ----break-even at 12yWishful - 30-12.3 = 17.7 ---- Break-even at 3.8yWhat is the best way to approach a situation like this? Should there be less money down, lower purchase, or interest? At what point do I draw the line between CF or equity? In a situation like this, I might not have any CF but 5 years down the road it's a paycheck if I sell?

Joe Villeneuve · Answer

You are correct, righty up to your numbers for CF.  They're wrong.  The numbers you listed are your rents...that isn't cash flow.  CF is rents (plus other CASH income) minus expenses.

Your expenses are your mortgage and taxes/insurance, so your yearly expenses would be $18.7k.  This would make your correct CF's:

Actual = $18k - $18.7 = -$0.7k/year...as in losing money every year.  Like I said, I didn't think you would be cash flow positive.Potential Wishful thinking = $30k - $18.7k = $11.3k

Break even becomes:Actual = Never...you just keep losing money.Potential Wishful thinking = $68.7/$11.3k = 6 years.  Not going to happen though.

This is still a pig with lipstick on it.

Advice on investment - is this a good deal?

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