complicated interesting deal. Does it sound good to you?

Question

So I have a slightly complicated deal that I'd like to get your advice on if it seems doable.  I'm purchasing a 2 unit building from family members (there are 3 owners who were given the property in a revocable trust from my grandma).  Here is the proposal I wrote for them.  The purchase price of the building is $129k as-is.  It needs $16,000 worth of repairs to the lower unit to be rent ready, the upper unit will be rented by my aunt at a fixed rate for the next 5 years. The ARV is in the $180-$200k range.  They are owner financing the deal as follows:

Proposal for Cicero House (Divided equally among Greg/Sharon/Laura)

$129,000 purchase price AS-IS

$43,000 each to Greg/Sharon/Laura

---------------------------------------------------------------------------------------------------------------------------------------

Loan Information (Greg and Sharon)

$3,000 each for Greg and Sharon up front

Loan amount is $40,000 each for Greg and Sharon

3% Interest rate on 30 yr loan for first 5 years

FIRST 5 YEARS (first 60 payments)

30 yr $40,000 loan at 3%

Payments are $168.64/month ($57.53 to interest/111.11 to principal)

AFTER 5 YEARS (next 84 payments)

After 5 years, the remainder of the loan ($33,333.40 each) converts to a second loan

7 yr $33,333.40 loan at 3%

Payments are $440.44/month ($43.61 to interest/$396.83 to principal)

*I have the option of paying off or paying extra on the loan at any time

------------------------------------------------------------------------------------------------------------------------------------------

Loan Information (Laura)

Loan amount is $43,000

3% interest rate on 5 yr loan

$772.65/month payment to Laura ($55.98 to interest/ $716.67 to principal)

Laura’s rent payment and living terms

Laura’s rent payment (including water/heat) will be fixed at $1,172.65/month for a 5 year lease

$772.65/month comes from the payment she gets from me every month

$400/month comes from her

Rent is locked in at $1,172.65/month for the next 5 years, it will never increase

Here are the financials for first 5 years:

cicero

MONTHLY

YEARLY

Income

Expense

income

expense

Rent 1st floor (includes water/heat)

1200

14400

Rent 2nd floor

400

4800

equity gain on loan

222

Mortgage (on 40k-$190/30, $266/sue,   $295/15@4%)

337

4044

Taxes

655

7860

Insurance

0

water

120

1440

heat

60

720

snow (tennant)

0

grass (tennant)

0

garbage (included in taxes)

0

HOA

0

vacancy (8% of one unit)

99.6

1195.2

capital expenditure (5% two units)

118.6

1423.2

repairs (5% two units)

118.6

1423.2

prop management (10% of 1 unit)

120

1440

TOTAL INCOME/EXPENSES

$1,600

$1,629

$19,200

$19,546

Cash flow

-$29

-$346

income including equity gain ($772)

2372

28464

equity gain (laura rent)

772

9264

NET GAIN

$965

$11,582

Actual Cash flow (not incl   prop mngt)

$91

$1,094.40

These are the financials for the following 7 years:

Rent 1st floor   (includes water/heat)

1200

14400

Rent 2nd floor

1172

14064

equity gain on loan

599.64

Mortgage (on 40k-$190/30, $266/sue,   $295/15@4%)

643.74

7724.88

Taxes

655

7860

Insurance

0

water

120

1440

heat

60

720

snow (tennant)

0

grass (tennant)

0

garbage (included in taxes)

0

HOA

0

vacancy (8% of one unit)

99.6

1195.2

capital expenditure (5% two units)

157.2

1886.4

repairs (5% two units)

157.2

1886.4

prop management (10% of 1 unit)

120

1440

TOTAL INCOME/EXPENSES

$2,372

$2,013

$28,464

$24,153

Cash flow

$359

$4,311

income including equity gain ($772)

3144

37728

equity gain (laura rent)

772

9264

NET GAIN

$1,731

$20,771

Actual Cash flow (not incl   prop mngt)

$479

$5,751.12

This is my first deal so any help would be GREATLY appreciated!!

Thank you

-Karl

Karl Kaeser · Answer

Thanks for the quick reply Patrice

1. I got the purchase price by comparing 5 comps that were on the same block all sold within the past 12 months.  The ARV was given to me by two separate realtors who saw the property.  The rental rates are very conservative... my mom has been renting out the lower unit at $1200/mo but market rent is closer to $1350, however I wanted to keep my numbers as conservative as possible

2. The way I worked out the deal was to figure out what the interest would be on a normal 3% loan with amortization and take the total amount of interest paid over the life of the loan and divide that by the number of payments.  It works out better for me this way since I don't pay all interest up front, and it will be easier for us to figure out how much equity I have in the property at any given point if I want to pay off the remainder of the loan early.  It also works out great for me if I do pay it off early since i'm not paying only interest at the beginning of the loan like a normal bank loan.

3. when I copy/pasted the excel spreadsheet it looks like it got a bit messed up.  I'm paying the water/heat and it will be included in the rent of the tennants since it's not metered separately for each unit.  It's included with the rent payment

4. the upstairs unit repairs haven't been figured into the deal as the plan is for my aunt to stay in that unit for the next 10 years and she doesn't require anything to be updated.  After she moves out I will update that unit and will bring it up to market rent

5. I did just one unit for the property management since my aunt is in the other unit and is taking care of her unit and any repairs that she will need in it while she's living there

6. I initially had the cap expenditures and repairs at 8% but lowered them to 5%, but I'll rerun the numbers at a higher percentage.  I think you're correct in that they are pretty low

7. Yes I have the cash to repair the downstairs unit

8. I didn't think about if she can't make payments.  What I'll put in the contract is if she can't make the $400 cash monthly payments, then it will come out of her equity in the property... If she stays in for longer than 5 years I put in the contract that rent will be renegotiated at that time since more than likely it will have gone up... If she or my mom/uncle pass away during the loan repayment period I need to think about what to do.  They want to name a beneficiary that the payments would go to.  I think that's reasonable but was thinking about asking them to make me the beneficiary of the property if they pass since in reality I am helping them out quite a bit by keeping payments low.

9.  I did figure insurance numbers, I just included them in with the property tax figure in the excel spreadsheet.  My mom gave me the numbers for taxes/insurance and just gave me one lump sum so that's how I put them in.  Forgot to mention that in the post.

Here are the summary of what I expect from the deal monthly:

For first 5 years:

monthly income is $1600 cash + $772 equity from my aunt + $222 equity from loan paydown

monthly expenses are $1629

So cash flow is -$29/mo ugh

But my net gain after expenses including the negative cash flow and equity gain is $965/mo

So it stinks it will cost me money to own however I'm adding nicely to my net worth.  Does that still sound like it is a smart decision?  It seems like a good deal to me considering all that, but it is rough that there is no cash flow

After 5 years, the rest of the loans enter into a 7 year loan and my aunt has used all of her equity so she will begin paying cash for the rent@$1172/mo

monthly income would be $2372 cash+$599 equity gain on the loan

monthly expenses are $1936 (due to the higher loan repayment to my mom/uncle)

so cash flow is $436/mo hooray!

net gain per month is $1036

After the building is paid off at the end of 12 years it will cash flow $1080/month!

So it seems to me I need to weather the first 5 years to get to the cash flow starting at the 5 year mark.  Then the building will be paid off 7 years after that and will be a great asset.

My biggest question I guess is; I can't make the monthly payments any smaller as my family members are in their late 60s and don't expect to live long enough to reap the benefits of getting the monthly payments if it was a longer term loan.  So is it still a smart decision to go into owning the property while it isn't cash flowing for the first 5 years.

Thanks again for your reply and help!!

This community is awesome :)

Patrice Boenzi · Answer

@Karl Kaeser opps when I ran my numbers, from your numbers, this is what I got - $1,600.00MONTHLY INCOME

$1,545.00MONTHLY EXPENSES

$55.00MONTHLY CASHFLOW

0.47%PRO FORMA CAP

$660.00NOI

$150,000.00TOTAL CASH NEEDED

0.44%CASH ON CASH ROI

0.51%PURCHASE CAP RATE

Patrice Boenzi · Answer

@Karl Kaeser I am an investor and Realtor and have a few questions:

1.  How did you come up with the purchase price of 129K, the ARV and the rental rates?

2. Usually the interest payment is higher than the principal payment especially in the beginning; are they letting you flip that?

3. If you are paying water, heat and taxes those are expenses I am confused on why they are in the income column.

4. How long will it take you to fixe the other unit and what do you have built in to cover those costs.

5. Why do you have only one property figured in on property management - when you run your numbers you should run them with what you will do in the end.

6. My two cents - your repairs and cap expenditures are too low.

7. Do you have the cash to repair the unit that needs to be fixed.

8. What contingencies are in place if your family member tenant can't pay you or if she does not want to move out in 5 years or what happens if during the finance period someone passes away (does the note go into their estate).

9. Why did you not figure in insurance numbers?

I know how tough this can be and even tougher when family is involved. I commend you for doing your homework and running thorough numbers.

Mark I. · Answer

wow. Without actually reading all the numbers you've clearly analyzed and evaluated the deal more than I ever did for my first. I say take the plunge and do it. Obviously nothing popped out at you that was a deal breaker. Best of luck! I'm sure some others will chime in with specific analysis or criticisms but I say give it a shot.