Buying Property From a Friend That's Cash Flowing Already?

[Andrew Liu]

Hello, 

I'm new to real estate and this would be my first property. I'm hoping to see if this is a good deal and if someone can help guide me.

My friend already has a property that's cash flowing in Kansas City, MO. I want to say its like a C neighborhood (not sure if there's an actual site that'll tell you more accurately).

He already has a team in place and I'm pretty much just taking over his property and its pretty stable. He bought the property pre COVID, so his cash flow is definitely going to be different than what mine will be.

The question I'm wondering if its a good idea and if the numbers make sense.

Purchase Price: $100,000

Down payment: $20,000 (20%)

Current cashflow: $900

Property manager: $90 (10%)

His expense for 12 months was only $1,430 (inspections, repairs, management, eviction services). 

I'm using dealcheck and its showing a negative cash flow for the first year, but after that, it becomes positive. This is assuming:

appreciation: 3%/year

income increase: 2%/year

expense increase 2%/year

What are some considerations? Is it normal to have a negative cash flow in the beginning? Should I do a larger down payment? Would it be possible to take over the property and then increase the rent?

[Amir Khan]

@Andrew Liu you did not list the age of the house. If this is an older home, the 12 month expenses of $1430 does not appear reasonable (the actual may be much higher). Generally, never buy a house that is already negative cashflow. Do you know why is he selling?

You listed the house purchase price but not the value. If the house is valued $100K, why are you paying full price? If the seller owns it free and clear and/or has a lots of equity, see if he will agree to owner finance it to you for smaller down payment.

[Andrew Liu]

Hi @Amir Khan thanks for asking those questions. The home was built in 1922. He did all the rehab in the beginning when he bought the house, that's why its now in a stable cash flow condition. 

He's selling the house because he needs the capital to do a new build.

I forgot to mention its a 3 bdr/1 bath. Is there a place to check what the house is actually valued at or is it that I have to do an appraisal to get the value? Not sure what the process would be.

This is kind of what I'm looking at (with a 7% interest rate):

Its not really negative cash flow, its saying $143/month. I might've misspoke about the negative cash flow. I think I was looking at the Investment Returns, that was giving me a negative calculation.

[Amir Khan]

@Andrew Liu Does your operating expense taxes/insurance? Regardless, you have to know the value of the property. DM me the address and I can tell you what the approximate value of the property..

[Robin Simon]

One thing to watch out for is the financing aspect of it - could be a hurdle getting a loan if the transaction is "non-arms length" - i.e. between "Friends" - might be worth looking at seller financing too

[Caleb Brown]

Where's it at in KC? Some places you will have turnover, bad tenants and have unexpected expenses. $900 seems low for a 3/1 so I think that can be pushed up. 

[Dan H.]

3/1 detached will have maintenance/cap ex in excess of $300/month over the long term in today’s dollars.  A life span/cost analysis will show this.  This would be in class b, class c will have higher maintenance/cap ex on average. 

you have $0 for vacancy. I would use a minimum of 5% for vacancy. 

I see no allocation for PM.  At that rent point I would use higher than 10%, probably at least $100/month.  

At today's rates, most properties at high LTV are negative even with 1% rent to value ratio This implies the 1% rule is far from assuring positive cash flow

Good luck