A Tale of 2 Four-Plexes

[Julian Caiceros]

I'm interested in 2 Four-Plexes but after running all the numbers for rental income (all units are at fair market value) and deducting all expenses (incl. Utilities, maint., cap repl., ins., vacancy, etc) due to my meager down payment I'll only cash flow about $365 per month total for all 8 units. The seller is offering owner financing at 8% 30 amortization with a refinance expected in 5 years. I'm planning to keep 10,000 in cash reserves.

I plan to hire an inspector, but overall the units look in great shape with no deferred maint that I can tell. Nevertheless, I'm being conservative with my planned expenses.

Budgeting 8% vacancy, 8% maint, 10% capital replacement costs (roof's in good shape but about 15 years old, hvac systems are pretty old as well), and while the 4-plexes will pay for themselves and accumulate equity, the low cash flow has me concerned. Unless the properties achieve unheard of increases in appreciation, I'll be one catastrophe away from not being able to save up enough down payment and the required cash reserves to refinance within the next 5 years.

The seller has had these properties on the market off and on for about 2 years and state they want to liquidate their rentals in preparation for retirement. 

In casual conversation in order to encourage me, they told me they had minimum cash for a down payment when they purchased 11 years ago but their good credit and a great mort broker still got them the loan. I pulled their purchase amounts from the county records, the current interest rates at the time of their purchase and calculated a ball park figure of what their mortgage payment could be. Needless to say, significantly lower than what my payment will be.

I'm considering offering to do a subject to purchase agreement to allow more cash flow and have a greater chance to put together the cash I'll need in 5 years. Structure it where I'll pay in full their CURRENT asking price in 5 years, minus a $15,000 down payment given upon signing the agreement, and minus however much the principal drops in the next five years. I'll provide semi annual reports with bank statements showing my progress accumulating the refinance monies and also detailing what work is being done to the property and/or ongoing maintenance/upkeep. Maybe couple it with a semi annual walkthrough?

In exchange, not only will they get their asking price but they will also no longer be responsible for the upkeep and property management of their buildings. Once the refinance is done with a 20% down payment and depending on current interest rates in five years, the cash flow should experience a measurable increase.

I'm aware there's a risk of the DOS clause being called, the unknown factor that their mortgage payment might be higher than I've figured if they've done any refinancing since purchasing the property and that interest rates are at times volatile so in 5 years my cash flow may not increase at all. That being said, what do you all think?