Is this a bad idea?

Question

I found what I think is a good deal in Wilson, NC (this will be my first deal).  I found a house with a tenant already in it, who has already agreed to stay and sign a long term lease at $950/mo.  The house is a 1,300 sqft 3/2 home in pretty good condition.  The tax value on the home is $105,000. Asking price is $50,000.  I'm thinking about doing a little creative financing on the home.  Please tell me if you think this is a bad idea! .....

I have some creative financing on the home I'm living in already in place.  I was provided cash to purchase the home, and do not have to start paying my lender back until January (only interest until then).  I have about $160,000 in equity until then. After January, I'll have around $35,000.  I was thinking about getting a loan on my current home for the purchase price of the rental house.  After I buy the rental house, I'll take out a loan on the rental and pay myself back the money borrowed on my residential home.  This way I'll have the money I borrowed on my own home back well before January, and I'll just be borrowing against the rental home.

Good idea, bad idea, or terrible idea??  Any advice is appreciated! Thanks!

Aaron Montague · Answer

@Dwayne George

This looks like a good purchase.  I don't know how much work it needs immediately, but with a tenant in place, probably not a ton.  Your Cap Ex will account for that work as you save for it.  If it needs anything major, account for that early, not later.  Or get it repaired by the current owner.

Here is how my numbers look on this property.  I recommend you purchase it barring any seriously ugly results from the home inspection.

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $201.31

Taxes $109.33

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

Cap Ex and Ops $150.00

Insurance $42.50

Mgmt Fee $95.00

Vacancy $76.95

Total Expenses $675.09

Total Revenue $950.00

Cashflow/month $274.91 (This assumes the down payment is in cash.  This will change if you are paying off a HELOC or other loan.)

Cash on Cash Return 18.33%

Aaron Montague · Answer

@Dwayne George

Your equity doesn't change in January, just your payment.  Your equity is define as:

The value of your house - your outstanding mortgage.

The value of your house is technically your assessed value though realistically it is amount of money you can put into your pocket after selling it.

The value changes slowly as you pay off your mortgage.  It may change quickly, hopefully up:), if the home values in your are are moving.  But it does not change when your payment changes.

It sounds like your house is valued at 35k more than your outstanding mortgage payments.  If the rental property is a good deal, see if your bank will refi your primary and allow you to cash out 15k for a down payment on the investment property.

Remember this is all about numbers.  $950 on a 50k purchase is probably going to be a good deal, but one never knows.  One of the costs you have to figure is the extra cost of your primary mortgage.

Post the whole rental property here and I'll run the numbers as I see them.  I'll want to see the following items:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops (my personal minimum is $150/roof/month)

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Peone Lee · Answer

Excellent deal.... i will go for it thank you

Derek B. · Answer

Sent you a message earlier today.  Reach out if I can help any with the area.

Dwayne George · Answer

@Aaron Montague

Thank you for crunching the numbers on the house.  I think its a good deal too, I've talked to my Grandfather who is a real estate investor in Greenville, NC and he said about the same thing you did.  My wife and I rode through the neighborhood today, and just visually checked out the outside of the home.  Everything looks like the tenant does a pretty good job at keeping things in good shape.  We'll get an inspection done whenever the seller finally gets back to me.  Thanks again!

Dwayne George · Answer

@Derek B.  I sent you a private note....not sure if that's the same thing as a PM.  I'm still trying to figure everything on this website out.  Thanks for the help!

Derek B. · Answer

@Dwayne George pm me the address if u will. I grew up there and can give you the lay of the land. A lot changes street by street so you really have to underwrite the area as well as the property.

Dwayne George · Answer

@Aaron Montague

Dwayne George · Answer

@Aaron Montague

Thank you so much for the advice, and definition clarifications! I'm overwhelmed with the helpfulness of the entire Biggerpockets community.  I've entered in the info you asked for. Thanks again!

Taxes- $1,312

Sewer and Water- (paid by tenant) $90/mo

Trash- $0

Heat/Utilities- (paid by tenant) $130/mo

HOA- $0

Cap Ex and Ops (my personal minimum is $150/roof/month)- I had planned on 10%.  But this is my first investment property...so I'm still learning ALOT! Let's say $150.

Insurance- $45/mo

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage) I'm going to self manage- 10%

Vacancy- as a %. (8% represents 1 vacant month/unit/year) 8% vacancy

Is this a bad idea?

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