Owner Financed Deal - is it worth it?

Question

Here is a 10,000 foot view of a deal that was brought to me. All of the information pertaining to income and expenses needs to be verified. The homeowner wants to sell due to age and health issues as they were also self managing the properties.

Three buildings for a sale price of $165,000 in a northern region of the US

Ten units in total with rental income of $6,125

Expenses are high due to utilities (oil heating) by owner.

The homeowner will owner finance and hold the second note on the property (20%) for five years (amortized over 5 years) at 4%. So basically there is no out of pocket.

After factoring in utilities, an 8% vacancy, 10% CAPEX, 10% repairs and 10% PM the cash flow is negative $150. The majority of this is due to the $600/monthly payment paying off the second loan and the other big nut is the utilities which are $1500 a month.

The buildings are also all over 80 years old.

Even though this is owner financed and no money in it, I am going back and forth if this ais a good deal because if you figure you want to get $100/key this would equate to $12,000 a year for five years  = $60,000. Subtract to that the 20% down I would have paid which is $33k and it returns a positve $27k.

Based on the owner finance scenario, I would have the $32k paid off minus the $150 I am paying per month which equates to $9,000 so a total of $23k to the good.

While I am not at where I would be with $100/door, it corresponds closer to $90/door.

Thoughts?

Chris Seveney · Answer

@Kevin Siedlecki

You are correct my math above was wrong and its not $90/door.

I agree with all, the utilites would need to get xferred to the tenants in order to make this work.

Kevin Siedlecki · Answer

I like @Gabriel Perez's angle, and if you had a higher return after the 5 year paydown, I would say it's worth a look.  My problem is that the $450 doesn't seem like great cash flow, especially on 10 units.  Did I miss something? That's $45 a door, not $90.  The other consideration is the age of the buildings.  It only takes a couple surprises to eat away at that margin.

Bottom line, you need much higher income to make this deal work.  As many have said, the utilities would make that difference.

Christopher Telles · Answer

In this case I would say its a double negative deal. One you're going to save on the downpayment, but you'll also have a negative cash flow every month from day one. And two, with the age of the building you're not covering your self with the CapEx.

I've owned extremely old buildings, stuff goes and its usually very expensive to fix. Installing a new water line isn't the same as replacing one in a new constructed building. Construction techniques, and materials used often make it difficult to replace plumbing. And power is just a whole other story.

I buy primarily commercial buildings, industrial and office, so I'm accustomed to negative cash flow going into to a deal (many are vacant) but I also know they're going to deliver positive cash flow after the preplanned vacancy period when they're finally leasing up.

I might suggest going back to the seller and hammering a deal that allows you to have several hundreds of dollars of positive cash flowing at entry.

Sometimes free is to costly!

Chris Seveney · Answer

@Federico Gutierrez

& @Mark Brogan

Let me clarify a few things as well. I can get financing for the first 80% and the owner is financing the back end, so I am $0 out of pocket.

The numbers I plugged (which have yet to be confirmed but were done for initial analysis using average numbers are (this is for all 10 units per month)

Total income: $6,125

ASSUMPTIONS:

Vacancy: $490 (8% but can see actuals for past 5 years)

CapEx:  $518 ($6k a year or $2k per building)

Management, repairs and other costs are from actuals.

I agree if there is a way to xfer utilities to the renters that is key.

What I was trying to explain earlier was is in a typical situation you would put 20% down (and if I did this would be cash-flowing $450/month but since its 0 down I am paying the 20% over 5 years so its a payment of $600 a month.

I do not have a good feeling on the deal, so I am gonna most likely pass unless the utilities can get xferred to the renters. But I was more curious to see what peoples thoughts are when putting 0 down and since your not cash out of pocket for initial investment is it ok to have a zero cash flow or low cash flow since you were not originally out of pocket.

Austin Youmans · Answer

• If you they are on a month to month lease you could add a flat utility fee
• If you are having a hard time finding deals maybe thing of managing it yourself to save the 10% PM fee for at least the 5 years of paying off the loan.

Depends how hard you want to work and if your not finding any other deals.

Mark Brogan · Answer

i am curious as well can you raise the rents and switch the utilities to tenant paid,if not i would walk or just stay in touch with seller until he comes down to where this deal makes sense for you good luck @Chris Seveney

good luck

Federico Gutierrez · Answer

Can I ask why you would want to lose money from day#1?

Are the figures you have thrown out actual to date? Cause three buildings will require more than 10% budgeted for repairs since its 80yrs old, I can bet that

All thought $16500 per unit is not bad. Is there chance to increase rents? Or cut some of the costs you pay?

Christopher Brainard · Answer

Hi @Chris Seveney

While the financing is very appealing and the interest rate offered by the seller is quite reasonable, buying properties that are negative cash flow are always risky. While you may be able to build equity, you're locking up a good sized chunk of your own money and having to pay for the privilege of being a landlord. Trust me, it isn't so fun that I would pay for this privilege of being a landlord. Also, iIf things don't go right, you could quickly find yourself very negative, especially given the age of the building.

I'd recommend finding something with positive cash flow. Even if you don't need the money, you can save it and use it as a buffer for unexpected CapEx and Repairs.

-Christopher

Christopher Telles · Answer

I will have to agree with all the others that the utilities are the issue. You should look into the cost of separating the utilities, but equally important whether that is customary in that market. Maybe all rentals come with utilities paid? idk, but you should before proceeding.