Owner financed 17 Unit Apartment Complex with 0% interest

[Devan Mcclish]

The Power of Zero is a magical thing. If you can buy a deal with zero of your own money, and have 0% interest financing, you've hit a grand slam. Deals like that do not come around very often, but they do come around! You just have to ask for it. Here is how I bought a 17 unit apartment complex by obtaining owner financing that came with 0% interest:

How I found it - Wholesaler brought it to me. Networking and relationships are HUGE in this business. I cannot stress that enough. A wholesaler brought me the deal with straight cash attached to it. At first glance, the deal was overpriced for what it was, which is where the inexperienced investor would've have stopped, but I said to myself: "How can I make this deal work."

The Cash Flow Numbers  - 

• Purchase price - 775,000 - the guy was dead set on this price. I remember meeting him and the wholesaler out at the property, and it was every 10 minutes "I just want my price. 775,000 and not a penny less." In my mind the deal was only worth 650,000 if I bought it outright with cash or traditional financing. I will explain later why I chose to overpay
• Gross income - 13,100 a month
• utilites (water and electric) - 1,800 a month (I know you guys want me to submeter but the thing is 100% occupied with long term tenants, I will explain later on, just keep reading :)
• insurance - 500 a month
• taxes - 458 a month
• management - 1,310 a month
• cap ex - 1,310 a month (my estimate, which is continuing to hold true)
• vacancy - right now this is 0 - haven't had a unit go vacant yet
• 4,500 monthly payment to the seller (I will explain this next)
• 850 payment to LOC I used for down payment
• Monthly Cash Flow - 2,372
  • Look's good right? It gets even better

Deal Structure

• 775,000 purchase price (remember I said the deal was worth 650)
• 150,000 down (I used a LOC to pay this)
• 4,500 a month for 48 months with a balloon at the end
• 0% interest on the 4,500 a month

Why I Overpaid

• First things first - purchase price when getting your terms is irrelevant and here is why
  • If I would've gotten this deal at 650,000 like I wanted and financed it using commercial financing (5% interest, 20 year am, 5 year arm), I would have financed a total of 520,000. The total payment over that time is 823,618.38 to the bank (not including my down payment of 130,000). Add the down payment and my total cost in the deal is 953,618.38. By getting this thing at 775,000 with ZERO interest, my total payment is what...... that's right, 775,000. I am saving myself in the long run almost 200,000 to overpay! 
• Where it gets better - Every time I write a check for the 4,500 a month, I am writing myself a check in equity. I am building 54,000 a year in equity, 216,000 in equity over the course of the note. I will owe the seller 409,000 when the ballon comes due. At that time, I will refinance with a bank. 
• The refinance - Let's speculate a little and be conservative with it. Let's use an 8 cap on the refinance (Nashville is trading at 6-7 caps right now). My NOI now is 7,722 a month / 92,664 a year. On an 8 cap, that brings the total valuation of the property to 1,158,300
  • I will be getting the 150,000 back for the LOC
  • That leaves me with a cash out is 599,300
  • Here's the best part. IT'S NOT TAXABLE. The tax rate for debt is ZERO. The IRS can bang on someone else's door that year :)

So how did I get the seller to finance with zero percent interest? Why would anyone in their right mind do that? That answer is actually very simple:

• There is really only one type of seller that is going to do this: The seller that only cares about the price. If the seller needs that money to go buy another house or do something else with it besides stuff it in a bank, they won't do this. If you overpay, you can get your terms. The guy knew it was overpriced, I knew it was overpriced, everyone knew it was overpriced, but I got my terms. Give seller's their price, but get your terms, and everyone wins

Here is the thing I want every investor to start thinking about. I hear people all the time complain about how there are no deals out there, seller's want too much money, everything is overpriced, market is too hot right now. TAKE ADVANTAGE OF THEIR GREED AND USE IT TO YOUR ADVANTAGE. If they want too much money, give it to them on your terms. There is more to a deal than the purchase price. And you newbies with no money, this strategy is the one I would use if I were you to get started

[Jay Hinrichs]

@Devan Mcclish  I am glad you found this.

WE were doing this type of financing in the early 80s  but for different reasons.

ONe interest rates were 15 to 20%... and we carried our contracts.. well we had to cash them out. to keep liquid... investors at that time bought paper for 25% yield. so we had to discount the paper.

OK so plug in 0% interest over 30 months and the PVN is exactly the same as a 15% note over 7 years.. same cash to us... how many buyers do you think jumped on 0% interest in the mid 80s.. well I can tell you we sold over 400 props one year alone  LOL. 

the car industry followed suit as well. that's why you still see zero %

the other main reason is I had a bunch of Saudi clients and they could not pay interest for religious reasons so I structured 0% deals for them as well.

Then in the crash when I ended up owning about 200 homes in the mid west how do you think I sold my OREO.. well to guys just like you who had figured it out.. I would ask for 5k down and 0% over 30 to 48 months.. they were even cash flow .. and this is were guys who buy for only cash flow miss the whole freaking point.. my clients made NO cash flow or they put in maybe 50 to 100 a month.. but they owned the assets OUT Right in 3 to 4 years... much better scenario than marrying a 30 year mortgages.. now for the 26 years your debt free guess what your cash flow is compared to the leveraged to the hilt buyer...

End of the day you want these assets paid for ASAP.. that's my mantra and I know I am in the vast minority of this thinking but in the long run  you have a lot more flexibility when your assets are paid for .

So kudo's for you to figure this out on your deal.. its been one of my go to weapons for 3 decades.. LOL.