Analysing a 0% Deal with Owner Financing & Traditional Financing

[Bechara Jaoudeh]

This involves 2 properties in a pretty affluent area outside of Philly (King of Prussia). The properties are in perfect shape, fully rehabbed in the last 5 years. The are is very desirable and the fair market value of these 2 homes is around 590K.

The seller is older and getting out of the real estate biz. 

• FMV for both properties together = 590,000
• Purchase Price: 550,000 to 560,000
• Traditional Financing: 412,500 (75%) @ 4.625%
• Seller Financed Amount: 137,500 (25%)
• Interest rate locked 5yrs/5yrs/5yrs at 4%/5%/6% payments would be $1017/$1087/$1160
• Security: 2nd position liens against the properties themselves
• Cash Flow after expenses AND paying the seller's monthly payment = 220/month
• CAP Rate = 7.32%

Yes, I know the seller is crazy to take a 2nd position lien on the properties... He's ok with it!

I'm really struggling to analyse this deal. I typically would not even look at a property that has a 7% CAP (in my focus area). My portfolio is made up of properties in Philadelphia with an average cap around 10%. The question that I keep coming back to is: Given that I'm essentially buying these 2 properties with 0% down, should I accept the 7.32% cap? Furthermore, my cashflow is a tiny 220/month, 1 month of vacancy and I wipe out 2 years worth of profits. Is this a worthwhile risk given the equity and appreciation I'm gaining? Am I analysing this short term but I should be looking long term? What do you guys think???