Buying with Seller Finance... do you accept lower profits?

[Doug Emerson]

A local landlord that I've known for a while, finally wants to sell a 12 unit building that's in pretty good shape and fully occupied.  I haven't started the due diligence yet but I wanted to get feedback so see if its worth pursuing further based on:

The seller will finance 20% in second position to my community bank that will finance the 80% in first position.  My upfront expenses are closing costs.

Based on my handy spreadsheet and the Rental analyzer tool on BP... I'm looking to cashflow $1200-1500.  Gross rents are $7081.  Cap Rate is only 9%.

I have experience with duplexes that I pay 20% down from my savings.  And I seem to keep hitting cash flow of $250 per door.  But this 12 unit is about $100 per door.

SO... my big question:  Do I sacrifice lower cash flow per door due to the fact that this is practically no money down?

I figured in 3% maintenance and 3% cap-ex and 10% property management and 2% vacancy.

I haven't done a deal larger than 3 units, but 11 total deals so far.  I've had property management in place for 9 months.  Your feedback is GREATLY appreciated!!

[Thomas S.]

In the case of the duplexes where you are putting 20% down your own cash is "buying" the additional cash flow.

 Do the numbers on the duplexes assuming 100% financing and you will discover your true cash flow from those properties as opposed to that generated by your cash.

Calculating cash flow based on assumed 100% financing is the only way to determine what a investment property actually generates in cash flow. 

Always remember every property actually has two income generating streams, 1st: the property itself and 2nd: your equity. Attribute 10% return to your cash, as it's opportunity value, off the top of your rental income and you will quickly discover why dead equity kills a properties cash flow. High equity actually turmnes a income property into a liability.