Low Cash Flow-- But What Do You Think ??

[Jesse Scroggins]

Help me analyze this deal and make sure I’m not missing something.

Backstory: I’m currently purchasing two duplexes from this same investor via owner finance. Currently 3 years into the deal without a hiccup or any issues from either side. I’ve added our previous primary home to our rentals. So that is a total of 3 properties, 5 tenants. We’ve used a local PM for the last year. PM is on board with the new properties.

This new deal consist of 11 properties, all occupied.

Average rent is 650 which is average for the area. Not necessarily B class neighborhoods but not bad areas. 2 are currently section 8. I don’t have a complete tenant break down, yet, but seller is “selling” the fact that these are all long term tenants. That’s to be determined.

The Midwest town is a weird one. With nice homes and run down/vacant homes side by side throughout town. I’m 31 and lived here my entire life. Property values have increased over the last several years and I feel these are under valued. Coming in at about 32k each. I think they are worth closer to 40k each or 450k and that may be a little low. I’ll have a better idea of this once I tour the properties. My issue is even with all this equity my cash flow is thin. More on that later.

He is wanting to sale due to his age, 75. This will be his entire portfolio. We are still in negotiations but have more or less agreed to 350k purchase price 40k down. His current proposal is owner financing 310k at 7% over 15 years. Hoping I can counter at 6% and stretch it to 16 years... increasing cash flow by 271.00 a month.

7200 total rent
-720 property management
-720 vacancy
-720 cap ex
-280 property taxes
-450 insurance
-2786 mortgage (7% over 15 years)
-1050 maintenance 15%

Cash flow $474.00
$745.00 at 6% 16 years

I know cash flow is very low. However I feel my numbers are very conservative. Another cushion is I could immediately stop the PM expense. Which would also slightly lower maintenance if I were to self manage. Increasing the cash flow by as much as 1,000 a month. This is not my plan as I still work my 9-5. My wife and I just had our first baby. Im perfectly happy giving up the cash flow. IF THE DEAL ALLOWS IT. I don’t plan on touching the cash flow, so that’s another “cushion”.

This isn’t an appreciation play as much as it’s an equity at purchase play. Paying down its own equity as well as gaining roughing 100k+ at time of purchase.

Plan on having an attorney write up the contract. And hoping to structure the deal so I can unload single properties. With a pre-determined pay off amount we agree to for each property. It would be ideal that upon each payoff the loan is restructured to lower my payment but I’m afraid that’s a stretch and to confusing for the seller. I would prefer to use a loan servicing company and will be looking into that and the costs.



Thank you guys in advance for any advice. I'll be happy to answer any questions you may have. 

Jesse

[Tim Herman]

@Jesse Scroggins Why are you doing this as a portfolio and not individual owner carry mortgages. That way you can sell one and he can get a lump sum and your payment drop. If he wants all his money in 15 years tell him you will amortize the payments over 30 and a balloon in 15. Portfolio note @ 30 years mortgage drops to 2062 per month, ballon of $229000 year 15.