Creative Financing Help

[Adam Rasmussen]

Hello BP,

I have recently been in contact with a motivated seller on a single family rental in my area. He is an older gentleman with a few pain points that I have found out:

1) He wants to make sure when he passes away, that his children are left behind with something.

2) He is tired of landlording and wants to be rid of his only rental property. 

3) He desperately needs a new vehicle.

The house is a 1300 square ft, 3bed, 2bath house that could rent for about $1900 - $2000 in my area. To my knowledge the property does not need a lot of work (famous last words).

The seller has a mortgage that he has been making payments on but is unsure on the balance. He estimates it to be about $50k left on the balance. 

I am trying to put together some creative financing option to make sure there is a deal that has some cash flow after all the bills and reserves have been taken care of, but also make sure the seller has his needs met. The seller is interested in listening to a few seller financed type offers so I want to try and present a few options for him. 

I am a local CPA very familiar with real estate taxation so he is aware of the tax hit he would take federally as well as to the state (owner lives in Oregon). Extra motivation for seller financing. 

Does it seem too crazy to pay the mortgage off as well as provide an additional $10k to the seller so he can make a down payment on a new vehicle, and then work out a seller financed note that is favorable to both sides? Assuming a sales price around $300k - $350k, interest is going to have to be low but I don't think that is his motivation.

I ran some initial numbers and obviously with the potential sales price being high this isn't going to be a home run deal. I am content with $200/mo cash flow and a smaller CoC Return but also want to make sure I am not just buying a bad deal. I am confident in my numbers except for reserves for maintenance and capital expenditures. If anyone has a good idea on how much to set aside for maintenance and capital expenditures, please share. Right now I am budgeting $200/mo.

Sorry for the lengthy post.

[Jon Kelly]

@Adam Rasmussen are you putting down $60k? At $200/mo, the CoC return is 4%? That's very low. The only reason you would do this is if you are HIGHLY confident in continued appreciation.

Hard to say what the right maintenance and capex amounts are without knowing about the property. 10% is a bit low. I would be more conservative and budget for 15%. Typically with an older "mom and pop" type landlord there is a lot of deferred maintenance. An inspection report will help you determine what needs to be addressed within the first year. 

Why are you going with "creative financing" / seller financing? Why not just buy the property out right for $300k? It sounds like you have the $60k for the down payment. The seller can take the $250k (after mortgage payoff) and buy a car and have plenty left for his children.