All Forum Posts by: Joshua Morgan

Depends on why the one spouse has poor credit. My wife and I have a similar situation. I have a reasonably high paying W2 job and all of our credit is in my name so I have a great credit. She has very limited credit history so it doesn't report as good. I'd like to think we'd qualify for my own rentals.

If the one spouse has a consistent history of late payments to utilities and such, then I'd be more hesitant.

Hi BP,

I'm in negotiations with a seller on an off-market deal to purchase 2 MFH buildings on the same street. There aren't any other buyers competing with me (at least yet). Here is the situation:

Property A:
4-units
Current gross monthly rent: $2800
Reasonable monthly rent projection: $3000-3200
Asking price: $305k

Property B:
5-units
Current gross monthly rent: $3295
Reasonable monthly rent projection: $3550 - 3800
Asking price: $360k

Both properties are at ~8% cap at these asking prices.

Seller owns both properties free & clear and lives next door to Property A. Property A he has owned for 3-4 years and Property B he has owned for ~35 years. He also lived in Property A for ~2 years within the last 5 years (though he's been told by his CPA that he likely won't be able to avoid *any* capital gains because of the way his previous returns were filed. Not sure on the details why this is. Neither his nor my CPA is available for further discussion until after 5/17 next week)

My wife and I have about $20k cash which is enough to get FHA owner-occupied financing for at least 365k. We would also qualify from an income standpoint for traditional financing for both properties, but cash for downpayment is the issue as 25% down is required for 4-unit building.

Seller is willing to do seller financing on one of the properties, but his concerns are:
1) Not losing money compared to an outright sale and dumping funds into stock market
2) FHA inspecting his unpermited 5th unit. The county/city zoning board has said this unit is not an issue and is grandfathered in, but he's worried about the more stringent FHA appraisal/inspection
3) Buyer "skin in the game" - doesn't want to be left holding the property again as this has happened to him at least twice on previous land-contract/CFD arrangements
4) Ability for buyer to acquire traditional financing at balloon
5) Effective total cash to the seller is a primary driver

We submitted an offer that solves all these problems:

Property A:
Purchase price: 360k using FHA loan, owner-occupied

Property B:
Purchase price: 305k, 0% down, 25 yr amortization, 5 yr balloon, 4% interest rate
Note + mortgage arrangement with professional loan servicing/escrow

Assuming a 9% annual return in the stock market, this arrangement is equal in total cash to seller (including accounting for inflation,etc). Further, FHA never sees Property B w/ 5th unit in this deal, and if Property A successfully appraises for 360k today, then Property B should comfortable appraise for the required value in 5 years at balloon. The "skin in the game" issue is handled because the deal really only works if *both* properties are on our portfolio (at least until we can refinance out of FHA and seller financing).

Seller likes this offer, but is now realizing he'll have a substantial capital gains and depreciation recapture tax bill from selling these. He's considering doing a 1031 exchange into a vacation home. This works fine for Poperty A w/ FHA financing. I know a 1031 is still possible under the installment sale, but honestly I don't see the seller going for this with its extra complications. I can't think of a way for him to still leverage the 1031 exchange on the sale of Property B while doing seller financing (or otherwise me securing financing for the 2nd property with the limited available cash)

My question is:
Anyone have any unique or creative solutions for how to acquire both properties with the cash I have? If I can come up with a way to offer an outright (non-installment) sale for *both* properties, we're in business and I'll have a great addition to our portfolio. Thanks in advance!

In Cincinnati last year, when most banks weren't offering these products, Guaranteed Rate was still offering them. Not sure if they are today, but at least they were when nobody else was.

Oh, one other aspect that I like about the physical keys....with electronic codes, you have no control over who has access to property or how many people have access to property. A tenant can give the common area codes or their unit code to anyone and everyone to come and go as they please. Really easy for the significant other to move in without your knowledge. 

The Landlord Locks keys or other similar locksets are near impossible to get duplicated (typical hardware store can't/won't duplicate) so if they need more keys, they have to come to you. At which point you can force a new person to be added to the lease, etc. Any system can be worked around, just feel like this gives me more control. 

I currently have electronic locks on a SFR. I prefer the Schlage Camelot style because it doesn't use a motor to perform the locking function. The battery & motor simply engage the knob for the user to manually open or close the lock. This makes it more robust to doors that stick or need a bit more push to get the bolt to close.

One thing to note is that the master code is stored inside the battery compartment as well as the user manual that comes with the lock. So, you need to remove this label to prevent the tenant from getting access to the "master key" with which they could use after move out, remove the landlord access code, etc. With these locks, you have to change the 9v battery maybe once a year. 

When I close on my multifamily soon, I will be switching all my locks to Landlord Locks. Search for them on the forum. They're highly recommended and we'll regarded here. 

Finally, no matter the solution, I recommend using only a passage (non locking) knob and a locking deadbolt. This prevents the tenant from ever locking themselves out as they must be outside the home to actually lock it.