Ok so this is probably not going to be an easy read, and i primarily write this down to make sense off my own thoughts, but i thought why not let a few of the great BP minds participate and maybe together find a satisfying answer to the following “Problem":
I have an offer to purchase a 2006 SFH that's owned free and clear with a current market value of ca 350k in a great neighbourhood in Las Vegas, Nevada (8/10, 9/10, 10/10 rated schools, low crime, nice amenities, walkable, views, etc)
Seller offers it for sale for 435k - 85k over market value, asking for 20% (87k) down & 0% interest for 17years - essentially charging ~4% interest on the current market value up front 😳
My general thinking is this:
If i were to buy the same home at current market value of $350k with a conventional mortgage at 20% down with 4%, with a 15 year term, i would have paid $90k in interest, so the real cost of the house (all other things aside) after 15 years would be $440k. With a monthly PITI payment of ca $2300 it would likely cashflow negative.
With a 17year term, i would have paid $106k in interest or $456k total.
(with the more common 30yr amortisation, the interest would be $200k, so real cost of $550k, but lower PITI of ca $1,600 it would break even / slightly cashflow positive)
The seller offers it for $435k at 20% down, with 0% and 17yrs - essentially charging the interest upfront or a 100% pre-payment penalty, and with a PTI payment (no I, yey..) of ca $2,000/month it would be breaking even at best.
This should automatically disqualify the deal in most investors eyes (including mine) right?
But i feel, there is more to it.
- I intend to use it as my primary residence for a year or so, and rent it out afterwards. I won't be able to qualify for another regular owner occupied mortgage at a reasonable rate until the next tax return. (so for another 6 months)
- Buying this, would enable me to buy something now before my second child is born and convert my current home to another rental, which would likely add ca $600 to my monthly cashflow. (Is this convenience worth locking myself into a 17year commitment? (100% prepayment penalty, remember?)
- Breaking even would mean owning the same A class property for 87k invested. Nice Piggy bank, property would be paid off by the time my first kid turns 18, talk about a college fund. AND rent`s tend do go up over time, right?
- Even if it cash flowed negative, lets say $300/month (worst case) for the duration of the loan, this would equal ca 61k over 17years - plus the 87k down = 148k invested, to own another paid off property in an A class neighbourhood in Las Vegas, NV.
- The payment is fixed for the duration of the loan, and every payment goes to 100% to the principal. After 5years, i would have already paid the loan down by $100k+
- Appreciation: I don't want to gamble on the future value, but historically prices have been going up, the average appreciation of Las Vegas in the past 20yrs was 3.45% - the population is growing, tons of jobs created - however the city is surrounded by mountains, so there is only so much dirt left to build on. I think it`s fair to calculate with 3% appreciation, which would bring the value at the end of the term to $580k. My return (assuming only breaking even on rents and not adjusted for inflation) would be $493k.
- After 30 yrs, this property would have appreciated to $850k and brought in $720k in rents, for a total return of $1,48M.
Opportunity cost: What could my 20% down get me alternatively?
87k is a lot of money - i could for example buy a C class BRRRR property in in the midwest cash, that rents for $900-1000/month.
After 17 years, this would equate to 204,000k over the same time period (not adjusted for inflation), assuming the same 3% rate of appreciation would bring the property value to $143k. The total return on my 87k invested (again, all other things aside) would come out to: $260k.
After 30 yrs, this property would have appreciated to $211k and brought in $360k in rents, for a total return of $484k.
🤯
If you made it until here AND are not completely confused, i would LOVE to hear your thoughts. What am i missing? Would you do the deal? Why / Why not? Thanks in advance for your 2 cents!
My apologies for the incoherent string of thoughts - I'm a (over)thinker not a writer :P
Best, Stephan!
