You are taking subject-to on a 3% mortgage when current interest rates are closer to 7% for rental properties?
You are at great risk of the lender exercising the due on sale clause if it ever finds out. Not such a big risk in a time of stable interest rates, or rates falling below the current note interest rate. That is because lenders just choose not to notice. Now, however, it is a realistic risk and must be accounted for in your planning. A lender who can get a 3% loan paid off and put that money back to work at 7% or more will take that opportunity. That was the whole reason due on sale clauses came into being in the 1980s.
If you reduce maintenance to $1,000 expenses that is more realistic unless stuff is just falling apart. But, if it is falling apart, it needs to be replaced, which is a capital expense, not an operating expense.
From an accounting standpoint, you can still put another $1,000 in reserves, but that is not an operating expense, so it doesn't affect NOI.
With maintenance expense of only $1,000 that gives you an NOI of $4,415. Student housing in Tuscaloosa caps around 6%, but let's say you are in a market of 7% or more. At a 7-cap and an NOI of $4,415, the property value is slightly over $63,000. Will 80% of that number be enough to pay off the current mortgage, if you had to do that? What if that particular property (location, condition, size, etc) caps at 9 percent? That gives you a value of only $49,000. Do you know where cap rates are for similar properties?
If you need to refinance on a value of $63,000 with an 80% LTV, assuming 7% interest and a 30-year amortization, your annual mortgage payments will be $4,023.75. Your NOI is only $4,415. That gives you a debt coverage ratio of 1.09. Conventional loans (with lower than 20% down payment and low interest rates) typically require a minimum of 1.2, so that means your rents will need to increase in order to gain approval for a new mortgage of 80% of $63,000. For a DCR of 1.2 and mortgage payments of $4,023.75, your NOI will need to be at least $4,828.50. Since your expenses seem close to the bone, that means increasing rent by $67 per month. Will the market support that? Would it support that if you spent a small amount of money for upgrades?
DCR loans will sometimes go as low as gross rents (with no deductions for operating expenses) just barely enough to cover the mortgage payments. But, that is down payments of 20% or more and higher interest rates. Have you taken all of this into consideration for this particular deal?
Again, the biggest risk for which you need to prepare is the possibility the lender will find out, call the note, and demand payment in full.
How do they find out? It usually starts when the current owner cancels its insurance and you put new insurance on the property, but with a different name than their borrower. Sometimes a seller gets mad at you, thinking they sold too cheaply (not your fault, but that's human nature) and rats you out. There are sometimes rewards for doing things like that.
You can't just leave the current insurance in place and pay the premiums because (1) that is insurance fraud and you risk the insurance being cancelled if the company finds out and (2) guess who gets the insurance check if the place burns to the ground? Not you.
Also, mortgage interest statements from the lender will be sent to their original borrower, and reported on income taxes for his/her/its SSN or EIN. When you declare interest deductions for that property, but have nothing from the lender to the IRS to back that up, you will have audit flags. Are you prepared for that?
Will you get the username and password for the mortgage loan so you can sign on to the account to get any info you need, without having to rely on the borrower to forward things to you? If so, you'll be also be able to change the settings to put your own email address and physical address for notices and things, so be sure to do that.
There are safer ways to do this, but they require all the right paperwork and steps. Each deal is different, so I can't give you general advice about how to go.
Or, you might want to go ahead, as is, with this deal. Just do it with your eyes open to the potential risks, and take steps to minimize their impact on you.
