I am looking for feedback on a deal I am working on. It is a solid owner financing deal for 7 years at 10%. Owner wants 20k up front leaving me a balance of 210k. In return I would obtain 18 units in 9 properties. I have the 20k to get into the deal, and I was thinking of selling off one or two properties to get some working capital and my inital investment back. My issue is maybe the quality of renter, and maybe some long neglected suprise repairs. These properties are located in Ohio. I found the deal through a guy I’ve been looking at to borrow some money from. I like the terms, and it would produce about 72k per year in additional income for my family. My intent is to just get some cash flowing, and then reinvest into other areas. My long term goals are to replace my income from my current job, and to invest full time.
Can’t give you much feedback without current operating numbers…
What is the GSI? Assuming you’re not paying heat and hot water, whatever the GSI is, divide it in half. That amount’s what you’ve got left over for your 10%, 72-month, financing scheme.
Does this still makes sense?
Not making sense to me yet. The tenants pay everything except in the multi unit complex. I’ve factored my payment to him at roughly 3500 bucks. My insurance is going to run around 500 per month. He is bringing in $6400 per month. That leaves 2k left. He is going to stay on as a mgr. for me. Does that help? Am I forgetting anything?
If you walk thru all of the units and inspect everything, there should be no surprise repairs. This isn’t such a big deal where you can’t walk thru each unit. That will tell you if he’s been keeping the properties up or not.
A couple years ago we bought eight units from a guy who was the flakiest seller I’ve ever encountered. He was bragging about the great cash flow from some of his units. Want to know why his cash flow was great? He wasn’t fixing squat and hadn’t paid property taxes for the last couple years. He was just skimming all the rent he could and letting the properties fall into disrepair. We bought them right, but we’re still cleaning up his messes two years later. Make sure you know what you’re getting into.
A seven year payback is aggressive. If the gross rent is $6400 per month, this deal is obviously not going to bring you 72k per year of additional income. Most of the money will go to debt pay down and interest. What are taxes for these properties?
Why is the owner selling and staying on as the manager?
This may be a good deal for you, but I think it depends on taxes, what deferred maintenance needs done, and how much the utilities are for the multi-family building.
Coming from someone who has taken on several loans on 10 year amortizations, I just want you to realize that things can and do happen which will make your monthly margins very thin. We’ve had some really good months and we’ve also had months where it felt like we were working to make the bank and our repairman money…
OK, so the GSI (Gross Scheduled Income) is $6400/mo. This means to me that your NOI (Net Operating Income) cash flow before debt service is $3200/mo.
You’re giving the seller $3500/mo as “debt service” (I’m presuming), and so your cash flow is negative by -$300/mo, or <-$1200>/yr.
This deal sucks drain water through a sewer grate.
Use this analysis form below to better understand your numbers and get a more accurate idea of what you’re getting into.
I agree that things are thin given the aggressive payments in this case. I think it could be made to work…just on a longer amortization. You and I have done this property management thing for awhile. We know that 2k he’s speaking of can go away in a heartbeat. I think $6400/mo based on a 230k purchase sounds like a promising start though.
My concerns remain from my other post.
We have one deal on a 7 year payout. We bought it for about 45% of market value though. We’re getting 3k/mo rent for 101k over 7 years at 6%. We pay no utilities there. Taxes are $4400/yr. Insurance is about $2400/yr.