Help a 1st timer with a lease to deal. thanks!

General Real Estate Investing
1

Hey, thanks just for checking this out! I’m trying to make my first deal happen in the next few days. By Monday, I will be in touch with my seller again.

I’ve met a seller with a rental property in Baltimore with 4 units. The seller is moving into retirement mode and wants to be hands off. She has a mortgage on it for $275,000. Right now she has a lease signed for the bottom unit for a year at 750 + utilities. And the top one for 800 incl utilities. The other two units are currently vacant.

We have decided a lease option agreement would be best. Luckily, she has experience investing in real estate (yippee!). Lease amount for the building is 2200/mo (PITI + her cut), she would assign her current leases to me. I would have the option to purchase for 285k in 4 years, I pay closing fees. I will pay repairs under $500.

Repairs:
-gutter
-back carport needs roof repairs
-some deck railing needs to be improved
-stove for one unit
-minor cosmetic repairs
-skylight has a minor leak
estimated total repairs: $2000

Estimated monthly cashflow:
Revenue:
rent 750+800+800+800
total revenue: 3150

Expenses:
lease 2200
net utilities (400? still waiting on numbers)
total expenses: 2600

Net Cashflow: 550

My thoughts: this is a secure investment. The neighborhood is directly adjacent to UMaB. This is a 2007 price for this home (bad year here) but I think having the lease option will make this a safe investment considering it will mature before a year is up. If the housing market bounces back up, this will be one of the first properties worth more. Otherwise, this could be a cash cow with housing in a crucial location.

I was hoping for some advice on the following points. And a SUPER THANKS for staying tuned this long!!!

  1. Am I correct in applying a lease option in this situation?
  2. Would I have her assign me her old leases? any advice on this sort of contract in general??
  3. Does anyone know if Sec. 8 laws in Baltimore are going to make this difficult?
  4. Is my cashflow margin 550/3150 = .17 sufficient?
  5. Any thoughts on what method I should use to borrow money at a good rate for those repairs I listed? Keeping my cash out is important!
  6. How do I approach the issue of acquiring equity? The mortgage was purchased in 2007. Obviously the full 2200 monthly payment shouldn’t go towards the purchase price or she is going to get screwed when I purchase and the check doesn’t include what she paid in interest, taxes, and insurance. Kapish?
  7. Any other advice or RED FLAGS that you saw in this deal?

Massive appreciations to ya folks, for any and all input!

-Nick

2

Hi,

Missoulala, Missoulala, Missoulala where do I start? First is for multi unit properties the rule of thumb is 50 / 50 now a 4 plex is considered a single family property however the financial principles are close to the same!

$3,150 Gross Income
$2,835 Adjusted for Vacancy Factor 10%

$1,417.50 Gross Expenses
$ Water & Sewer
$ Trash
$ Electricity
$ Gas
$ Snow Removal
$ Lawn & Yard Care
$ Property Taxes
$ Property Insurance
$ Property Management
$ Advertising
$ Legal
$ Repairs & General Maintence
$ Major Repair Reserve
$ Replacement Reserve

$1,417.50 NOI
$1,312.89 $275,000 @ 4% ~ 30 Years

Yea, she sure is experienced in real estate, you pay $2200, she pay’s underlying mortgage $1500, $1600 per month and pockets $600 or $700 and does no work for four years and pockets $28,000 and your paying down the mortgage for 4 years and still paying her $285,000 so she makes $50,000 or so in this deal and you get the shaft!

If she owes $275,000 the only way this deal even remotely works is if her payment is less than $1,417.50 not including taxes and insurance and you take it over today for what’s owed on it and are only making the mortgage payment! I would also ask for 5 years on the agreement!

But I am not sure a lease option is right as I don’t think section 8 will pay you without being recorded as owner, and any way you cut it this deal will require money out of your pocket as I would not do this without some inspections, and this needs to be escrowed, documented and recorded so their will be those cost’s and I would require seller to agree to the mortgage being paid through an escrow service account as it insures mortgage payments are paid rather than paying seller the money!

                                       GR
3

Crucial thanks, GR. It was very useful to see how you work the numbers.

I will renegotiate with her; we’ll see if I can stir up more motivation.

Nick