Debt Service is the monthly amount you send to the lender to pay the principal and interest that is due on the loan.
I am looking at this as if you were the owner.
Yes, the tenants’ rents cover this payment for you. You need about half the rent to pay the taxes, insurance, maintenance, repairs, legal fees, leasing fees, advertising costs, common area cleaning, utilities, trash removal, and to cover your vacancy periods.
This leaves just half the rental income to make the loan payments each month. After the dust settles each month, you have just $50 per unit positive cash flow, that is until you have to make a major system replacement. If an HVAC system needs replacement at $4500, it will take two years of cash flow for you to break even.
That is why I say this is not a great deal for you and that you should hope that the seller rejects your offer. I would not want to own this property on these terms.
If the deal is not that good for you as an owner, it is not a good lease option deal either. Under your proposed lease option agreement, you have just $600 per month to take care of all the “overhead” that you should expect to cost you around $1500 per month, or were you planning to have the seller pay for all that too until you exercise your option? If the seller wants to get out of the landlord business, I don’t see how your offer does this for him.
Let’s say the seller agrees to your terms. The seller pays the mortgage, and all costs of ownership and rental mainteance/upkeep. You only do the rental management. You guarantee the seller $2400 per month and you get to keep whatever is left over after you do the monthly rent collection and pay the costs of securing a tenant.
Now, let’s just anticipate that sometime during the year, each tenant in each unit will move out. You have to get a new tenant, and will probably have at least one month of vacancy in each unit per year. Since the rent is $750 per month, and you guarantee the seller $600 of that, your annual rent collection is reduced to $33000 ($3K per month for 11 months), while you pay the seller/landlord $28800 ($2400 per month for 12 months). Your annual net is $4200 before you pay advertising costs, and leasing fees.
If your projected income is $600 per month, then $4200 pays you for seven months. You are working the rest of the year for free.
Tenants don’t always pay their rent. Sometimes they have to be evicted. Before you get to the point of eviction, how many months has the tenant failed to pay rent? How long is the eviction process in your county? How much does it cost to go to court and to serve process? What if the tenant appeals? Just one lengthy eviction, and you are working for free the entire year.
Are you sure that this is the deal you want to do?