Too good to pass up

I am being offered a deal to buy a home, value is $130K, with tenant already in place. Tenant is currently paying $1500 a month, and lived there for 2.5 years (with 0.5 years to go on current lease). Current owner (who works at a FT job with me) wants out of the landlording business.

I cannot for the life of me understand why this person wants to sell this house which I estimate to be cash flowing $550 or so a month, but who am I to try to talk him out of it.

Anyway, my problem is that I only have about $35K in cash right now. I have 4 mortgages already on 5 properties – one property is free and clear, but I am only a 50% owner of that one.

Credit is no problem, and my FT job makes good money too, but I need about $60K in cash (25% down, and 6 month’s PITI on 4 properties) if I do a traditional 75% LTV on this purchase.

I could try to refi out $65K of equity (my 50% share of the free/clear home), but my partner in that one is currently in the middle of buying two homes simultaneously and even if I found a lender willing to do that 5th mortgage, I’m not sure how favorable they’d look at my partner taking on 3 new mortgages in a very short time span.

So, what other options are out there? Hard money is not an option – cash flow would be negative with no financing exit strategy.

Thought of relatives, one is offering $35K @ 6% interest for a few years, but that doesn’t get me close enough to purchase.

Go knocking on doors in a retirement community offering 5-6% on their money? :shocked

Offer him the money you’ve got. Have him finance the rest. You refinance the property in 12 months for 80% of appraisal.

You could get a little more aggressive. Offer to take over his mortgage and give him a lien against your free and clear house. This way you’ve solved his “management headache.”

My gut feeling is that management is not his problem. Whatever his problem is, solve that problem in return for the terms you actually can offer.

Otherwise, you’re just negotiating with yourself over what you think the seller “has to have.” Forget that. You make your offer that works for you, and let the seller say, “yes.” Of course, the seller may, or may not be softened up to actually accept anything less than cash to solve his problem. So, you need to start somewhere less than where you must be in regard to terms, so the seller can force YOU to cave to your terms. Think about that for a second.

Can’t get any owner financing – what little equity he has he’s trying to get out and by selling to me directly he can save the realtor commission. That’s the main reason he’s shopping it around to me. I’m paying a little bit under market at $130K (maybe $3-$5K).

I’m looking at it from the value perspective of the cash flow and ROI potential.

I have a bit of leverage (his commission savings) – I just am having trouble figuring out how to make this deal financially work given that he wants his equity out.

Chances are his loan is not assummable. I can ask I suppose, but aren’t most loans non-assummable these days? I can see the DEED of TRUST on the internet, it’s Wells Fargo and I see the loan amount (and thus his approximate equity), but there is no interest rate and no discussion about assumability.

How could I utilize the free/clear property to purchase this one? My partner is very flexible, so I can do pretty much whatever – to include cash out refinancing – but as explained above, that’s not quite likely given my partner’s current mortgage scenario.

Turns out the 75% value on the $180k home is around $125k – I could make up the difference with my cash to purchase this property, but i’m back to doing a cash out refi again.

So how can I trade equity in what I own for what I don’t own but want to? Seems like there should be a way to tap that without going the normal course of a cash out refi.


Just for fun…

If this house is only $3-5K under retail, why in the crap are you so furiously trying to buy this thing…?

Rent: 1500/mo
Exp: 750/mo
NOI: 750/mo
Debt Service: 1000/mo (principal and interest)
Cash Flow: -350/mo

This is the deal from hell. NO WONDER the seller is motivated. You can trust me when I tell you he’ll be happy to finance you 100% if you promise to take this headache off his hands.

Meanwhile, to expand on my last idea (assuming this were actually a deal, and not a negative cash flowing headache …and in Texas, I would just take over the loan, transfer the deed into a Land Trust called, “Achey Head Family Trust,” name yourself the beneficiary and trustee, and call it a day. (If this actually works this elegantly in TX I don’t know).

Meantime, this seller is experiencing negative cash flow. In fact, he’s got his lips wrapped around the exhaust pipe on this deal so hard that smoke is blowing out his nose.

Leverage 70% of ARV with a hard money loan, then refi to conventional drastically minimizing cash out of pocket.

Chris Jameson

But that’s the problem – I don’t have an exit strategy to a convential loan with already having 4 mortgages. I haven’t found a bank that wants to touch a 5th mortgage yet.

I’m ok with the Hard Money loan, but I need an exit strategy because it’s going to be cash flow negative at Hard Money rates.

There are tons of conventional lender that do 5+. You need a 720 credit score and 6 months reserves for all properties. That’s about it for the basic requirements. Otherwise, you need to keep looking because there are plenty out there.

A hard money lender is recommending going with hard money…go figure.
I recommend you check out doing commercial loans at a local bank. They will hold these loans as part of their own portfolio. Rates may be a percent or two higher, but IMO well worth it. The only limits you’ll have is how comfortable the bank is with you having multiple mortgages. At least there’s no 4 mortgage limit and no specific reserve requirements.

Correct me if I’m wrong, but aren’t most commercial loans calculated on a 20 year amortization? That change in term (plus the higher rate) adds a few hundred dollars to the monthly payment, which can make the difference between positive and negative monthly cash flow. I do like the fact that there is no limit to these loans.

You’d also need a business plan wouldn’t you? (and heck, a business too – I have not formed a business currently, though may need to as I continue to add properties)…

Thanks for this awesome thread:)
I collect a lot of information from this post:)

That’s probably one of the drawbacks to those loans. The majority of ours are based on a 10 yr am. I like it because we’ll have them free and clear sooner. I don’t like the idea of not owning cheap little houses for 30 yrs. We still have positive cash flow regardless. I can see how you wouldn’t want to go for that short of term if you’d be cash flow negative though. We have an LLC with a business plan, so we had all of that documentation to show up front.

I’m being told now (by 3 different lenders over the last few days) that basically it boils down to the fact that if I am purchasing a property that will become a 5th mortgage (or greater up to 10), and I can meet all of the additional 5-10 year requirements (75% LTV, and 6 months reserves on all other existing mortgages), then I am able to get an additional mortgage.

The main problem is my free and clear property. I’m not going to be able to use that equity to help with any of the 25% down or 6 months reserve requirement. If I had cash out refinanced prior to exceeding 4 mortgages, it could have been done. But in the current lending environment, no one is allowing cash out refinances on mortgages 5-10. Maybe that will change going forward, but at this time, a cash out refinance on mortgages 5-10 is not something that a lender will do.

At least I’m getting some consistent responses from difference folks now.

JAVIPA gave you some great advice. RUN FROM THIS DEAL! You should not be buying (IMO) rental property at more then 70% of market value. This gives you various options when YOU decide to get out of the landlord business. With that small of cash flow you have no margin of error. What is the average vacancy rate in that area? How long does it take to find a tenant? The tenant’s lease is up in 6 months…then what? If you haven’t factored repairs and vacancy into your cash flow calculations you need to.

Based upon the little you have told me this is not a good deal. Something to always remember… If this is usch a great deal why is the seller selling? The reason he gave is not the “whole story”.

Good luck!

so, a couple of things:

  1. perhaps you can get a HELOC on your free & clear home.

  2. This isn’t a good deal in the usual REIClub sense of a deal. If you have a long-term view, it could be ok.

See, REIClub (and a lot of investors who are running a business) need to have bigger cash flow right now. Today. 2% rule, all of that.

However, there have been plenty of people who made good money the old fashioned way: put down 20% and let someone pay the principal down for you.

most people are somewhere in between and closer to the old fashioned way. if you can accept the vacancies and various expenses that come up as “part of doing business” and you hold the place for 10 years, making extra equity payments, you’ll be fine.

i’ve been wanting to start a thread about this…

This is precisely what I am doing – long term cash flow with new-ish (<10 years) homes. I get people like JAVIPA who follow a different model. No big deal.

My model has worked well for years.

What I’m currently doing is refinancing my Primary Residence (while still at 4 mortgages). That’s in process to close with a 3.75% and no out of pocket. That will free up about 30K as cash out. I’m also simultaneously refinancing a 2nd investment property which will cut the monthly payment by about $50 at no cost to me. Doing this now as once I get >4 mortgages, it sounds like it’ll be impossible in the current environment.

Once both of those are done, I’ll purchase this house with the $30K down and I have a lender lined up to do a purchase as a 5th mortgage. I’m not going to touch the free and clear home at this time.

I can’t find anyone that will do a cash out refi on >4 properties and/or HELOC or anything else like that right now.

You’re right about the cash out refi on 5+ properties. Can’t do it. I’m not just a “hard money lender” as I invest in real estate myself and own 10 properties now (I’ve bought one since I was last in these forums). I would never drop $30,000 as a down payment on a property when you could buy 2-3 with $30,000. There are several mortgage companies that provide the financing for 5+ properties. THE best scenario is to buy a property at 70% LTV using hard money which would take less than $5,000 out of pocket for closing costs. Then refi into a 30 yr fixed (or 10 yr, whatever) at around 4%. Since you have more than 4 properties you can only refinance at 70% LTV, so you will be out out pocket roughly another $5,000 for the second closing.

The last 3 properties I have bought in San Antonio, TX have been less than $10,000 out of pocket (all using hard money) and they each NET over $5,000 cashflow per year. That’s a 50% cash-on-cash return. And they collectively have roughly $95,000 in unrealized capital gains. That’s a 300% return on unrealized capital gains. I refinanced into 30 year notes at 4.25%, 4.5% and 4.25%.

My most recent purchase was less than $4,000 out of pocket on the front side and should be close to $0 out of pocket on the refinance. This one cashflows over $5,000 per year as well. I bought it for an even $50,000, putting $22,000 in repairs into it, and it appraised last week for $106,000.

Hard Money is, by far, the best strategy to use to maximize your returns. HOWEVER, there are hard money lenders out there that will take advantage of you. Make sure you do your due diligence and check out the loan details. AND, MAKE SURE you are pre-qualified for the conventional refinance BEFORE you close the hard money loan.

We only lend in Texas at this time and are a very professional company. Our average borrower’s credit score is 741 and is in our loan for an average of 3.7 months. You want to look for a professional company that won’t lend you $100,000 if you have $0 to your name and a 550 credit score.

If your goal is to actually receive a passive stream of income, using commercial loans before you have 10 loans is a deal breaker. You’re going to lose around $150 per month in cashflow per property using commercial loans instead of 30 year fixed, which is at the lowest interest rate EVER. There are plenty of requirements by an individual bank loaning their money. I’ve talked to several about it, most look for a large active deposit and net worth to match their requirement. If you can get long-term, low interest rate financing right now (arguably the hardest time to ever get it), GET IT. You don’t need a creative way to finance your rental properties.

I’m an investor fist, lender second.

You’re right about the reduced cash flow. I guess it all depends on a person’s goals. I just can’t picture taking my little 25k loans out to 30 yrs. As an example, payments for 25k at 5.65% on a 10yr am are $273.18. The same amount financed at 3.5% for 30 yrs is $112.26. For this 25k house, I’m probably getting $550-625/mo in rent so I’m still at double my mortgage payment. I’ve been pretty fortunate with the banks I’ve dealt with. No specific reserve requirements or anything like that. I just want the properties paid off as soon as possible and I’m willing to take less cash flow now to make that happen.

Listen to Javipa.
Listen to Javipa.
Listen to Javipa!