Only you can answer this question.
This starts out as a 100% leverage play. That’s OK, as long as you’ve got plenty of time to create/force appreciation enough, so that when you have to pay off the seller you can, without having to come out of pocket.
Meantime, 12/mo balloons are just bad business. This is obviously the seller’s opening salvo in the negotiations. He’s got to start someplace. Why not just start by lighting a hot, burning, smoking 12-month fuse? Ha!
You want five, to ten, years of seller financing, not 1. Or you need to come up with cash. A 12/mo seller-financed note is useless to even negotiate. It’s a non-starter.
Here’s my analysis. With 100% financing it still cash flows. This means that we would be happy with this price, and especially the terms.
We would be even happier, if the rents were under market by say $50/mo. per unit. We would jack up the rents by $50/mo, without having to do much, except maybe repaint the front doors of all 20 units…
Multiply that fifty bucks by 12 months, and then by 20 units, and all of the sudden we’ve got an extra $12,000 dropping in our back pocket. And we’ve got nothing invested in the property. Yay.
$1,486,000 Sale Price
$ 226,000 (15.5% of Sale Price)
Seller Carry Back (12/mos @ 3%)
($1,505/mo - $18,060/yr)
$1,260,000 (84.5% of Sale Price)
Balance Owed (30/yrs? @ 2.99%)
$ 221,685 GSI
<$ 112,825> EXP (Includes maintenance, management, 5% vacancy, etc.)
$ 108,160 NOI
<$ 18,060> Less 2nd TD Payment
<$ 60,660> Less 1st TD Payment
$ 29,440 Pre-Tax Cash Flow
7.2% CAP RATE
**13.02% Return on assumed $226,000 Down Payment.
Some other assumptions: The property needs nothing. The vacancy factor is 5%. The owner only pays water, and common lights and gas (if any).
Average Per Door Rent: $879
Average Price Per Door: $70,761
Rent/Price Ratio: 1.2%
If the numbers and assumption made here are accurate here, this is a decent deal, made even better with the high-leverage financing offered by the seller.
The deal-killer is the 12-month balloon. There’s no overcoming that nut, without simply coming up with cash, or SIGNIFICANTLY raising the rents and increasing the value by at least 20%.
You couldn’t even refinance the property in that time without at least 12-months of performance history, once you’ve assumed ownership in the first place.
After 12 months of performance history, then you could start looking for financing. Give yourself another year, and now you’re at two years right there, without thinking much about it.
**The 13% cash on cash return doesn’t include depreciation, and mortgage pay-down.
7.2% CAPS tell me this is not a cash flow play, but an appreciation play. Just saying. The low interest rates actually make this project at all profitable.
For actual cash flow, I like management-intensive properties with rent/price ratios of about 2%, or more. That means if the GSI is $221,000, I want to buy at around $525,000.
If you look, you can find owners of these in downtown areas trying to get out of them all the time. The worse looking (and managed) the more likely you can get in with very little. These are for CASH FLOW only. They don’t appreciate and require strong, consistent management application.
Hope that helps.