What you need to understand about the seller is that he can’t sell with owner financing if he wants to 1031 exchange. The owner needs all cash at the settlement table.

Whether you get the cash with your own financing, bring in a parther to fund the deal, or take the money out of your own pocket does not matter, as long as it is cash that the seller receives at settlement.

Since both of your options are predicated on the seller’s participation in financing the deal, expect both your options to be turned down. If you need seller financing to make the deal work, you need a lot more motivated seller. Based upon the numbers you provided, this property just barely cash flows for the owner if you consider that his monthly cash flow is probably only $100 per door.

A couple comments about your arithmetic. If the asking price is $360K and the NOI is $31K, then the cap rate is 8.6%. A 9% cap with a $31K NOI, suggests the asking price is around $344500. Since the appraisal came in at $324K, there is no way a lender will give you more money than can be supported by an appraisal.

If you want to work some more numbers, let’s try to figure out if this property will cash flow at $324K. Let’s assume that a commercial lender will require 25% down, and loan only $243,453.60. At 7%, and with a 15 year amortization, your monthly debt service will be $2,188.23, or $26,258.76 per year.

To support the debt service, the lender will want to see at least $32823 NOI. Basid on your numbers this property falls short. This example assumed 75% financing. If you were able to get the seller to carry back 25% so that you would have 100% financing, then you don’t have any cash flow after you make the loan payments. I strongly suspect this property has a negative cash flow at 75% financing, and is even deeper in the hole with 100% financing.

Your first hurdle to overcome with commercial financing is coming up with the $61K downpayment from funds you can prove you have on hand. The second hurdle is proving that the property generates enough income to support the loan the lender gives you. Since you can’t overcome either hurdle right now, suggest you look for a smaller deal to reenter the real estate market.

BTW, with a $31K NOI and a $324K purchase price, the property caps at 9.5% but does not cash flow for you.

Also, the seller’s NOI is irrelevant. You need to know what your NOI will be. We all suspect that if you work your own numbere, you will get an NOI much closer to $20K. Here are a few questions that an investor will need to have answered before proceeding with a deal. This is just a list to get you started. There are a lot more details you need to know before you get to the point where you would seriously consider buying a rental property.

- What is the property’s vacancy rate?
- How much will you have to pay a property manager?
- How much will the property taxes be after you purchase (will it be reassessed any time soon)?
- How many units are filled now, and how long before those leases expire?
- With municipalities strapped for cash, expect to see rate increases for water, sewer, and property taxes. How much will it cost you to insure the property and to purchase a substantial liability rider?
- How much maintenance has been deferred and how much will it cost you to get caught up on the maintenance?
- What will you use for cash reserves when something major needs to be replaced or you have a few vacancies and your income is not covering all the bills?
- You say this property is in a college town. Are your most likely tenants going to be college students who might vacate every summer?

One final afterthought, every deal is potentially a good deal. Whether this is a good deal for you depends upon whether you are the seller or the buyer.