Seller Sharing The Equity With Me...
I am a newbie and want to get into the real estate business. I met this investor who is offering to sell me a rental unit with renters. He is also going to give me some of the equity in cash. Do you think this is a good idea/investment for me?
I think you need to tell us a little more about the property. It sounds like he wants to get rid of it he will pay you. However does the property cash flow? What is it the FMV? What is he selling it to you for? What is the deal with the current tenants? What type of lease is in place? Are the current rents at market?
These are some of the questions you will need to answer in order to determine if this one is worth while.
The home is assessed at $120K. He is bought it for $80K, and put about $10K rehabbing it. His total cost was $90K. He has also put a Section 8 renter in the property that is paying $1200/mo.
He wants to sell it to me for $120K, which will profit him $30K. From that $30K, he will give me $5k + first months rent ($1200) + $800 deposit he received from the renter, this would give me $7K cash for buying the rental.
What do you think my mortgage payment would be?
Is Section 8 a reliable source for renters?
What do I do with the property once I get it? Do I keep it and refi one day and pull out the equity? Do I just keep it as rental property?
Is this deal worth doing? What if I bought four or five of these at the same time?(which would give me $28,000 or $35,000 cash to reinvest...he wants to do 4 or 5 at one time with me.)
Any expertise would grately be appreciated.
I'm not sure if there is really a deal here. You stated that the assessed value is $120K, and that is what he wants to sell it to you for. Is $120K the current FMV of the property? If so you could be in trouble if you need to get out of the property as selling costs will not allow you to recoup your total cost of the prop.
Is the seller going to take back a note? How would you get financing? A lender would require something down (you can use equity that the seller is giving you - but it doesn't look like he is giving you any).
As far as your payments, you should go to the tools section, and use the property analyzer... with info you get from a lender regarding the rate and terms of the possible mortgage...
You should note that the security deposits the seller is giving you is not your money as you will owe it to the tenant...
You said the homes are assessed at 120K. By whom? The seller? If he had an appraisal done, ask him to see the report. Make sure to check the date. Also look up comps. If he hasn't had an appraisal done ask him how he arrived at that figure. Then if after looking at comps it seems off, have your own appraisal done - it's possible the properties are undervalued or overvalued by the investor. Either case find out the facts for yourself.
Lets say that the house does check out to be valued at $120K with appraisals and comps.
Whould these be a good long-term rental investment for me? (he wants to do 4 of them simultaneously)
A mortgage for $120K with $0 down for 30 yrs would cost me $983.36 (including PMI and residential tax) per month according to the TCI Advanced Mortgage calculator.
With Section 8 renters paying $1200 a month, is that enough positive cash flow more it to be worth it. Also keep in mind that there are 3 other similar properties that will net about the same amount. So thats 4 rentals yielding a total monthly positive cash flow of $800.
Do I keep the properties and let them earn equity to refi?
Do I wait for appreciation and then refi or sell?
Do I keep the rental as a long term investment and refi or sell years down the road?
What could I do with the property once I have it ? :-?
A couple of things to think about :
Look into where you are going to get financing. If you want to put zero down, it is likely you would have to get financing through the seller. But it sounds like this person wants to cash out, so that might not be available. The zero down mortgages you get from banks etc. are usually for owner occupied properties. Since this is not going to be an owner occupied property, traditional lenders will require a larger down payment (such as 20%) and possibly a higher interest rate.
The next thing to look into is do you want to be a landlord? From personal experience, it gets old sometimes doing maintenance on a Sunday afternoon when I would rather be on my porch relaxing with family and friends. (and I only have one property with 2 units to worry about) If you have a property management company do it, that runs 10-15% which makes your positive cash flow much smaller, and we haven't even gotten into costs of major repairs.....
On the positive side, with Section 8 tenants you know you will get paid!
See if the seller is flexible. Tell him your money is tied up in other projects at the moment. He may be more willing to adjust his bottom line if you agree to take all 4 houses.
Your first priority should still be to do your due diligence before you sign anything. That includes verifying the conditions of the properties and checking that 120K figure out.
Before that your speculating -
I would listen to Dstueba and Steeler19. Do your research to get this done. Also I would ask the existing tenents if they would be interested in a lease option for "X" amount of years. If you do that and they are willing to sign a lease option I would go for it. You will have secured tenents for "X" amount of time without the lanlord bs. You could write into the lease that the leasee is responsable for maintanence and upkeep. If you do this set a selling price at the end of the lease so the tenants don't trash the place so it will apraise lower. During the lease option you are bringing in money form the rent and at the end you cash out your equity.
So it looks like this is an opportunity for me to make a quick $28,000 and become a landlord for 4 single family homes.
If there is a section 8 renter in there, can I look for someone to lease option at the same time? Then when I find one, can I let the section 8's go? Sounds kinda cruel though.
It doesnt seem like there is big profit potential here unless i do lease options with the properties. It just seems like a way for me to get some quick capital to reinvest somewhere.
Where and how would you recommend I invest $28K cash?
No offense, but I really think you need to run the numbers. The most frightening thing to me is that you say you are making a quick $28K. I don't see where you are making this money. First of all $3200 (deposits) is definitely not yours. The 20K (4x5000) you 'made' cannot be considered cash profit until you ->sell<-. Can you sell this property for 125K+ (don't forget the transaction and holding costs) to make that profit?
20K is a nice chunk of change, but it is small compared to the major liability you are taking on (loans equaling $480,000). If you lose some rent and have to do a major repair or two, this could get very ugly. How long can you cover those mortgages if one or more were vacant?