Found My First Opportunity - Is "Interest Only" Way To Go?
Background: My credit is excellent and I have approximately $30K to use for investment and another $15K for reserves. Only debt right now is my home. No credit card or personal debt.
I am searching for a property to produce income $300-$500 a month for 3-5 years and then unload or keep (depending on how well it goes). Income is to be used to take care of upcoming child expenses.
Opportunity:
Sec 8 Housing with existing renter living in it. Built in 1981, 1700 sq ft single family home. Comparable Home Values are $91,000. Owner will sell for $84,000 and wants to get out b/c he claims he is not making any money. Come to find out he has a 15 yr fixed loan on the property.
Section 8 pays $850/month and tenant pays $50/month plus utilities, gas, and water.
Deposit is $500.
Current Rent: $900/month
Expeditures: $290/mo ($200 prop taxes, $40 lawn care, $50 insurance)
Mortgage pymt: $277
7 Yr ARM "Interest Only Loan" for $64,000. I will put up the remaining $20,000 for the down payment.
Rate: 5.125%, APR: 6.222%
Assuming the independent inspection goes well, this sounds like a good deal for me to NET $333 a month and a little more after I raise the rent after the existing lease is over.
What does everyone else think?
Did I get the right type of loan? Is an "Interest Only" the way to go to keep the note low and the cash flow high?
The way I see it is that I lay down $20,000 to Net $3996 yearly for a 19.98% return.
Beauty is that the current tenants love the place and do not want to move. If for some reason the properly goes vacant for a short time, the $277/mo note will not break me.
Thoughts?
Is there a cheaper way to finance to gain more CASH FLOW that what I propose?
Thanks in advance for your help!!!
The 7 yr IO ARM sounds like it achieves your objectives nicely. Low rate, low paymt, good cash flow, fixed for more than the time frame you intend to keep the property. Just remember that you will owe $64,000 on the property as long as you are making the IO payments.
There are other ways to gain more cash flow, but they come at a price . . . a higher interest rate and/or risk, and a loss of equity. The 7 year IO is a good balance between risk and cash flow.
BTW, the seller is not "losing money" due to the 15 year loan. The seller may be having a cash flow problem, but cash flow and saving/losing money is not the same.
Thanks for the solid advice, everyone.
I do believe the "Interest Only" is the way to go too.
I found out about the property through my friend whose wife is a Realtor here in Houston. Through her husband she knew that I had expressed an interest in REI and told me about the property. However, just like the Seller, she did not see how could I make any money from the purchase. I explained to her about the "Interest Only" and she sort of understood.
I believe the Seller of the property use to live in the property at one time. Then, he probably upgraded houses and someone probably told him to rent out his existing place and let someone else pay it off. To achieve this, I believe he contacted a friend who has information regarding Section 8 housing and got his property approved. Next thing you know, he had tenants with a nice guaranteed rent check every
month.
Though he was paying down the note and gaining equity by using a 15 yr loan, I think he had hoped to have some cash flow by renting. In short, he had the right idea just the wrong type of loan to meet his goal. Essentially, the guy is a blue collar type of guy who is just not familiar with the available financing type of options. Frankly, I was shocked that the guy owned property b/c he did not seem the type.
GOT A NEW QUESTON:
When I buy the property, rather than jsut simple lease out the house to the Sec 8 tenants, should I consider a "LEASE TO OWN" type of strategy. I am just now getting to understand the fine details of REI myself, but from what I have read so far, this might be a good strategy.
Can anyone explain to me the LEASE TO OWN" concept and why I see so many of these sort of signs around town?
Thanks!!
I Work for a major Bank and this product will fit you perfectly.
aggierob,
Before you sell any properties in Texas on a lease purchase, be sure you are familiar with the new law regulating these type of transactions.
See:
http://www.capitol.state.tx.us/tlo/79R/billtext/HB01823F.HTM