The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: KarefulKactus15 on July 08, 2019, 12:44:09 PM
-
Hi All,
Wanted to get your thoughts on this before I acquired any more details.
A coworker put an offer in front of me. Gave some basic details to think about and can get more if needed. A short back ground, he pretty much acquired a camp ground 1.5 years ago by way of his father being ready to retire and no one else in the family being interested. From his side, he doesnt really want to deal with it or be tied to the location. (Hes commuting 2.5 hours a day and managing this place and working a full time job)
Currently it produces 165,000$ a year from 28 camper slots (Renter pays their own power) and 2 cabins. Currently 100% leased, most long term. (Pretty riverside location in countryside).
Hes willing to owner finance at the following terms:
Owner financed:
2,000,000$ Purchase price
0$ down
3.5% interest
30 year
I think at the end of the day, he wants stable headache free money and to spend time with his family for the next 30 years more than he wants to be a business owner / landlord. As with anything, the business and real estate would be the security that is re possessed if the mortgage is defaulted on.
Im sure some expenses have been left out. But in general, would you guys follow up on this and get more information like profit and loss and tax documents on this operation?
Cash on Cash is strange to calculate with 0% down....
Share your thought!
-
You need a full set of books to see the complete finances on the place before making any kind of decision. Expenses I can think of off the cuff will include; utilities, taxes, mowing, lot & drive upkeep, building upkeep, any employee wages, insurance, etc.
A big ticket item on campgrounds can be the sewage system. If it's not tied into municipal sewer, it may have a very large septic system or sewage treatment system that could be very expensive to replace or keep up to current standards. Same deal with the water system if on a private well, although not quite as involved.
If there is money to be made, the no down payment and 3.5% interest sure sounds sweet.
-
It sounds like 1 vote for at least getting more info.
Water is well -
Sewer I didnt ask, I imagine if we are running well, its in a remote location also using septic.
For maintenance labor cost - Its currently being traded to a resident onsite in exchange for free rent. This covers all low skill jobs. If I were to evaluate, I would use a standard rate and not a discounted barter rate for maintenance cost.
I imagine when everything is said and done, the margins arent as large as one would expect on a 2 million dollar purchase. But 0% down owner financing....
-
Paying the note, even at 3.5%, is going to cost something like $110k/year. So the key here is going to be to figure out what the expenses are (if it's been in the family this long, there might be some serious deferred maintenance) and then verify if the income numbers are correct (ie, get a look at their taxes/records).
It could be that it's only costing $10k a year to take care of the place, in which case this is a massive free pile of money every year. It also could be that it needs new everything and the income numbers are grossly inflated or something. Reality is probably somewhere in between.
If it was cash flowing at least $20k a year, I'd probably do it, since you can always walk away/hand it back if something goes really wrong.
-W
-
I would certainly be interested in getting more information. There isn't a red flag so large that it would prevent me from getting more information. Fishindude had a pretty good "off the top of the head" list of things to ask about.
-
It's definitely worth looking into.
When you don't have your own money in the deal it's particularly easy to walk away.
Do your homework because a foreclosure does make other paths harder to achieve.
-
If you are really interested in the property, you may want to think about paying for an appraisal once you receive a copy of the books. Not only will it give you a value for the property but it will also give you a better idea on the cap rate (I don't know enough about camp grounds, but you will get an idea of the return is greater or lower than other forms of real estate in your area).
The appraisal may as for a purchase price, but see if you could get an appraisal without. If not, then you'll easily know your cap rate based on the $2MM purchase price anyway.
-
Alright - I'll gather more information specifically tax records accounting docs.
If those check out and maintenance isn't deferred I'll look into the formal appraisal.
-
I'd ask for at least the last 5 years returns. Even further back to '07-'11 if possible.
100% occupancy rate is IMHO unrealistic. What is his true vacancy rate on the year?
Just be aware that the RV industry is VERY dependent on gas prices and during economic downturns suffer greatly.
-
As someone currently going through an owner-finance nightmare, insist that payments go through an escrow company.
I've had to resort to getting a lawyer to handle the payoff of mine (I'm allowed to pay off the property early, but that's hard to do when the owner uses stall tactics like pretending phone doesn't work, fax didn't work, and then just flat out refuses to talk to me). Using an escrow company to handle the payments and amortization would have been so much better.
-
I'd ask to see:
- Income over last 5-10 years
- Expenses over last 5-10 years
- Any deferred maintenance (as others said)
I'd be a bit concerned that this would be cashflow positive in worse economic conditions. Depending on where the location is, tourism like this can massively fluctuate based on the economy.
If they own it free/clear, that's much less of an impact than for someone with a $2M mortgage. Dropping revenue from $165k to $80k is easier if you don't pay $110k on a mortgage a year plus say $50k in expenses. A property that for them is cashflow positive might be a significantly cashflow negative property for you.
-
Conceptually, I'd think of this as a hybrid land investment / property management job offer. With no money down and a competitive 30 year mortgage, I'd be trying to think of this as more of the opportunity to purchase a business than a piece of real estate, with the analysis coming down to how much of my time would I need to receive how much income. The potential sounds there for this to be a good way to make some money if you can come into your own easy relationships for maintaining things, and if you last 30 years, you get the land to boot!
-
This is a super interesting possibility... please keep us updated!
-
It sounds like 1 vote for at least getting more info.
Water is well -
Sewer I didnt ask, I imagine if we are running well, its in a remote location also using septic.
Not necessarily. I sold a mobile home park a few years back with 30 units. It had a well but was attached to the sewer system. You can have that scenario.