Poor credit - investment property - advice?

[scamutz]

Here's the situation:  My parents own an investment townhome and expenses are $1400/month - it rents for $1800/month.  They are looking to sell and I was considering purchasing.  They paid 170,000 - looking to get 185,000.  The challenge is that I took a beating in 2007 when the market tanked in FL and I got transferred to SC and ended up short selling my home and a second home.  Don't ask - I was thoroughly embroiled in the American Dream, making lots of money and spending more.  So - the situation now is I've got everything paid off, still making good money and looking for a wise investment for some it.

My goal:  Purchase the property from my parents - and keep their mortgage - or refinance it.  I'd be able to come out of pocket with around 15k and would be cashflowing 400/month....so that part sounds good, I think.  My challenge is that it took several years to get out of that mess, so my credit is pretty trashed (mid 600's)

Question:  I know that if I have them quit claim it to me I risk the banks calling the note due.  Is there a way other than getting financed for a new mortgage that I'm missing?  It is not an assumable loan.  I'm going to talk to the credit union tomorrow, and more money down is doable if I qualify, but I don't have enough to buy it outright yet.

Is there a big downside that I'm missing here?  Thanks for your thoughts!

[Another Reader]

That's pretty skinny cash flow on a townhouse unless you have accounted for all the expenses.  What's the PITI?  Are you including vacancy and collection loss along with a stabilized repair and maintenance expense?  How much have the HOA dues increased since your parents bought it and how much will they go up in the next few years?  How are the roof and the HVAC?  I would expect townhouse expenses to be near 40 percent for a newer property, primarily because of the HOA.  Over time, I'm not sure you would cash flow.

What's the interest rate on the note?  Did they buy the property as owner-occupied or as a rental?  These things may affect how interested the bank is in calling the note and how quickly.

Mid 600's is probably not going to work for an investment.

[scamutz]

That's pretty skinny cash flow on a townhouse unless you have accounted for all the expenses.  What's the PITI? 

PITI 1250/m, HOA 800/yr Maintenance 1200, Rents for 1800 - I was looking at ROI if I'm able to somehow get it with only $15,000 out of pocket

Are you including vacancy and collection loss along with a stabilized repair and maintenance expense?

Townhome was brand new in '08 so maintenance should be minimal - vacancy shouldn't be an issue, we're in a destination community and there's a rental waiting list at all times.  There will always be collection loss risk, but it's in a pretty high income area, so I would assume risk is lower.

How much have the HOA dues increased since your parents bought it and how much will they go up in the next few years?  How are the roof and the HVAC?  I would expect townhouse expenses to be near 40 percent for a newer property, primarily because of the HOA.  Over time, I'm not sure you would cash flow.

Roof/HVAC in great condition.  HOA dues haven't increased at all yet, so I suppose they will start to go up as the complex ages.  Can you explain what you mean by expenses being near 40%?  Of what? 

What's the interest rate on the note?  Did they buy the property as owner-occupied or as a rental?  These things may affect how interested the bank is in calling the note and how quickly.

Currently 3.5% and I'm pretty certain it was purchased as owner-occupied, though it's rented right now to my ex wife, they've never actually lived in it.  She's moving out into a sfh - the reason that they no longer need it.

Mid 600's is probably not going to work for an investment.

Thanks again for your thoughts.  Right now they're putting out $1400/month total.  Is my thinking skewed if I'm figuring that if I put out 15k - and I can cash flow $400/month or even $300, that it's a pretty decent return?

[Another Reader]

I think expecting more than a minimal cash flow or even a loss over time is unrealistic.  Everything has to go right for you to get the $400 a month.  Operating expenses, not including principal and interest payments, typically run around 40 percent of gross income for newer townhome properties.  You can self manage to reduce that number, but you will still have vacancy (even if it is just turnover time), collection loss, repairs and maintenance (including capital improvements such as paint, carpet, the dishwasher, etc.), and the taxes, insurance, and HOA dues.  Your HOA dues are very low, which says either your HOA does nothing to maintain the property because the owners are responsible, or that you will get large assessments when work needs to be done. 

You mentioned you are in South Carolina.  Is this beach property?  Is there another reason the occupancy is so high?

Generally, banks are not in the mood to foreclose right now.  Over time they will be very interested in getting out of that 3.5 percent loan, particularly if the loan to value ratio is low and there is substantial equity. 

[scamutz]

Not beach property - it's just outside of Charlotte, but over the SC line - much lower property taxes - fantastic schools - and a neo-traditional planned community.  Check it out....  www.baxtervillage.com

Thanks again - I really appreciate your thoughts.