At what point does this become a good deal?

[brandino29]

There's a small SFH that I'm interested in as a possible rental but I'm not sure if I'm being objective or not so looking for some advice. 

The house is a small 2 bedroom in a good neighborhood directly across the street from a good elementary school.  It's older (1940s) and has some typical repair needs but nothing major that I know of.  It's been on the market for nearly a year, and a few months ago my wife and I checked it out with a realtor.  We came to find out that it's currently owned by a former co-worker of my father's who moved out of state for work. 

The house is listed at $62,500, having been dropped a couple of times the longer it has sat.  I emailed the owner yesterday asking if he may be interested in an seller-financing deal on the place and he said he might be.  I began thinking of seller-financing because I don't want to tap our emergency savings for the 20% down required for a typical bank financed mortgage as I'm about to quit my job and go back to school full-time for a few years.  In the meantime, we'll be living on my wife's salary and the income off another small SFH rental, having some additional monthly income during this time would be helpful.

I believe the place would rent comfortably for $800/month (we purchased our current rental which is a similar house at $67k and rent it for $800).  It's a low COLA and rents typically range from $400 to <$1,000, although most anyone around here able to pay $1,000/month is likely going to buy their own place.

So, here's my question: at what terms (purchase price, interest rate, and term length) does this lean in my favor, if ever?

For example, according to the Zillow home mortgage calculator, if we financed $60,000 for 20 years at 4.5%, the monthly payment would be $380 in principal and interest, $494 including taxes and insurance.  That would mean it would be cash flow positive by $300/month but it obviously doesn't meet the 50% rule.  Terms that do meet the 50% rule are $60k for 25 years at 3.0%.  I've not talked any specifics with the owner and have no idea what he would be willing/interested in.  I can't imagine a seller being excited about 3% interest for 25 years considering CDs are bound to exceed that rate at some point in that same time frame. 

Is there a viable option here or am I reaching too hard?

[Blindsquirrel]

    I would widen your search a tad and see what similar foreclosures and short sales are going for in your area. Sound like the price is retail and the rent yield is meh unless it is a high appreciation area which it is not given that the place is still there and the price is dropping. Never buy a place because the financing is sooo good. I did that once and still owe on that dog.

[waltworks]

Is there a reason you can't just do conventional financing? If you financed the whole $60k, my amortization calculator says you'd owe about $300 a month for P&I @ 4.25%. You'd probably have to put down $15k or so for a conventional loan, of course, but IMO if you think it'll rent for $800, it's a decent deal (and better than your current rental!)

Edit: saw the reasoning for the seller financing now, not sure how I missed that. IMO, if you can't come up with $10-15k for a DP, maybe you should be doing something else that requires less leverage/risk.

-W

[daverobev]

1.5%-ish rental income vs total purchase price is a good guide for a SFH, I guess.

So for $800, you'd want to pay - inc. renos - $55k or less. Or there abouts.

[brandino29]

    I would widen your search a tad and see what similar foreclosures and short sales are going for in your area. Sound like the price is retail and the rent yield is meh unless it is a high appreciation area which it is not given that the place is still there and the price is dropping. Never buy a place because the financing is sooo good. I did that once and still owe on that dog.

Definitely not in a high appreciation area. 

Edit: saw the reasoning for the seller financing now, not sure how I missed that. IMO, if you can't come up with $10-15k for a DP, maybe you should be doing something else that requires less leverage/risk.

-W

That's what leaves me wondering the most.  I think it would be a great rental but we're just not in a position to go about it conventionally with 20% down.  On the one hand I think of the seller-financing as an opportunity to jump on a reasonably good deal that I wouldn't be able to otherwise, on the other I think I'm trying too hard to make it a good deal and over-leveraging in the process.



Thanks for the insights! Just another one of those times I wish I had better prepared years ago with higher savings to take advantage of opportunities now.