This may all be moot. Bank may not give you the loan with so little equity.
Timing is everything. Personally, I wouldn't think it's the right time...you're already pretty leveraged. You're not experienced in the landlord business. If things go a little sideways, you're done, and selling at a loss, most likely.
You mentioned changing the numbers slightly to account for not having to renovate/etc., but I would do the opposite, and assume that you won't be as efficient as the current owner, who has done this for a long time.
Plus, you don't mention anything about a sinking fund - especially for a building of that size - and I'm wondering what it would be or where it would come from since you don't have the down payment and already have significant leverage. Again, I'd have a slightly larger one at the outset as you learn to adjust to being a landlord and may need to hire more out, etc.
You don't give your overall financial picture, though, just a sense of it.
Urgency is the mother of most bad financial decisions...don't let it get the better of you. Take your time, and if you're not really sure about it, be fine walking away. There will always be other deals.
I'm not just saying that; I had to walk away from a fantastic deal recently. It probably would have worked out phenomenally well, and it was only cash going in. But I got into the deal far enough into it that there was urgency, and just not enough time for diligence. So I passed on it, even though I'm pretty sure it'll work out. Better that than taking a big, fat loss because I missed doing my diligence.
Perhaps I misunderstand how seller financing works, or my post was poorly written.
So for the situation I described, I would put 10% down, the seller lends 90%. There is no bank to approve the loan, right? The seller is the bank.
Then at the 5 year mark when the balloon payment must be made to the seller, then I go to the bank. At that point, I would have paid almost $30k against the principal, plus my initial down payment, so I would be at roughly 27% equity. The bank would not require an additional down payment, correct?
I didn't change any of the numbers. I rounded them just to be vague and not end up in any confrontation about sharing information on the internet (he did not ask me to keep the information private). I actually rounded to make the numbers slightly "worse" for me, certainly not to try to fudge them. The lowest year of rent since 2012 was $19.5k, and that was a year they put on a new roof and renovated the top floor. The average is $22.5k. Would it make sense to count those null months for that unit as vacant months?
The property was purchased by the current owner 8 years ago and in need of rehab (hence the units being unoccupied for periods of time). Should I expect that they will be in that condition -- meaning unlivable and requiring extensive upgrade costs -- consistently? That seems pessimistic, but I'm willing to listen to experience. I didn't state it in my post (sorry), but I included that 5% of rental income would go toward Capex/repairs, but then clearly was doing some inadvisable accounting in other places.
What info would be helpful about my overall situation to make it easier to analyze? After a down payment, I would still have ~$13k cash if needed and would probably keep about that much available at all times for the property.
My non-mortgage loans are approximately $20k at 2-5% interest.
And perhaps urgency was the wrong word. I basically meant that I wasn't actively looking for the opportunity, and so I wasn't really ready to jump onto this forum and ask for advice, since I haven't interacted with anyone here yet.
You don't appear to be accounting for Capex and management expenses in any way (ie, how much time will it take you to take care of the landscaping and shovel snow? That's a job, not an investment).
I'd look at it as:
$26k gross rents (these are ~$600/mo units?)
Minus -
$3000 management/maintenance. It's going to suck at least a little and you should expect to put in significant time if you DIY. A management company will charge you 8-10% plus some costs when they call in plumbers or electricians or what have you.
$3000 Capex - and this is probably being very generous. Lots of things go wrong in a low-end apartment building situation.
$10k insurance, utilities, taxes
$12000 principal and interest. You'll need to roll closing costs into the loan, presumably, and for the sake of simplicity I'm just going to assume a 30 year amortization with zero down.
That puts you at about -$200 per month.
Even if this was a reasonable deal (it's not), not being able max tax-advantaged accounts says to me you're not ready. Stick with simpler investments and change your lifestyle - having a car loan is a sign that you're not really serious about this whole FIRE thing.
-W
The units are not all the same, but they rent for an average of $585.
I was accounting for 5% Capex/repairs. Should I increase that number?
What sort of costs would be associated with a low-end apartment? I'm not being purposefully obtuse when I ask this. The current owner replaced most of the appliances, the roof and gutters, windows, toilets, bathtubs, plumbing, most of the flooring, electric service, heaters. That is why I was only accounting for repairs at 5%. He is fine with me bringing anyone to look it over.
Management consists of screening tenants, handling complaints, and arranging for repairs, correct? I would plan on doing that myself. Same with snow removal / yard work. The yard work is barely anything, especially since I live so close. He currently has a tenant pay a neighbor 10 bucks to trim and mow, and there are about 30 yards of sidewalk that need shoveled when it snows. I would basically consider them paid exercise. And yes, I realize this is not passive income. And that is fine. I'm not at a point where I have something more profitable I could be doing, so I can think of it as a side job. Maybe I'm naive. But it is a fair point. Should I basically bill myself and factor that in, and only pursue it if the numbers come out as a solid passive investment after that?
None of this is set in stone. I could make an offer lower than what the seller suggested. Or I can request a longer amortization period, or ask the seller to cover closing costs, or whatever. Obviously I don't have the experience and that's why I'm here. What price and amortization period would allow the numbers to work from an objective outsider perspective?
I appreciate the criticism. Our cost of living is around $25k/year for the two of us, and about $4k of that is toward vehicle expenses to allow me to commute thirty minutes to a job that pays $30k more than the same job that is ten minutes from where I live. I know a lot of people on here live within walking distance of their job, but I do not, and at this point that is intentional as it is the most financially advantageous thing to do.
On the other hand, the car was bought before I had any inclination about personal finance, FIRE, frugality, etc. Anyway, it was bought new and is one of those deals where at this point the best option is to drive it for 20 years rather than take a huge loss selling it.
Essentially what it comes down to is this: with the cash I have on hand, I could make a down payment on this property (or a different one), or I could pay off my car and student loans. Based on the first two replies, it seems that your general advice for me is to pursue some lower hanging fruit. Or more specifically, if I reach for higher fruit, this particular one isn't a great choice to reach for.