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Anatomy of the -6 Homes-deal

October 23rd, 2013 at 07:47 pm

Hi all,

Lots of questions on the 6 homes deal.

Here are the details.

I bought 6 homes as a 'package' from one guy 4/26/2013. . He was a senior real estate investor who had 'made his money' and just wanted out and was moving to Las Vegas. I used an 'old time' realtor who knew the town and headed up the Landlord Association. He was very well known in town and 'knew everyone'. All homes were rented. 4 had renters who had lived there 7 years or more. 2 homes had renters who were a year old (rental status). Seller owned these homes for 12 years. One home was fully rehabbed (fire years ago). Homes were maintained reasonably well. All homes were Section 8 and are in working class areas. Homes are approximately 1000-1400 square feet. Most have basements.

Purchase price $275k
I put down $30k
SELLER CARRIED the loan (agreement for deed) .. $245k at 3.15% over 5 years (the loan will be fully paid off in 5 years)

I am not able to pull out any cash flow on these in the first 5 years in order to meet the short amoritization. In fact (per chart below).. I may have to put in up to $1000 a month. *I have the income to do this** Currently I have to put in less than $1000/month

Safeguards built in the deal

1. If I default I have 60 days to cure. If I do not/can not cure,. seller can only take the homes back.. no recourse against me personally
2. I worked in the deal that I can pull out 'fully paid off deeds' every 14 months . So in another 8 months I will get a deed to one of the homes and can sell it or do with it as I please at will and it will NOT be encumbered by any debt. If I default. the seller can NOT take these homes (that were pulled out) back. I am 6 months into this deal already.
3. Section 8 gives me some more confidence with rent (thought it comes with pitfalls too)
4. I retained a local management company who runs all 6 homes for me
5. I have placed $6,000 in escrow for large repairs not to be used (this is based on reviewing prospective large costs, roof, water heater etc and the current shape of the homes)

My plans with the homes

1. Remove 3 homes from Section 8 as they come up and folks move out. Section 8 has a rent freeze and homes can attract non S8 renters. We are removing one now -in process
2. Separate out the 3.5 car wide garage and rent it separately (in progress). I get no rent for this garage currently and it not used.
3. Baseline costs and get maintenance repairs slimmed down as much as I can
4. Hang on. This will be tight and scary the first few years.

Chart below.





Posted in Background, 6 homes-rentals | 6 Comments »

6 Responses to “Anatomy of the -6 Homes-deal”

  1. momcents Says:
    October 23rd, 2013 at 08:08 pm 1382558886
    1382558886


    Wow is all that I can say. Looks like you've got a plan in place and probably buying a "package deal" from a trusted individual saved across the board (think about closing costs on each one of those!). We've managed rentals in Westmont, Berwyn and Cicero and never dealt with Sec 8. The largest building was 8 units. Have you kept the maintenance man and property managers that the previous owner used?

    Thanks for sharing the details, I wondered about it. In another life I might have done something like this. I've got college tuition for five on the horizon, so my fate is sealed. Smile

  2. Petunia 100 Says:
    October 23rd, 2013 at 09:09 pm 1382562598
    1382562598

    Sounds like you made a very smart purchase. Smile

  3. Rachael777 Says:
    October 23rd, 2013 at 09:29 pm 1382563774
    1382563774

    The seller managed these himself but the 'old timer' realtor refrred me to a very good management firm and they are managing the homes. I only get one check a month (across all 6). 100% rent collection. Only issue is we vacated a property (high maintenance tenant) at a bad time (now)and I am concerned it will not fill by the 1st. The seller has also made himself available to the property manager (they met) for any questions issues and that has been useful. I am thankful and scared (wish I was on year 3 or 4 of 5 not 6 months into it.) Smile

  4. momcents Says:
    October 23rd, 2013 at 10:10 pm 1382566231
    1382566231


    What are the tax benefits of this deal? Just curious ... can you tell?

  5. Rachael777 Says:
    October 23rd, 2013 at 10:53 pm 1382568815
    1382568815

    Hi there. tax advantages are much the same as a normal realestate transaction..I have about $8k interest and $12k tax write off per year in addition to all the other 'expenses' and depreciation. We have not figured it in full yet but I should be incurring a 'net loss' for tax purposes for some time on this deal which will offset my own income. After these are paid off I lose the $8k interest but still can deduct expenses, taxes from the rental income to further reduce that income on my taxes and once I leave my full time job I will no longer be subject to the 25k cap on losses (my accountant mentioned this. I am not clear on the details yet). I want to "be able to" leave fuill time work in 5 years but will not necessarily do so ((in fact it is unlikely I will do so.. working keeps you young)

  6. LivingAlmostLarge Says:
    June 12th, 2014 at 05:46 pm 1402595168
    1402595168

    How do you qualify for loans on rentals like this? How does it work on normal incomes?

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