Help on 1st rental financing deal - Posted by Shawn Wright

Posted by Nate on February 18, 2001 at 15:16:21:

Interesting…maybe I should go get a bank loan in Canada :slight_smile:

And just because you can’t find a deal with a reasonable cap rate doesn’t mean you should take this one. That would be taking the least-bad deal instead of a good one. Another reasonable option might be to wait until the market has cooled off and you can buy at a better price.

Just something to think about – I always like to play devil’s advocate.

Whichever way you go, good luck!

Help on 1st rental financing deal - Posted by Shawn Wright

Posted by Shawn Wright on February 16, 2001 at 20:58:19:


I’ve read Robert Allen’s Nothing Down. I’m ready to start looking for good revenue properties, but I have no cash to put down.

I do have: 25% in our home (although we had 25% down 7 years ago, we still are about the same or worse off due to falling markets locally), so getting a 2nd mortgage for the down pmt is not an option - most banks seem to cap out at 65-75% LTV for 2nds. (Canada)

I also have approx $25,000 line of credit at prime + 1.75%, but at 3% per month minimum payment, the payments would be too high for long term financing.

The most promising property I’ve found is a four-plex, with 2x2BR and 2x3BR and total income of $2450 per month, fully rented with long term tenants (6mo, 2, 4 and 6 years!). Income/Expense statement shows a positive cashflow of $20,800 annually before financing costs. Asking price is $199,000 - I offered $170,000, they countered at $195,000, I countered at $175,000, and they countered at $190,000 FIRM.

If I could finance 95-100% using a 75% first mortgage and the balance as a 2nd mortgage, I could see $100-300 positive cashflow, but if I have to use much more than 5% from my credit line, the monthly payments will eat up the cashflow.

The seller is a couple getting divorced, so vendor financing is not an option. There is an assumable mortgage, but the rate and payments are too high to consider, again unless I can get a low cost 2nd mortgage for the remainder.

I can’t seem to get any of the Nothing Down ideas to fit this equation, and I’m running out of time. I could accept the counter offer, and try to get financing, but I hesitate to do this unless I can be condifent that a solution can be found.

Any ideas?

Re: Help on 1st rental financing deal - Posted by Nate

Posted by Nate on February 17, 2001 at 24:08:35:

The question I have is, why you are so interested to get into this deal? If you paid $190K and the quoted income of $20,800 is right (might be a little optimistic - leaves only 29% of gross income for expenses) there is only a 10.9% cap rate going in. By comparison, the rate on your line of credit is 10.75% and it could go up. So it probably does not make sense to use any of the LOC funds because you would have minimal, if any, positive leverage. But without the LOC funds, you can’t do the deal. Ergo, you shouldn’t do the deal!

Re: Help on 1st rental financing deal - Posted by Shawn Wright

Posted by Shawn Wright on February 17, 2001 at 11:02:51:

Thanks for the reply, Nate. Actually my LOC rate is 9% (prime is 7.25% here), but the point is well taken. The only way this deal can make sense is if I can secure longer term financing for the balance, and avoid using the LOC except for maybe 5% of the purchase. I have countered back at $188,000 subject to financing, partly because it may be the only way I’ll find out what financing options are open to me.
As far as cap rate goes, anything over 10% is considered good around here - rents are quite low, and this is by far the best property of about 10-12 I’ve looked at so far.