Posted by Penny on April 16, 2007 at 10:39:07:
You basically have a deal that is 100% leveraged. I have included 2 links below on figuring your cap rate and the pitfalls of 100% financing that Ray wrote:
It is important to estimate what return you will receive for your efforts versus the risks you will encounter. The payments you make on your down payment need to be factored into your rate of return and whether you have positive cash flow.
If it were me, I’d steer away from any co-ownership options. My business attorney said he sees many poorly defined arrangements that cause headaches due to misunderstandings, unrealistic expectations of inputs on decision making and poor memories of what was agreed upon, sometimes despite what is on paper.
That said, others in this forum may have had great success going this route and can provide you with other suggestions and advice to minimize risk.
I have Ray’s Dealmaker’s Guide to Commercial Real Estate and it has excellent material on financing and deal structuring. I would expect the Mobile Home guide to be just as good.
Since you know how much you need to borrow, you have three main parameters that affect your payment and cash flow - the interest rate, loan term and the amortization period. Any loan amortizied over 25-30 years would give you primarily interest payments and a little principal paydown during the first few years. You could also specify interest only for the first few years, if you like, and even no payments for the first several months or even first year, providing the lender is agreeable. There are a lot of ways to do this. This will make your payments the lowest and allow you to manage your cash flow.
I would suggest analyzing what interest rate you can afford to pay versus what this person could get through other investment opportunities, as I don’t know how you arrived at a 12% interest rate. As you’ll see in Ray’s guide, the financing has a huge effect on whether a deal is a good one or a mediocre one.