Newbie needs help to structure deal - Posted by Michele

Posted by Tom on July 16, 2001 at 12:56:54:

Why not ask the seller to carry a second to cover the 15%, pay 5% yourself, and ask the bank for 20%. Also, ask the seller to fix the roof up front, or have the bank set aside the roofing money from the note.

Unless there is a significant different in interest rates, go for the 25 or 30 year mortgage, but pay it off in 15 years. That way, you can always drop back to the 30 year payment amount whenever you have a cash flow crunch.

Newbie needs help to structure deal - Posted by Michele

Posted by Michele on July 16, 2001 at 12:40:57:

We have located a duplex in St. Cloud, Florida that we are quite interested in. We have excellent credit and enough
$'s to put down although we really would like to put only 5% (or nothing) down if possible. Want to save the cash to enable us to do multiple deals - however prices are quite high here.

Dilemma is this: Asking price is $105,000. Listing Agent says they already had one offer of $110,000 that fell through due to “technicalities”. We thought a GRM of 7 was reasonable and we offered $94,700 (allowing us $4,000)
for fix up as property will need new roof soon. Annual rents are $13,800 and bldg is 1,540 sq. ft. Agent is of course laughing @ our offer - we asked for a counter.

Questions: 1. Does anyone have experience in this area with GRM & cap rate - are we too low @ GRM of 7?
2. Can anyone see a way to make this work without putting 10 - 20% of our cash into it? We’re trying to keep the mortgage
to 15 years (is that foolish?)

Your thoughts would be greatly appreciated as we are just starting out.


Re: Newbie needs help to structure deal - Posted by SueC

Posted by SueC on July 16, 2001 at 14:52:42:

My understanding is that you can use GRM for a rule of thumb, but you need to calculate the cap based on actual expenses, at a return that is acceptable to you. You mention the roof, but what other delayed maintenance is there? The amount of gross rent doesn’t tell much as it doesn’t take those fctors, plus rental costs, vacancies, tax hikes, etc. into account.
The way to conserve your cash for other deals is to find better deals where the seller is more motivated and you don’t have to put in more cash. You have to ask yourself whether you are planning to make your profit going in, or just let the rents pay off a mortgage and make your profit some day ten or twenty years from now. That should determine your strategy.