How Would The Pros Make This Work?
How can I make this work. Owner is looking to unload many units with tenants in them. I’m looking to purchase 12 units.He’s asking 82000 per unit . Tenants are paying $750 per unit. Owner is willing to give discount for multiple units. Tax rate is 3.5%. Assoc fee is not in place yet but figured at approx $75 per unit (with common insurance), but may change. Want to make this a no money down deal, with owner financing the down. Positive cash flow is a must.
Also is there a formula a bank or mortgage co. goes with to figure how much they would lend on something that generates $9,000/mo gross income? Let me know if I left anything out. Thanks to you all
Gross income is irrelevant, you need the "net" ask to see a schedule E for the last couple of years.
Additionally what about deferred maintenance? more than 4 units and you have to to seller carry of commercial note not conventional.
Ask Hibbey for his ideas, he has a lot of them.
Correct me if I am wrong but from what I heard from my mortgage broker, most lenders required you to put at least 20% down on an MDU. Lenders will first look at net operating income of the complex before anything else. They figured 42% as an operating expenses even though the actual expenses might be lower. On your formula, you might want to put both the actual and the 42% as your expenses and see what is your cap rate or cash flow come out to be.
Just looking at the $82k purchase price/unit and $750 rent/unit immediately raises a BIG red flag in my mind. That works out to 9x gross annual rents. Some people will go as high as 7x or 8x but I think it is almost certain you are going to get yourself into a major negative cashflow situation at 9x. Maybe you have deep pockets and can hope for appreciation. If you're hoping for cashflow, I would move on or I think you are asking for some serious financial pain.
I just want to give you one more thing to consider. I recently spoke with a mortgage broker for Washington Mutual and they look at the Cap Rate as one of the determining factors in making a loan. They will lend 80% LTV but with a Cap Rate above 10%, preferably above 11% on B and C type properties.
Just want you to make sure you know how much money you are going to ask the seller to carry back.
I thank you all for your replies!
Well thinking back, the owner did mention he would offer a discount if multiple units were purchased. Suppose I offer the owner 57k per unit, ask him to carry the 20% dwn with some interest with a 5-10 year balloon. (on the down)
(And would that method of down pymt satisfy a lender?)
He's looking to unload 300 units. So he might have room to negotiate.
Anyone know any good workable commercial loan lenders or brokers in the chicagoland area?
If anything, looking into all this will give me a feel for what works and what won't. And if the numbers don't work, I then ask myself, what can I get the seller to do to make the numbers work for me. And if the seller can't or doesn't budge, or doesn't budge far enough, then I will walk away.
So I am curious as to what the more experienced investors would ask the seller to do to make the numbers work for them.
Anyway, you guys are great, and I thank you all!
I heard someone call my name!
Stockpro99 is right....find out what the net income is. Add a "0" (to the yearly net income) and many would consider that a good price. Keep in mind, the seller will inflate the income and underestimate the expenses when you ask him, so ask to see his Schedule E from his tax returns for better numbers as was mentioned by stockpro99.
"Also is there a formula a bank or mortgage co. goes with to figure how much they would lend on something that generates $9,000/mo gross income?"
The DSCR (Debt Service Coverage Ratio) has to be GREATER than 1.20 for anyone to lend on it, and they'll prefer properties that are 1.5 and up. Keep in mind, properties with a DSCR of 1.5 aren't necessarily great deals. DSCR is figured by NOI/Yearly Debt Service
You didn't tell us about what the properties are. If there are 1-4 units per parcel it is a Residential deal. 5+ is commercial. They are handled totally differently depending on which they are.
As has been said, I'm also skeptical about the numbers....especially when you don't know the NOI and you're considering this deal. That is crucial. Based on the Gross income it doesn't appear to be great.
Most of all find out what the seller needs and wants. Is he doing a 1031? Sick of managing them? Retiring and sailing around the world? Find out what he's going to do with the proceeds and how much he'll need to do that.
You may want to go into it as a partnership and buy him out later on. See if you can get em on a wrap around mortgage also (with his portion in second position)
Without more info, I can't really offer any sound, specific advice. Keep us posted.
Thanks Hibby,
Yes i do have to get more info from the seller.
But what I do know is that they are 4 unit parcels, they're only seven years old, so everything is fairly new. The owner is the builder and he's turning over his present stock for proceeds to start another project. But another question is why would a builder put tenants in his units rather than selling them off from the start seven years ago?