1st Commercial Property - 42 Units

edcanfield profile photo

Hello All,



I would like some help evaluating this possible deal. My realtor knows the owner of a 42 unit building that wants to get out of the business and they agreed to not list it and give me the exclusive option to buy. It is in a small community and is 1 of 4 complexes but is by far the cheapest rent - currently has a 6 month waiting list. Only vacancies they ever have are for cleaning.



Asking Price: 1.3mil

GROSS POTENTIAL RENT: $204,360

Total Other Income:$11,040.00

GROSS POTENTIAL INCOME:$215,400.00

Vacancy(2%):$4,087.20

EFFECTIVE GROSS INCOME:$211,312.80



Expenses

Real Estate Taxes$36,011.00

Insurance $5,600.00

Utilities$21,500.00

Advertising $50.00

Repairs & Maintenance$8,000.00

Supplies $2,900.00

Auto Expense$100.00

Annual Report$25.00

Office Expense$1,200.00

Payroll taxes$1,500.00

professional fees$3,100.00

salaries wages$14,000.00

telephone$950.00

trash$2,100.00

laundry$800.00

work comp$600.00

Replacements & Reserves$10,500.00



Total Expenses $108,936.00



NET OPERATING INCOME (NOI) $102,376.80



cap rate with those numbers = 8.19%



Most of those numbers I got from a sheet the PM gave the owner at the end of July. Not sure what a lot of the charges are for. Also, I had last years sheet so I compared the two. Obviously I would have to dig deeper to verify numbers but how does it look so far?

Assessed value is $810,700 and taxable is $687,500.



What kind of Int rate should I look for? Type of loan?



Thanks!













Comments(28)

  • roberth30th August, 2005

    With a cap rate of over 8% this one should have a decent cash flow. The other numbers you will need to find out is the Debt Service Coverage Ratio (DSCR)
    This is the NOI divided by the total debt service. The number that you want is 1.20 or higher to qualify for financing. The normal LTV on this type of property is 80%, but it can go higher with the right situation. It is very common for the seller to carry back a portion (they probebly had a portion carried back for them also) to qualify for the loan. There are programs out there that offer 100% financing with some equity partisipation in a limited partnership. This is a good structure if there is enough cash flow and you have some time for rents to bump up.
    Good luck,
    Robert
    [addsig]

  • mattspence231st August, 2005

    You said you found a lender willing to do 75% to 80% of appraised. Most likely they will only lend 75% to 80% of the appraised value or purchase price. Which ever is lower. So if you get it under the appraised value then they will likely only loan 80% of the purchase price which would leave you still needing 20% or an owner carry second.

  • ashwin15th March, 2006

    Have you figured out the reason as to why the current owner is selling property that appraised for 1.8 Mil, for 1.3 Mil. ? That is a big chunk of money. is 1.8 is based on replacement or comparable market price ?

  • Mantis15th March, 2006

    Fantastic! Glad it worked out.

  • Ababish16th March, 2006

    Hey! Congrats on what sounds like a steller deal. Just soaking up the info here. What kind of terms did you set up with your dentist friend? A fellow 25 year old punk here trying to get in the game and sounds like you hit the nail on the head.

  • ashwin27th March, 2006

    Hey, i see a future Donald Trump in making

  • lovetoknow27th March, 2006

    I am still learning the game. Could you share some more details to your successful deal ?

    How did you study the market before buying the 9-unit ? also how did you find it ?
    How did you lower the tax on the 9-unit?

  • ashwin28th March, 2006

    Edacnfield,
    could you please elaborate on 100% financing? did you get all from bank or partly from owner or did you take second mortgage after closing?

  • niravmd15th April, 2006

    Congrats on your deal.

    what sort of financing did you get on the bank part of the loan?

    how big was the proposal you presented the dentist?

    where are you located?

  • Colinl2216th April, 2006

    Read the post from the begining. Ed lives in MI. Ed wrote about how he proposed his down payment deal witht he dentist. I live in CA, have my first two rental properties in Denver, CO and am selling these to help with a downpayment or trade on a 20 unit building in CA near me.

    Ed - I am 29, and you accomplished what I am trying to do right now. I want out or SFR and am looking for a aprtnership to buy a 20 unit apt. in my town (North West Los Angeles) Simi Valley, CA. Glad to know you found an agent that hooked you up with a money partner. You know of any possible partners for this deal I am working on?

  • wokdaddy3319th April, 2006

    ED

    You bring light to all of us aspiring young investors.
    Did you resolve the property management issue?
    Who currently manages the 40 unit property?

    Thanks for your wisdom.

  • InActive_Account20th April, 2006

    Jarod102/Keith Walker

    What kind of financing do you provide? Hard money or brokerage?

  • edcanfield20th April, 2006

    Yes I did resolve the property management issue, though it did take some sneakyness. The lady who was doing it was 72 years old and was doing it as a favor for her sister (the previous owner)...she made it clear that she did not come with the building. My lender would not allow me to run it since i did not have experience in this size. So I had the previous lady sign a letter saying she would be doing it.

    My first project after I took over was converting an unused storage room into an office. This took about two weeks and I moved the office into it and rented out the previous apartment/office before I was even out (they helped me move my stuff). My girlfriend is the PM. It works out perfect since we have a 1st grader so she works after our daughter gets on the bus and is home before she gets off the bus. Any sick days or special events, my gf just schedules her work days around them.

  • wokdaddy3325th April, 2006

    As a young father, what level of risk were you willing to assume, and how did you insulate yourself? Especially with your first commercial deal.
    I am currently finding myself in this predicament, between providing for a young family and a possible career change.
    Thanks again for your thoughts.

  • jfromchicago23rd June, 2006

    will be back.

  • shamund16th April, 2007

    Wow...read the entire post. Congratulations my fellow young investor!

    May be irrelevant now, but I am still trying to figure out how you came up with the cap rate that you did in the first post. Dividing the NOI by the cost of the buildng (1.3mil), I got a cap rate of only 7.8%. Did I miss something?

  • shamund16th April, 2007

    Edcan,

    Check out my posting under "group investing"......have any advice on the matter or would be interested in partnering?

    Darius

  • roberth16th April, 2007

    The most important comment was.....He built a team!

    Good Job,
    Robert
    [addsig]

  • pilgrim4now19th April, 2007

    Hey, good luck. However, I am not sure he is giving you such a good deal. I am also moving from single family to multi-family ownership and have looked at dozens of deals. Cap rate should include all fees including management. I do not see this. If you are planning on managing the units then you still have to pay your self, at least allow for this. Mgmt. is often about 10% of the gross. I think he is selling because he is tired of working for free. You are paying almost 31k apiece for apartments that rent for less than 500/month. Not a very good deal.
    Pilgrim4now in Texas

  • shasty23rd May, 2007

    Hey Guys,
    I have an "A" lender who will go down to a 1.15 DCR . Last LOI I recieved was a rate for 6.9% on a 30 yr AM (7 Yr Fixed rate). Another Lender offers PAY OPTION ARM loans on Multifamily with a minimum payment rate of 1% (with negative amortization).

    Susan Hasty, Mortgage Broker for
    Commerical Multifamily Financing
    Cash Flow and Due Diligence Consulting

    "Advice you can COIUNT on ~
    Results you can BANK ON

  • platty24th May, 2007

    Just quickly,

    you mentioned the MLS as the worst place to search, where else would you suggest

  • acuguy24th May, 2007

    I have read all the post with great interest but have a question about one of the stages of your story; You mentioned you bought 4 rental properties- two with 100% loans and two with 10% down. You then put 35k in upgrades into them and then refinanced them 1 year later at 75% ltv and paid off your HELOC. My questions is how is it that you were able to take any cash out with 75% refi LTV loans? Did these properties go up in value 30% in one year because of your upgrades or through market appreciation? Did you find an appraiser who inflated the properties values for you refi loans?

    Thanks for the info.

  • loandudefromsac31st May, 2007

    question...

    based on the original senario is this true ....
    let say you put 20% down and finance the rest at a 8% I/0. So
    Put 260K down
    1.040 mill financed payment of 91,573 a year 8% I/o subtract from the 102376.8 cash flow equals a return of 10803.00 a year
    10803/260,000 you put in = a return of 4.16%.
    Cant i get way better return anywhere else. CDs are 5.25 right?

  • kelvin_REI1st June, 2007

    RE: 1.040 mill financed payment of 91,573 a year 8% I/o

    91,573 / 1.04M = about 8.8% - i was wondering how you arrived at the mortgage interest only payment of 91,573.


    Quote:
    On 2007-05-31 21:17, loandudefromsac wrote:
    question...

    based on the original senario is this true ....
    let say you put 20% down and finance the rest at a 8% I/0. So
    Put 260K down
    1.040 mill financed payment of 91,573 a year 8% I/o subtract from the 102376.8 cash flow equals a return of 10803.00 a year
    10803/260,000 you put in = a return of 4.16%.
    Cant i get way better return anywhere else. CDs are 5.25 right?

  • hunter9991st June, 2007

    I am very new to large deals. Being so, I am not familiar with the types of available for larger properties. Other than the obvious immediate cash flow benefits, Is there a reason why you chose a interest only mort that balloons in 5 years? Did you do this to free up more cash to pay back you investors? Are you concerned that it will be difficult to re-finance?

    On second thought, perhaps not. Since, in theory, you will have paid both investors back (20% equity) plus you will have paid down the mortgage with your extra 12K per year (~5% equity) plus appreciation. So you will qualify for rates on loans for 75% LTV.

    And I think the statement of the ttl payments of $91573 on an interest only at 8% was actually on a prin + int loan.[ Edited by hunter999 on Date 06/01/2007 ]

  • cjmazur21st May, 2007

    do you report the profit on your CA return?

  • rglover5486th June, 2007

    Ruby,

    First of all, Im assuming that you want to split an established monthly payment.

    By paying on the 1/2 on the 10th & 1/2 on the 20th, you will reduce a 30yr loan to around 26 yrs. So it does make a difference, you just need to be sure that the lender posts your payment on the 10th...and not just hold it. Its actually very troublesum for the lender, if you dont commit and just want to pay as you have extra funds.

    I have a mortgage where it is set up bi-weekly (electronically), the banks do it, I actually had to pay them $350 to setup like that. Of course, you can do it for free (thats what you are doing), but you need to be diligent.

    Good luck

  • ypochris8th June, 2007

    As was stated before, it really depends on how the contract is written and when the payment is posted. I am currently dealing with Countrywide, they seem to be buying up all the mortgages, or at least the servicing rights. If I make a payment on the 15th, they dont post it until the first, so it does me no good to consistently pay early.

    By contrast, in land contract type deals, I send in an accounting with each payment, easily generated on my computer. Interest is figured to the date of the payment, deducted from the payment, and the rest is applied to the principal balance. So every day I pay early saves me a bit.

    On my HELOC also, the principal balance is reduced on the day I make the payment. So it depends on the lender, or the contract terms. It all comes down to when the payment is posted to your account.

    Chris

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