Second Opinion Re: 5 Unit.
I am looking at a 5 unit building in a decent residential neighborhood and am in need of a second opinion.
The asking price is $450,000 with monthly income of 4400. Monthly owner expenses are $1100.00.
Based on rates quoted from local lenders, this bldg should net at least $1000.00 per month. Good deal, right?
Problem is, lenders I have spoken with provide 75% LTV, max. I only comfortably have 40000 in cash - not quite the 25% necessary, plus closing costs.
What other creative funding options should I be looking at before movin on? Many of the building tenants are long term (but no leases). I also have two sf rentals with $100k total equity, my credit is over 720, and I have a good job paying well over 100,000.
Thanks in advance for any suggestions.
First,
I would be looking at the schedule E to see what the yearly expenses are and then any deferred maintenance on the property.
Second,
I would only buy one that was 75% LTVf(80 at the outside) and the cap rate should be at least 10%
That said,
You could ask for owner carry first or second to make the numbers work.
You could do a "master Lease" where you pay the owner X $ each month for a specified period of time with a pre negotiated option price at the end of the 5 year lease agreement. THis would give you time to improve the cap rate and rate of return on the property bringing up the value and making it easier to get financing for the option purchase price. Additionally you will find out if the property will work for you or not.
You could get a partner and do an "equity split" he puts up X and in return receives Y$ and or tax benefits on depreciation etc.
You could take over the seller's existing loan "subject To" and pay him for his equity. I would suggest putting the property into trust for that.
You could find another lender or put an add in the paper 8% interest secured by first mortgage on rental property. (then refi as soon as you can
There are always at least 5 sloutions to every problem if you look hard. Setting the goal of five will get you thinking and looking.
Best of Luck
Randall
[ Edited by Stockpro99 on Date 02/18/2004 ]
If the seller is willing to hold a note for say 15% of purchase price, what typical terms should I expect to get?
I'll get the Schedule E from the owner next week to verify income and expenses and will try to negotiate the sale price down based on deferred maintenance and low cap rate - this should test how motivated the seller is.
Thanks, Randall.
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It is always a pleasure to find an informed and constructive forum on a topic of interest. Congratulations to all posters at TCI!!
RD
Are all units currently rented?
One thing I have seen done in the past is take one unit and use it as "storage" or "wash room" which would move you from a five unit complex to a FOUR unit complex in most appraiser's minds which would be either FNMA or Freddie Mac approved -- FNMA and Freddie will do up to 4 units, but not five -- This may open "conforming" financing to you which should create better financing options.
Just a possible idea.
Thanks for all of the input.
I let the place go - margins just too slim for me and sellor not budging.
Onward and upward!