BiggerPockets

There's a little rambling here, but I want to get all my "facts" out and see if anything comes up about my logic and direction for the regulars here:

My plan was originally to acquire SFH for the appreciation only, maybe a little cash flow. The reason was my comfort zone -- however, I looked ahead and realized that I was willing to push my comfort zone a bit in exchange for a combination of instant equity AND cash flow. In other words, purchasing something at a discount that also cash flows nicely. (currently I own one house worth 90 that I got for 76 and it rents for 695 - about -500 per year cf and one I am closing on next week for 65k after repairs, rent for 795 and will cash flow just the opposite, or a little more, like $500-$600 per year) -- house is worth 85-95k

Now I'd stayed away frm anything over 4 units becuase I knew that if I didn't like being a landlord, I'd have tougher time dumping them due to more difficult financing (in general). Well, this week I said "F*** it!!" I put 2 offers -- one for an 11 unit for 198k and another for an 8 unit for 184k. Owner of 11k is very wealthy, just wants to get out of it, get his money back. Appriased 2 months ago for 255k, he paid 260k for it. 1 unit vacant in each bldg., each building "base case" cash flows at 12,500 per year using my "line item" excel calculator (it shows 57% expense to gross rent vs. 50) and when I do a 50% analysis, they cash flow 15-17k per year. (I have financing and inspection contingencies on both and my buyer's broker holding my hand a bit) --

with approx. 100k down, my cash flow return says 25%. I like this. It's VERY strange that 4 units in my area are going from 110-160k but these bigger places are at such a lower "per unit" price. I've found a few since, 5-7 units going for 140-200ish.

Financing at 5.75% / 30 year (5 year fixed) -- this is the thing I didn't know -- that there's almost no such thing as completely fixed commercial lending on bldgs over 4 units?? I'll need to put 20-25% down, depending on how the financials look. What I'd LOVE to do, because they seem to cash flow so nicely, is come up with a way to get my downpayment back -- My closing costs are very low ($500 give or take) so I don't mind closing then doing something after the fact -- any suggestions??

I'm doing margin loans vs. taking cash out for the DP -- I don't like the idea of liquidating that much (100 plus k) becuase the market went down, and I'd be selling toward the bottom (presumably) -- so I'm going to do margin instead for now which only accounts for 25% of what I have in there, so there's no margin call risk or anything.

A local property manager who's been mentoring witll take care of the 11 and 8 units -- but I plan to negotiate -- the man who takes care of both (and owns one) now, would charge me 10% for mgmt. but NO additional for getting tenants in -- whereas my "mentor" is I believe 8% on both ends. Hopefully with a sudden gift of 19 units (or 21 if I turn over hte houses) will earn a discount.

That's about it!! I'd love your feedback --

I understand that the two I already have aren't very good cash flow wise: that's why I'm buying the 19 units, because they are. I was just reviewing a couple of chapters in your book 15 minutes ago, by the way! Funny you should post!!

What might you suggest with the two current ones? Now that I KNOW I'm ready to say "no" to anything less than $100 per door / 2% rule, etc., what could I do with the two I have that do NOT meet thses? Perhaps sell with owner financing? Get cash flow that way plus a premium?

Really appreciated your book, by the way -- I got some chuckles from the cynical stories too!

Thanks Eddie
The owner lives an hour away and says he doesn't want anything to do with it any more. He's got some more up where he is locally. He has put 175k into it over the past 3 years.

One of my "mentors," (the property manager I spoke of) had considered buying it at a much higher price 2 years ago but did not--and he told me he thought it might be a good idea when I told him of it. Obviously this is all "academic" -- but I will be inspecting them myself next week, with a follow up building inspection later on the same week as well as a code inspection.

The man who manages the 11 unit also owns the 8 unit, and is the same broker that sold me my first residence back in 2001. Though he's selling the 8 unit to me, he actually considered buying the 11 unit when he found out the man was selling it for the amount of the loan he had out on it (198k) -- now I'm not stupid--I know not to take any of these facts too seriously, the inspection and code check as well as the financials will tell the story. Meanwhile, I do have a very conservative team on my side --

Meanwhile, both meet all the "quick numbers" (<25k per unit, 2% rule, 50% rule, 100 per door, etc.) -- again, I know not to use these a blind green lights, but it would seem things are ... on the right track going forward, no??

Please, keep playing devils advocate with me -- I certainly am new, and although I've soaked up an immense amount of info, I have NOT SOAKED up an immense amount of EXPERIENCE and I want my initial "soak up" to be positive!!

Thanks Mike! I usually tend toward TOO MUCH info!!

11 unit
Gross rents $5,500
Purchase price $205,000
Rehab needed - unknown until inspection - owner has put 175k in, but I'm allocating 5k minimum
Financing terms for BOTH units (including arm details and cap, if any) - 30 year, 25% down 5.75% commercial 5 year then converting to 1 year arm. My banker tells me that I can come in before conversion and for $250 loan modification fee can lock in another 5 years at prevailing rate. May be able to give me 20% down if numbers on the buildings work.

8 Unit
Gross rents - $4,833 per mo.
Purchase price - $183k
Rehab needed - same as 11 unit, allocating 5k but inspection will give me out or reneg. opportunity if anything unexpected comes up. new siding, energy efficient windows, roof and boiler within past 5 years.
Financing terms (including arm details and cap, if any) - same as 11 unit.

CASH FLOW -- i double checked agains 50% rule, but using my spread sheet and doing "line by line", expenses came to 58% for the 11 unit and 57% for 8 unit. Cash flow for 11 would be 15k per year, while 8 unit would be 13k per year (rounded up or down)

recent appraisal on 11 unit this year was 255k. No appraisal on 8 unit, but town has it assessed at 230k. (that's probably irrelevant)

Thank you Mike. By the way, Mike, in your book, you say, "on the LOWER priced units (under 50k), you like to get 100 per month per door. Do you have a different standard on higher priced units? Thanks!

Mike
Thanks for the heads up about the cap. I need to add that to my checklist -- Hopefully it's similar to hwat I have now with the two SFHs. With them, my loans are 3 year ARMS, 5.25%, 2% cap per each 3 year period, 6% total cap.

I know the loan rate is unusually low. This is kennebec savings here in waterville maine -- a very stodgy conservative bank that keeps ALL it's loans in house and has very low closing cost. Total for each of my SFHs is around $350 (not inc. title search and insurance).

Thanks for your time and input. I heard someone say on the forum to "approach each deal" like you have everything riding on it ... which I will certainly do.