BiggerPockets

If you have no cash, no experience, and bad credit, you're not going to do this by yourself. Commercial loans are at least 30% down right now, with limited possibility for owner carry. Money is incredibly tight. Lenders fear rates are going to jump, which will tend to reduce the value of properties like this.

Lets figure out if this is a good deal, first. I get an average price per unit of about $21,000. That's somewhat promising. Rents will need to be at least $400/month, average. $500 would be better. Less than $400 and this is a loser, even when its stabilized.

The $2million purchase price is just the start. This place has a huge vacancy. Why? Is there no demand? Is the place trashed? Are the tenants that are there criminals that scare away any new applicants? You need to find out. Regardless of the details, you have two additional costs. One is the costs to fix whatever is wrong. Maybe that's rehabbing the bad units or the entire place. Maybe that's evicting bad tenants. Whatever it is, it will cost you something to fix. Then, there's the costs of holding the vacant units until they're filled. That includes both the lost rent until they're filled, plus the costs (advertising, promotions, special rent deals or reduced deposits) of filling them.

So, you need to figure out those costs and add them to the purchase price. That's your real acquisition costs.

Now, lets back into a good price for this place. Apartments are valued purely on income. If the broker starts in with cap rates or comparable sales, be wary. They're aiming at a newbie (like you!) and hoping they don't really understand. Once stabilized, the best you will manage is for all expenses (including vacancy and capital expenses) to be 50% of the gross rents. Plus, you want to make something out of this. A common goal, and I'm sure in works in Dayton, is $100/unit/month.

So, add up the total expected rents to get the gross scheduled monthly rent. Subtract $9,500 ($100/unit, 95 from your other post.) What's left is your max payment. Commercial loans are going to be more expensive than RESPA residential loans. So, I'd use 8% unless I had information to indicate something different. You're also unlikely to get a 30 year amortization. So, I'd use 20. In reality, you're likely to have a 3-5 year balloon payment with a loan like this.

So, now use the payment, 8% and 20 years to figure a max loan amount.

Now, some folks might say add on your down payment. But that's making your money work for free. Further, you're going to need an investor to pony up this money. So, just use this max loan amount as the starting purchase price.

Now, subtract off those costs you figured out. This gives you your max purchase price.

Here's the bottom line. Don't do this. You don't have the experience or the financial ability to do this. You're going to have to bring in an investor, either as a lender for the down payment, stabilization costs, and working capital (If you don't have $50K in cash on hand and ready to spend on a new roof you don't want to own this sucker) or you're going to have to bring them in as an equity partner. A lender like this is going to be looking for 12-15% and an equity partner even more. This will eat you alive.

Start with a few SFRs. I'm absolutely certain you can find good deals there in Dayton. We have a guy in our investment club here who offers Dayton deals, and I've researched it a little. Cut your teeth with half a dozen SFRs, buy a 12 unit, then jump into this.

Jon's reply is full of wisdom and great advice.

His points are spot on about your experience, realistic LTVs that are out there, and associated costs.

The number one issue will be the low occupancy, the second will be your lack of experience, and the third may be the cash to close this deal.

You could be looking at hundreds of thousands to close this deal. That being said, I don't know why anyone would JV a deal like this when there's plenty of stabilized projects to pick from right now. As Jon stated, even if you found one, they're going to take most of the profit. To the point where it probably won't be worth your time/effort.

I'm not trying to come down on you, but as a broker, I'd pass on this one and suggest you do the same.

I still would want to look at it even if just in a case study for myself to see how these things are put together.

Pre-judging from your posted unit numbers and rental rates, this building is in a very bad area. One deds under $400 represent a low D class property. The other problem I see is that it is in Dayton. This city has one of the higher vacancy rates in the country, the population is steadily increasing, the unemployment ratio is higher, etc. It would not be my choice of area to purchase a building like this. That said, you may feel different about this city and that is certainly your choice.

Here is what I see:
36 1 beds X $350 = $12,600 monthly
62 2 beds X $400 = $24,800 monthly
Gross income = $37,400
Less 45% vacancy of $16,830 = Adjusted gross income of $20,570
I couldn't see paying more than a 15 cap for a building likle this (less repairs) so my max offer based on these assumptions would be $1,371,000 less the repair costs (this you can get via a reduction in price or a repair credit from seller, or have the seller perform the repairs before closing and subject to your approval.

At 2 Million, it is a dead dog. At 1.3M, you have something to work with.
Just keep in mind that you will have negative cash flow during the stabilization period and therefore need cash reserves to cover it.
Since you can not do this alone and it is an REO property, your only option is to find a partner, or lock it up at a great price and wholesale it.

All votes for my posts are appreciated.

I'm with Will here. For the right buyer, this has great potential. As your first investment, Myka, this is fraught with potential for getting in over your head.

Having the mix and rent helps. Personally, I like that unit mix better than what I see here, where buildin$gs are 90% 1BR with a few larger units and a few studios.

Your monthly scheduled rent is $37,400. Subtract 50% for stabilized expenses. Pretty sure nobody with argue with 50% as about the best you can do on a complex like this. That leaves $18,700 for monthly NOI. Subtract $9,800 for desired cash flow and you're left with $8,900 for max payment. Using my terms above (8% and 20 years), I get $1.06 million for the max price.

Now, lets guess it will take you a year to get those vacant units rented. Lets guess you evenly ramp them up from now for the next year. Lets assume you can get from 54 occupied units now to 88 occupied units in a year. (You'll never be at 100%. If you are, your rents are too low.) So, that's 34 vacancies to fill. Using an average rent of $381/month, the lost rent while you fill those units is $77,853. So, that comes off the purchase price.

Now, you say the vacant units are move in ready. But you also say this is bank owned. Those two don't go together. I can guarantee if this place is bank owned, it needs, at the very least, a thorough cleaning top to bottom. Probably squatters need to be kicked out of some of those vacant units. You probably have some repair and make-ready work. You probably have at least a few units that are really trashed. You have a few evictions. Wouldn't be surprised if you don't have at least one major problem like a roof or boiler. You'd need to figure this out and subtract that off.

So, max price is at $980K, less the cost of the work. Knowing nothing more, I'd just guess that at $100K. So, lets just guess a purchase price of $880K. I realize the bank's at $1.3M according to your post, but lets try this first. In addition to the $880K, you need $177K to handle the repairs and to cover the lost rent. You'll also need something like $30K for closing costs. Lets call that $50K. And, you really will need some working capital. Assuming you can get a 70% loan, you need $264K down payment, plus the above cash for a total of $257K. That's $521K in cash and a loan of $616K. Monthly payment on that loan is $5152.

The NOI we computed above is $18,700. That includes some allowance for vacancy, but not what you actually have. So, lets subtract the lost rent for the 34 "excess vacancy" units. That's $12,975. That leaves NOI of $5,725. The DSCR (debt service coverage ratio) is $5,725 / $5,152 = 1.11. That seems low for what I think lenders are wanting right now. Just guessing (been a while since I've spoken with a commercial lender, and things have NOT improved), I think 1.2 is about the least you'll get. So, you would need another $46K to kick in to get the loan down to $570K. That puts you up to $662K you need from your partner.

For an experienced person, this might be a great deal. Buy it cheap, fix it up, then flip it to someone to hold long term.

Most lenders are still using 1.2-1.25 on multi-family. HUD uses 1.17

k thanks

It is nice to see that this conversation was a valued learning experience (and much needed it appears), but for future reference, may I suggest you visit the property fairly early in the game next time as all the due diligence and so forth takes time and effort just to find out the area or building may not be what you are looking for. By viewing the property early in the game, you can then decide if you want to continue with the DD process or move on to the next and save yourself valuable time.

So something like this that needs work, but would be a good property to hold on to and needs work in the areas of management and TLC on the properties, should my offer be the same as above the 750K. Or should I try to flip with an offer of like 900k and flip for 1.3? Or something like that?

Wasn't sure if I needed to post a new thread for this or not but, I got my proof of funds letter for this deal. Offering way less on this building than what the bank is asking. I went to see it yesterday. It is not really as nice a place as I thought it was. The commercial realtor wasn't there, he sent... "The Loaners" . :lol:

A management company that was managing the building next to it. What a couple of cooks they were. Literally first day on the job, no keys, not to mention dressed like they were going to 'the late night after hours joint'.

What a mess. They couldn't show me but 1 apartment ( that was only because the door was kicked in on that one). They didn't have the keys! The building I saw first was mostly empty. There must have been several evictions because most of the doorknobs were removed from the doors in this building. Hec one whole floor was empty.

It had a coin op'ed wash room in each building one had a sign on it that said open from 8am to 9pm. That door had been kicked in, and there was no knob, plus one of the hoses to the washer had been removed and was just laying there in the middle of the floor.

I was able to peek into a few door knob holes and I can tell you that the apartments needed extensive rehab.

All carpets have been removed from the units that needed rehab.

All appliances were missing.

The floors in the hallways looked like jail house floors and the paint was horrid green.

Some of the tenants ACTED like they NEEDED to be evicted... loud, obnoxious, cursing, music blaring from some of the apartments and so forth. I should have brought my muscle with me (boyfriend and or a 38 preferably the latter).

One building, way in the back of the whole complex, needs total rehab, however I don't think that was part of the package.

That being said. This place could turn a nice profit once fixed up. The outside was peaceful and had nice scenery.

The inside of each building has three levels about 16 units per level (that's a guess).

The walls and sinks were good and all pipes were there that I could see.

It is definitely in need of good management and someone to clean this place up just like the agent said. I can literally imagine the new floors preferably hard wood (that's just me) new ranges and paint.

In my opinion, as someone who was a renter, this place could be livable again. Just needs someone who can come in and get rid of the riff raff, then start revamping the place, then hold on to it for a great profit once they get everything in working condition and rented, then who can plan a nice exit strategy.

Any thoughts?