BiggerPockets

I get gross annual rents of $128,928 and they're claiming expenses of only $51,000. That's just under 40%, and that seems quite low. I would use the 50% rule as a safer estimate.

Using $5372 as monthly NOI, and assuming desired cash flow of $100/unit/month, I get $2972 as the max payment. Not sure about your amortization period, so I'm using 28 years and 7%. That gives a present value of $437K. So, you're not too far off, IMHO.

On these low rent units ($424), taking $100 a month is a big bite. OTOH, its a tenant to deal with whether its $424 or $1000.

Those loan terms look pretty good to me, assuming the amortization is pretty long after two years and that rate is locked in for a while.

If you pay $437K, and kick in 20%, I get a loan amount of $350K and payments of $2377 leaving cash flow of $2994 a month or $35,933 a year. That's a 41% cash on cash return, excellent in my book.

But, it may be too much to hope for 28 year amortization. If its only 18 (20 year minus the two years of IO), your annual cash drops to $30,227 and your cash on cash to 35%. Still good.

If you were to pay $500K and put in 20%, and assume 18 years amortization, cash flow is $25,319 and cash on cash 25%. Still good enough, in my book.

The lower rate IO payments for the first year improve cash flow for those years. I get a total savings of $34,288 for those two years, which improves your cash flow. But you do have those vacancies to fill. Assuming you can get from 60% to 90% over a year means this vacancy is costing you $19,339 in lost rent over the first year. So, the discount on the payment would seem to make up for the lost rent. For the first month, where you have the full 60% and a $1666 payment, I have you still cash flow positive about $482 (remember, the 50% rule includes some allowance for vacancy). At the start of year two, assuming you're at 90% occupancy and you payment bumps to $2000, you're cash flowing $3372 a month. At the start of year three, and assuming 18 year amortization, I get $2110, which is just under the $100 a month goal. You're helped by your down payment but hurt by the shorter amortization period.

Did they mention the amortization period, rate lock in period (if any) and balloon period (if any) once the loan starts amortizing?

All my calculations are a little optimistic because I'm ignoring the due diligence and closing costs. Those could easily be $10-20K. Though, if the seller is that desperate, I'd see if you could get them to cover some of them.

This does seem like a pretty good deal, even at $500K, assuming I'm in the ballpark on the long term loan terms.

Originally posted by Anna Estes

... Under Depreciation Assumptions says depreciable life 27.5 years, and depreciation start date 1 January 2010.

That 27.5 years sounds like the IRS time period for depreciating real property, used for computing income tax deductions; has nothing to do with amortization period that Jon asked about IMO.

That 1% cost is probably the loan origination fee. You'll have other costs, too. Appraisal, title insurance, probably an enrivonmental study and all that other misc BS that always shows up.

I think Steve's right they're just point out this is residential, so its the 27.5 year depreciation schedule. Ask them about the amortization period, fixed rate period and balloon term.

Anna, why would you pay stabilized values for a property that has not been stabilized? The idea of buying these low occupancy properties is to buy them based on their current real numbers and then fix them with your better management and enjoy the upside. If you buy it now based on 90% occupancy and only subtract the lost rent for the first year, you will be paying the seller for all your work getting the property stabilized.

Here's how I would do it:

Stabilized vale = $128K X 5 (10-cap) = $640K
Current NOI = $26K per year. Value = $260K

Your goal is to get it as close to the $260K as possible. You should discuss with the seller the financials of the property as they are and not as they will be once you turn it around.

The seller may not be willing to sell to you at such a low price, so perhaps you can play around with the cap rates and offer them a more attractive cap rate of 8% and raise your offer to $325K. Try to get it for as low a price as possible. Use your negotiating skills to get the price down with current financials as the starting point in your conversations.

I'm actually surprised you can get only 20% down for a commercial loan. Nevertheless, it doesn't hurt to ask.