BiggerPockets

Dave... I know there are some really smart guys on this board that will provide some pretty great answers... but here is my two cents...

I like to do all of purchasing or refinancing using small local lenders. The costs for doing this is usually higher interest rates... but the benefits are much greater.

1. They understand income producing properties.

2. You can purchase/refi in an LLC thereby avoiding what I commonly refer to as a proctology exam during underwritting.

3. These lenders are as concerned about this property cashflowing and you should be...

and here is where my response to your question comes in...

Almost every commercial lender is going to want you to demonstrate that the building can not only cover the cost of operations but that is has enough "income" remaining to cover the debt service. Usually lenders are looking to cover the debt service (commonly referred to Debt Service Coverage Ratio) 1.25 times. Meaning that after all of the operating expenses are paid, that the debt service could be paid for once and then one-quarter again.

While I have not taken the time to run your numbers, I am pretty sure that the $1,500.00 would not cover a mortgage on $243K to $263K mortgage 1.25 times. In fact, it may barely cover the debt service one time.

I hope this makes sense?

Dave,

It may cover the P and I... but just barely. A commercial lender will want the net after expenses to cover the debt service (your $1,500) in this case 1.25 times.

Also, most commercial lenders won't go for a 360 month loan.

Here is the deal... it is next to impossible to get non-commerical loans for income producing properties. I can be done, but the underwritting requirements are a pain on their best day...

Regarding your deal, the most I would pay for this deal based on the numbers you presented would be a very low number... like $170K...

Your deal as presented just wouldn't support my cash flow and lending requirements.

To your original question, Dave, you're on the right track at first. I'm assuming the $237K is accurate. But, do not divide by 0.9 to get to $263K. That's putting your money in with no return at all. I don't know about you, but I want a return from my money. So, stick with $237K as your maximum price.

Now, subtract off the $20K for work, and you have a $217K max price.

That's not your max offer, its your max price. Start lower if you're going to do some negotiating.

Let me come back to Peter's discussion and tell you where I go from here. I'm borrowing hard money to buy, then refinancing into a perm loan. That reduces my cash out of pocket, but adds a bunch of extra costs. So, if $237K is my calculated number, that's my max permanent loan. I'd subtract off refi costs. I don't buy houses this expensive. They make crummy rentals. So, I'm not sure what it would cost to refi a loan this big. I'll guess at $6K. Now I'm at $231K.

Then I have the hard money costs. So, lets say I can borrow the full $231K. Between points and interest, I'll spend about $23K. So, now I'm down to $208K. Closing costs are makbe $4K. Now I'm at $204K. Now, subtract off that $20K fixup costs. The most I'll pay is $184K.

To go with Peter's approach, and assuming you're buying outright, you have to account for the down payment and actual terms. If you're buying for $237-20K= $217K, and putting 25% down you're putting down $54K and financing $163K (rounded). You also have to put in the closing costs and the $20K fixup costs. Use 20 years and 7% for interest and your actual P&I payment is $1264. Your NOI is $1600 ($1500 plus $100 cash flow). That gives you a DSCR of 1.27. I think that would work, but I've not tried to get a loan like that, opting instead for the proctology exam.

You end up with $336 a month in cash flow, $4,035 a year. You have over $75K invested. That's about a 5% cash on cash return. Uninteresting, IMHO.

You don't have to do a commercial loan for a duplex. Regular loans are just a pain in the tush right now. Hopefully your sister has enough income to cover the mortgage on this and a nice down payment.