Property a Little Out of My League

12 Replies

I recently launched a marketing campaign and received a call back on a four unit property valued at about $1M. It's a bit out of my league for myself but there is definite potential. Being new, I'm not sure what I should do. Any advice?

Little more info... units are rented in full under market. Currently bringing in about $5k per month. Full potential after renovation is about $8600 per month. Renovation won't be too extensive, but electrical is not to code. Exterior looks well kept, but dated and owner said interior was in good shape. Estimating the ARV to be $1.4M by comps, though comps are somewhat difficult to determine due to the uniqueness of this property.

Owner is looking for somewhere close to $1M in cash at closing to pass onto her heirs. I have some capital, but not access to all of it. Would love to find a partner to make it work but not sure where to begin with finding one, especially when the property is not in contract.

Based on your numbers (the higher number 8600) this is not a good deal. You're looking at a five cap rate for a quadplex that's just horrible. And idk how the comps are 1.4 because that would be a terrible cash flow property for any investor on the back end. I would pass on this one.

I agree with the post that income and cash flow determines the price on a four-plex. There are exceptions of course, such as when the Ellis Act passed in California and you could convert from tenant to owner occupied and finally sell income property at a truly fair market price in rent controlled areas. I believe I was the first to break the Berkeley rent control boards little kingdom of pushing around landlords and making them dance for their amusement. So in those cases I could pay more because when I converted them to TIC's a large profit was created.

I still believe in location, are these in Oakland, or Walnut Creek? The East Bay is a very large area and is where I started. How old is this woman? There are ways to satisfy her wishes of leaving heirs a set amount of money that would allow her to get less for her property and to accomplish her goals. Don't ask me how, I bought a 14 story building while two of the biggest commercial brokers kept telling the owner his wishes couldn't be fulfilled and then they bugged me for a couple of years asking me how I did it. Even though I retired Jan 1st I am still keeping that tidbit quiet for a couple more years. And I intend to pass it on to a great nephew first because I know of a forming situation in his area that could become his first mega deal using this as the answer.

@Devan Mcclish @Brian P.

Thanks gents. Great point on the cap rate. That was the light bulb I was forgetting. I was looking at comps on the MLS based on recent sales. Using the cap rate on a property like this, even though many sellers would balk, is definitely the right way for me to be looking at it for my business.

The owner is approaching triple digits in age. She said her heirs want nothing to do with being a landlord and are likely to sell it anyhow. So she was being somewhat proactive at settling her affairs. I asked about alternative sales strategies and she mentioned she'd rather have the cash to disperse. 

Very curious about the nugget you have. If you know of anyone I could work with, I'd be interested in doing so. I'm a newbie taking action and would very much appreciate the guidance. 

Joshua

I'm still going to keep my secret weapon secret for a few more years. But something I have used in situations like this is to ask what do you think your heirs are going to do with a large amount of cash they get all at once. My experience is they usually blow a lot of it on ridiculous things, and that is wonderful for a short while. But you give them a double gift Mrs. Seller. you can fix it now where they will get the money already invested at a good rate of return and available to them over time and by then their choices will be wiser and benefit their futures.

How do you do that, easy, you can check with a lawyer and your tax adviser, but all you do is take back the mortgage on the sale of your property and put it into a trust to avoid probate and when our maker calls you, you avoid probate on that part of your estate and your heirs as trustees can get your gift to them already invested wisely.

Time to shake and bake. 

If you truly have a deal. Look around for other investors who have bought something similar (the ones who have bought mutliple types and purchase with cash)

Tie it up and ask them if they want another. 

Take a close look at those numbers to be sure you have a good deal. You may not.

If you do, I think the comment regarding seller financing is spot on. That would work perfectly in this situation because you could proteins up with a better deal and the heirs would have a consistent cash flow on a great investment instead of blowing the money on something else.

@Joshua Durrin

Is this woman managing the property herself? Have the tenants been there awhile? Perhaps the rents could come up without much work being done? 

I'll make the assumption she just wants to be able to pass on a nice even $1M to her heirs. As others have mentioned, you might want to get someone estate-savvy involved because if she sells this property while living, she'll pay capital gains. Then when she would pass, her heirs will pay inheritance tax. You'll need to do some digging on how to get her heirs the most money, satisfy her wishes, and then agree on price. 

[email protected] | 215‑490‑4851 | http://www.atanosmanagement.com | PA Agent # RS314542, NJ Agent # 1221341

Great feedback all. I've been thinking about this dilemma for a few days more. Just popping back into the forum to realize our thoughts coming into alignment. I was thinking along those same lines @Brian P. by approaching her with an offer for a portion (ie 1/3) cash and the remainder carried back in a second position note for a period of two years additional to enable me time to force appreciation in the property. Response to her is drafted and going out in the mail today. Thanks for all the feedback. I'll keep you posted on the progress. 

Oh, just for clarity, it won't be for a million dollars though either. So we'll see how this works. 

And fortunately rents are below market currently and the tenants know it. Again, we'll see where this goes. :)

This is a seller finance deal. It's just that no one knows it yet!

Everyone can achieve their objectives, IF you know how to sell it.

Seller financing, structured correctly, can allow the seller to achieve their price point objective and best provide for a future generation who might squander their cash inheritance. What better security than the very asset which generated the value?

Seller financing can be structured so that payments to seller relate to rental cashflow, yet still leave a margin for buyer. It can be structured in such a way that the different beneficiaries (heirs) receive varying payments via separate notes; all kinds of wild ideas. 

And the real attraction is that you may no longer need a partner. Later, once the sale closes, is seasoned and you are better established, the seller (or their heirs) will likely return to well and want to cash out all or part of their note(s). This is yet another opportunity to negotiate.

Seller financing us a beautiful thing. Too bad there aren't many real deal makers around anymore. 

Originally posted by @Joshua Durrin :

I recently launched a marketing campaign and received a call back on a four unit property valued at about $1M. It's a bit out of my league for myself but there is definite potential. Being new, I'm not sure what I should do. Any advice?

 If you think it's a good deal, wholesaling it would probably be the best bet.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

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