Getting closer to Deal #1 - monthly payments freaking me out!

Sugar Land, TX · Member since 2015 · 17 posts · 1 vote

Hello BiggerPockets! I'm getting closer to my Deal #1 seems like (closer than I've ever been)...and I'm getting a bit nervous thinking about monthly payments I'll owe to the lender.

The property I'm looking at is currently 70% occupied. One of the 4 tenants has less than 1 year left and there are two units currently vacant.

What if somehow none of the tenants renew their leases and I'm stuck with this huge payment that I'll owe. I know every business has its risks - am I worrying for no reason? This is a 12 year old commercial property. Couple of the tenants have been there a long time. About 3 years ago property was 100% occupied I'm told.

Am i worrying myself for no good reason? How do I verify past occupancy information? What is the worst case scenario I'm looking at if property goes to 100% vacant?

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James Maher

Real Estate Investor · Campobello, SC · Member since 2015 · 74 posts · 11 votes

10y

My suggestion would be to not enter a deal until you have enough saved to make monthly payments for an extended amount of time. Currently, I only own one rental property but I leave ALL incoming rents in one account so my monthly cash flow piles on each month and I could cover 6 months rent or so. That being said, I started out with enough in the account to cover 3 months rent in case it was unoccupied.

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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
10y
You need to get 3 years of operating statements and a historic rent roll. Where are the units renting compared to the market? What kind of leases are they, NNN or gross? You need to reconcile the numbers. I have been seeing deals in Houston where the numbers are improving, so I would question current management.
Mark
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Mark Brogan
Investor · Roanoke, VA · Member since 2012 · 1k+ posts · 374 votes
10y
@Obaid M. ask to see proof of rental history from the seller and if property is not far from you go talk to the tenants and find out if they plan to stay

good luck
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James Maher
Real Estate Investor · Campobello, SC · Member since 2015 · 74 posts · 11 votes
10y
My suggestion would be to not enter a deal until you have enough saved to make monthly payments for an extended amount of time. Currently, I only own one rental property but I leave ALL incoming rents in one account so my monthly cash flow piles on each month and I could cover 6 months rent or so. That being said, I started out with enough in the account to cover 3 months rent in case it was unoccupied.
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Sterling WhitePro Member
Rental Property Investor · Indianapolis, IN · Member since 2014 · 554 posts · 153 votes
10y
These are one of the risks with real estate when using leverage @Obaid M. however you should be fine in this scenario.
Have you spoken with any of the tenants to feel out where they stand? What condition are the vacant units in? I would start marketing those upon acquisition
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Obaid M.
OP
Sugar Land, TX · Member since 2015 · 17 posts · 1 vote
10y
@Mark Creason point noted!
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
What is your cash reserve plan? If you have one, that should take care of your 100% vacancy fears. If you do not have one, then you are probably right to be nervous. You have to have a backup, total disaster plan.
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Obaid M.
OP
Sugar Land, TX · Member since 2015 · 17 posts · 1 vote
10y
@Mark Brogan Once I have the rental history, how do I verify that its not bogus info? As in, how do I know that the seller is not simply making it up on Excel and printing it? Ask for bank statements for the property account?
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Obaid M.
OP
Sugar Land, TX · Member since 2015 · 17 posts · 1 vote
10y
Great advice @James Maher. How can one check to occupancy rates in the area - to get a feel for what occupancy rate to expect in the future?
@Sterling White and @Mark Brogan - seller has sent me a confidentiality agreement which asks for me to not reach out to the current tenants. Is that wierd? I have not yet signed it.
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Obaid M.
OP
Sugar Land, TX · Member since 2015 · 17 posts · 1 vote
10y
@JD Martin - great point. I've not even thought about that. What does a good cash reserves plan look like? What does a "total disaster" plan look like?
Thank you everyone for all the great information, pointers and insights.
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Matthew King
Henderson, KY · Member since 2015 · 66 posts · 26 votes
10y
If you can't cover the payments with 0% occupancy then you need to think about your exit strategy. How easy would it be to get out of it or get tenants.
I would be nervous also if I didnt have the cash reserves to handle it.

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Rachel Pervis
Real Estate Consultant · Houston, TX · Member since 2015 · 172 posts · 51 votes
10y
@Obaid M.I agree with @Mark Creason as to the things to check. There is a reason that the occupancy is 70%, it could be management, but I'm thinking it's something else and I would keep researching and asking questions as to what has happened in three years that has caused the occupancy to drop. I would start with the three year rental history to determine if increases took place or decreases. The fluctuation in rent prices can be an indication that something took place.
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James Maher
Real Estate Investor · Campobello, SC · Member since 2015 · 74 posts · 11 votes
10y
@Obaid M. You can check the rental history by asking the seller to show you their tax documents from the previous year. You can have them block out other info that you don't need to know. If it's on a Schedule E, it should be easy.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Originally posted by @Obaid M.:

@JD Martin - great point. I've not even thought about that. What does a good cash reserves plan look like? What does a "total disaster" plan look like?
Thank you everyone for all the great information, pointers and insights.
There's no "1 answer fits all", but I consider 2 major things with multi-family:
1. Can I cover the note & all expenses infinitely with 50% vacancy?
2. Can I cover the note & all expenses for at least 1 solid year with 100% vacancy?
#1 covers what could be a normal market in your area, or things out of your control - a bad recession, neighborhood disruption (construction, crime spree, etc) - without any money out of your pocket. #2 covers a catastrophic issue in or out of your control that makes the entire structure uninhabited/uninhabitable for at least a year.
If you rely entirely on rental income for your income, you should have enough properties & diversity that the loss of income from one location will not bankrupt you or force you into making a bad financial decision to recover/replace the income, and enough cash reserves to weather any local downturns. On a multi-family unit, if you have to have 100% vacancy for an entire year, you need to be employing your exit strategy unless you have certainty that it is only a temporary situation - i.e. you took the building offline to do a major renovation of all units.
Disclosure: I hold only SFH because I prefer the diversity of location and structure and consider the investments part of my resale & exit strategies. In my area it is difficult (not impossible) to purchase MFH and make it work long-term, as suitable properties are in high demand and bargains are not to be had.
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Ray A.
Professional · Cypress, TX · Member since 2015 · 309 posts · 17 votes
10y
@Obaid M., PM me I have some questions and may be able to help.
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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
Commercial property can be a much higher risk than residential units. People MUST have a place to live but they don't have to run a business. As others stated, I would make sure I have LOTS of cash reserves. It is not uncommon to have a commercial vacancy for a year or longer. If you cave and accept a tenant you feel is not a good fit with other tenants, that could affect landlord-tenant relations. If you allow a strip club in with a church that rents a unit that might not go well either:) What sort of commercial property is this? Strip center? Office warehouse? How is the location? Visibility? Are the rent at market, below, or above? What is the condition of the property and how is the street appeal? There are lots of factors that will play into this but we don't know a lot about the property.
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Jack Butala
Los Angeles, CA · Member since 2014 · 2k+ posts · 515 votes
10y
@Obaid M.
Great post.
Cutting to the chase, I think you should walk away from this deal.
The first investment real estate deal you complete should have you running to the bank saying "I hope the seller doesn't change his mind." On top of that you should know exactly who is going to buy or rent it from you and all the terms of the deal.
Real estate investment is not gambling. You should know all the outcomes (within reason) before you buy the property.
Good luck and please let us know how it goes.
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Obaid M.
OP
Sugar Land, TX · Member since 2015 · 17 posts · 1 vote
10y
Thank you all for the great and informative feedback and support. I will not be pursuing this deal! Many factors played into this decision from all the participants in this post.
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