Specialist · Katy, TX · Member since 2018 · 19 posts · 7 votes
This is my first ever deal getting into real estate I have the funds available to buy this. It is one lot that has been converted into 5 unit apartments in a very busy tourist area of Houston Texas . How do I approach this as fast as possible and how would I even determine the legitimacy of the value .. it will have no problem renting out as a short term leasing deal or long term. What would my next steps be I have given a contract with Ernest money and I have a period now to get the financials looked at he is currently renting the property and it is generating money . Any advice ?
Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
7y
Just to verify, you have an earnest money contract to purchase a 5 unit apartment in Houston for $1.1M on owner financing. This is your first deal and you are looking for advice on what to do?
Well...
You open title and get that working. Check the terms of the sale, chain of title, and any conditions on closing. Probably don't want to take title to a large asset like this in your own name.
Order a commercial appraisal and survey. If there was anything like a convenience store, dry cleaner, garage, etc., you want a phase 3 environmental study.
Financials: get 3-years income and expense statements, monthly rent rolls, and select income tax returns. Check maintenance records, make-ready, property taxes, and insurance. Big question: did it flood in any of the recent events?
Income, minus expected vacancy loss / commissions / incentives = net income.
Expenses: look at historicals actually spent (and suspiciously missing expenses you would anticipate). You should adjust property taxes to the new purchase price, not historicals because it adjusts. = operating expenses.
Net income - operating expenses = Net Operating Income
From NOI, deduct reserves and capital expenditures (CapEx) for replacement of obsolete replacement (parts of buildings that come to the economic end of its useful lifespan).
What's left is EBIT = earnings before interest and taxes. Some include d = depreciation. Financing determines this is what you can use to pay debt service. Most use a debt service coverage ration of 1.25, meaning you can use up to 80% of this to make the loan payment.
Hope this helps. It is just a quick and dirty brain dump on only the biggest issues. Not even enough to navigate this transaction. An attorney can be useful to help close these transactions, too. Better an ounce of prevention than pound of cure. In commercial transactions, there are few protections when compared to consumer transactions. The law presumes everyone is a big boy or big girl and can look after his/her/its own interest. If BP is the beginning and end of your knowledge base, might be better off bringing a more experienced person along.
Specialist · USA · Member since 2015 · 7 posts · 6 votes
7y
Determine total rent roll. This is gross income. From this everything subtracts.
Determine total debt service, taxes, insurance. Take this from your gross income.
Determine total obligations for servicing the building. This is trash, water, sewer, gas, etc. Take this out.
If you have any money left over, which you should...you need to make allocations for repairs...this should probably be between 30% and 50% of your "take home". Sanity check this figure against the operating costs of the building. This would be for things like driveway repairs, tree trimming, tuckpointing of brick, roof and guttering, drainage and landscaping, toilets, heaters, A/C, stoves, windows, screens, etc.
What's left, roughly, is yours. Now weigh that up vs the financial risk you're taking, and see if it's worth it.
Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
7y
Just to verify, you have an earnest money contract to purchase a 5 unit apartment in Houston for $1.1M on owner financing. This is your first deal and you are looking for advice on what to do?
Well...
You open title and get that working. Check the terms of the sale, chain of title, and any conditions on closing. Probably don't want to take title to a large asset like this in your own name.
Order a commercial appraisal and survey. If there was anything like a convenience store, dry cleaner, garage, etc., you want a phase 3 environmental study.
Financials: get 3-years income and expense statements, monthly rent rolls, and select income tax returns. Check maintenance records, make-ready, property taxes, and insurance. Big question: did it flood in any of the recent events?
Income, minus expected vacancy loss / commissions / incentives = net income.
Expenses: look at historicals actually spent (and suspiciously missing expenses you would anticipate). You should adjust property taxes to the new purchase price, not historicals because it adjusts. = operating expenses.
Net income - operating expenses = Net Operating Income
From NOI, deduct reserves and capital expenditures (CapEx) for replacement of obsolete replacement (parts of buildings that come to the economic end of its useful lifespan).
What's left is EBIT = earnings before interest and taxes. Some include d = depreciation. Financing determines this is what you can use to pay debt service. Most use a debt service coverage ration of 1.25, meaning you can use up to 80% of this to make the loan payment.
Hope this helps. It is just a quick and dirty brain dump on only the biggest issues. Not even enough to navigate this transaction. An attorney can be useful to help close these transactions, too. Better an ounce of prevention than pound of cure. In commercial transactions, there are few protections when compared to consumer transactions. The law presumes everyone is a big boy or big girl and can look after his/her/its own interest. If BP is the beginning and end of your knowledge base, might be better off bringing a more experienced person along.
Katy, TX · Member since 2019 · 44 posts · 28 votes
7y
Hi Johannes, If the numbers work out, this seems like a great opportunity. I would get a couple of long-term renters in there for stability. If it is in a "touristy" area, you may want to consider short term vacation rentals for the other units to maximize your cash flow and profit potential.
I agree that a commercial lender is not only necessary for the transaction, but can help you with the numbers. I can recommend another commercial lender as well - see Bob Neumann at Texas Funding & Consulting.
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
7y
I thought in the opening post it's mentioned as a owner finance deal. So not sure why there are posts about getting a lender?
@Johannes Bezuidenhout I would add, get a good attorney that specializes in these deals, to make sure the contract and terms are good. It's not mentioned where the contract came from, but if it was all from the sellers attorney, I would certainly have it double checked. And as others mentioned, make sure the deal makes sense numbers wise. Just because owner financing is offered, doesn't make it a great deal.
This is my first ever deal getting into real estate I have the funds available to buy this. It is one lot that has been converted into 5 unit apartments in a very busy tourist area of Houston Texas . How do I approach this as fast as possible and how would I even determine the legitimacy of the value .. it will have no problem renting out as a short term leasing deal or long term. What would my next steps be I have given a contract with Ernest money and I have a period now to get the financials looked at he is currently renting the property and it is generating money . Any advice ?
How much have you budgeted for due diligence? Speed costs money...