First Deal!!!! Income property!! (partnership)

24 Replies

Hey all, and thank you for your interest in my endeavor. I am posting today to request any feed bad on a deal that I am contemplating. This would be my first deal and want to cover all the bases to ensure I am not being brash and putting myself in a bad decision. 

A little about the deal. I have located a 6 unit income property in my area. it has 4 two beds and 2 three beds. the seller wants $450,000 and is willing to carry with 20% down at 4% over 15yrs. I will be going into a partnership with my father and potentially a friend of his. I will make an offer if all checks out and negotiations will start. My questions are in regard to what bases I should cover. I plan on hiring a lawyer to help with the contract and leases if the deal goes through. A more specific question would be to the partnership. What do you think of the terms of the patnership (in e-mail below)? Are they fair? What steps should I take to make this an official deal between partners as opposed to simply a handshake I take your word type thing. I also think this will give my investors some reassurance. 

Now, onto questions about the purchase. I have his 2016 financials (from the horses mouth). I will be requesting tax documents pertaining to the property to compare and make a more informed decision. Anyway, what should I be looking at when I walk the property and do inspections? What should I ask for in the offer and contract? What considerations should be made in all aspects of the purchase and management? What should I be asking of my attorney? Any other thoughts are appreciated. I could make this list a mile long but will leave pointers/opinions to your discretion.

I have pasted an e-mail that was sent to my father pertaining to this property. It contains numbers and predictions.

Thanks for your time!

Side note: This property is in a college town and there is no lack of people looking for a place to live. Vacancy rates are generally low in the area.

________________________________________________________________________________________________________________________________

Hey Dad, these are the numbers on the proposed deal I have in the works. Let me know what you think. I look forward to making some money together. I see this one as a win/win for all of us. Below I list out numbers and projected returns on this property in 3 potential scenarios. Sorry about the lack of order, my Microsoft excel is expired.

So, his ask is $450,000 on a 6 unit 4x2 beds and 2x3 beds. Currently, there are 3 units occupied and 3 vacant pending improvements. The current lessees are in till 4/1/18, 8/1/18, and 10/1/18. These occupants are locked in to $620, $675, and $620 respectively. He has plans to up the vacant rooms to $750 for the 2 beds and $850 for the 3. I think that matches market prices, if not slightly lower

The selling agent already divulged some good info on the seller. She says he is willing to carry the loan as he has owned this property for some time, owes no one and there are no liens on the property. He would like 20% down amortized over 15 yrs at 4%. The agent also gave insight that this is all negotiable and he would consider a 20 yr. She made him seem very motivated. He apparently is retired and wants to travel. The ask has already been dropped from $490,000. She also divulged that he said he was willing to discount estimated repairs needed if any found in the inspection.

I believe his asking price and terms are fair but the numbers just don't crunch for our purposes. The cash flows are too low. I see this as unreasonable risk. Before I go into the numbers I will list what these numbers are based off of. Which are the financials the agent provide me. I will be asking for copies of his taxes pertaining to this property to compare and be more informed.

As for last yr (2016) his expenses were:

Insurance (full coverage) $1,668.00

Water $3,060.00

Trash $792.00

RE Taxes $1,650

Repairs/Maint $2,400.00

________________________________

Total $9,570.00

Vacancy Rate was 6.8% for 2016

Here is income for this property over 12 mo. I have current and expected. Current is based off all current rents and 2016 expenses and vacancies. The expected is based on a 10% increase on expenses and a bump up to 10% vacancy rate. Also, expected accounts for rents AFTER current leases expire. I believe the 3 beds could also be rented at $900 but this is not in this calculation.

                                         Current          Expected

Gross                              $51,180           $56,400

Net                                  $38,130           $40,233

Now here are the cash flow and cap rate numbers. I am basing these off of 4 different offers from his ask to best price. The numbers, again, will be represented in current and projected incomes. Note that the offers are subject to change. This is simply to give you an idea of what I am seeing and what my thoughts are.

Price$450,000 [20% down 4% int 15yr]

                                         Current           Expected

Mortgage: $2,662.88

Cash flow                         $6,175                $8,278

Cash on Cash rtn:             6.8%                    9.2%

Capitalization Rate            8.4%                   8.9%

---------------------------------------------------------------------------------

Price $440,000 [20% dn 4%int 20yr]

Mortgage: $2,133.05

Cash flow                          $12,534              $14,637

CoC 14.2% 16.6%

Cap rt                                    8.6%                     9.1%

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Price $430,000 [20% dn 4%int 20yr]

Mortgage $2,084.57

CF                                       $13,115               $15,218

CoC 15% 17.7%

Cap rt                                    8.8%                     9.4%

-------------------------------------------------------------------------------------

Price $420,000 [20%dn 4%int 15yr]

Martgage $2,435.85

CF                                       $8,900                  $11,003

CoC 10.5% 13.1%

Cap rt                                   9.1%                        9.6%

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As you may have noticed I am basing this deal mostly on the cash flow of the property. This is because this is not a buy and sell for equity investment. It is a cash flow (income) investment. And considering you are looking to retire soon, higher cash flows would be more beneficial to you. As for me, I am starting this venture and plan on acquiring 3 multi-unit rentals by the end of 2018. The cash is security for mishaps and for future deals/investments. That said, I understand that equity is important and you may be interested to see what influence it has on returns. So I will list other numbers related to the investment.

Before I go into these I will propose the deal and terms in regards to us. The numbers will be based off of that. I offer to you a 50% ownership of the property and lock in period of 5 yrs. All expenses, cash flows, and equity, will be split 50/50. On my end, I will construct this deal and be sure that it is sound and fair both financially, & legally. I will ensure that the proper measures are taken as it pertains to the structural integrity and condition of the property for this deal. I will manage this property myself, ensure the repairs/maintenance, rents, tenants and leases to the best of my abilities are adequate and maximizing profits. I will also pay any legal and or professional fees involved in putting this deal together. On your end I ask that you put up the money for the down payment to buy 50% cash flow, 50% equity, and my services involved with the property.

Here are better measures to the return on your money as it pertains to this investment. The numbers for 5 yrs will be based on proposed rents and expenses for the yrs 2018/19. Equity on ten years is based on a 15% increase on rent but is not represented in the cash flows. The 15% is added to the gross income then I used a net income multiplier based on current market value to forecast appreciation. This is a conservative view. Note that this representation does not account for any capital expenses and major repairs. All investments are variable and subject to risk. They may fluctuate up or down. Also, note that all cash flow numbers previously listed will be divided by two, and the following numbers are representative of YOUR returns on this investment.

Price $440,000 [20%dn 4%int 20yr]

                                                            5yrs                                                10yrs

Return on investment              $81,757 / 92.9%                        $203,594 / 231.4%

Annual ROI 18.58% 23.1%

ROI Compounded Yr/Yr                 14.04%                                             12.73%

-------------------------------------------------------------------------------------------------------------

Price $430,000 [20%dn 4%int 20yr]

ROI $87,486 / 95.9% $209,893 / 244%

Ann                                                     20.35%                                          24.4%

Yr/Yr                                                   15.07%                                          13.15%

-------------------------------------------------------------------------------------------------------------

Price $420,000 [20%dn 4%int 15yr]

ROI $96,110 / 114.4% $225,271 / 268.2%

Ann                                                        22.9%                                             26.8%

Yr/Yr                                                       16.5%                                            13.92%

There they are. Good sound calculations to analyze an investment property. And this property so happens to get a passing grade. As far as the condition, all looks good so far. It is spacious and clean. The total sq.ft is 5,200 and each unit has washer/dryer, dishwashers, and appliances. Only issue is it is pink. But that can be changed. ha.

So, as you can see. This is a good deal with very productive returns. I hope you don't pass it up. Investments like this will ensure you retire without worry of finances. At this price, I believe it won't sit on the market long so we need to act fast and decisively.

On a side note, I would be proud to guide you into your retirement while at the same time building my company and providing for our family. I have big plans for this and this is just the beginning. I will have a business plan written up shortly for myself and our investors. I will be sure you get a copy.

Thanks,

Kyle

It seems like in the partnership

you found the deal and will provide all the services related to upholding the investment

your father(and potential other investors) will be limited partners and provide all the capital.

I don't see this as an issue.
You may get some pushback from investors that they would prefer a "hurdle" where you don't get paid until they get paid a certain percentage. Especially considering since this sounds like your first deal.
Dealmakers with more experience have a greater chance of dictating terms.

I would budget in Property management fee and capital expenditures into your budget. It seems like you will self-manage which is great and will afford you a lot of experience. However, you may not be wanting to do so in 4-5 years.

Basit Siddiqi, CPA
917-280-8544

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Thank you @Basit Siddiqi for your input. Your thoughts reflect all of my own. I, as you said, do plan on hiring management at some point. This management may very well be my own company (which I know is still a cost to me) but it is much too early to say. As for Capital expenditures, I really don't have a reference as to what % I should use to calculate this. any input on what you use for your analysis would be helpful. As for other investors, I did not anticipate a "hurdle" in terms. As for that I plan on sticking to friends/ family and anyone else looking to increase returns for now. Also, doing lease options may be a good route for me as well. The reasons being, this will provide me with a base of income before I look for more experienced investor/dealmakers. Thus, a safety net and wiggle room. Also, at this point I will look for flips on the side and SFR's for equity investments.

What are your thoughts on an offer? If you don't mind my inquiry. I obviously want as low as possible, And I believe I won't do a 15yr. Going to push for 20yr and will walk if otherwise. This said, I do not want to offend the seller and have him turn his back. I would have a better read if it was a face to face negotiation. But it is through his agent. I was thinking I would start with $400k at 15yrs. and bump to 20 anything above $410k. And throw interest rate increases at 20yr lower prices at him to protect cash flows.

Sorry for the ramble. just trying to get a feel for how all this goes. I don't want to come across as ignorant.

@Account Closed I agree fully. I would not consider this a juicy deal. More of a deal worth making. Not a home run by any means. I will not go any higher that $435k at this point. I thought this very thing. Seemed like a pitch and too rehearsed. 

@Kyle Dutson

Most people budget 5%-10% for capital expenditures(it can be more or less during a year but thats the average).
The age of the house may dictate the number you use - Older homes require more upkeep than newer homes
Quality of tenants - Better tenants will take care of home better and require less
date of capital expenditures done by seller - Permits are usually required when there are big repairs done to a house. I think you can pull up the permits related to a house from the state/county/city.


It looks like a good deal considering it looks like it surpasses the 1% threshold(monthly rent >1% of purchase price).
I like that you are getting seller financing. Chances are slim that you would have qualified for a porfolio loan considering you have no track record.


A 20 year loan will obviously allow you to cashflow better than a 15 year loan. However, if he does push for a 15 year loan; instead of walking away maybe you should ask for a deeper discount on the interest rate to make up for it. or for the loan to amortize over 30 years but the loan to balloon in 15

Basit Siddiqi, CPA
917-280-8544

Thanks again @Basit Siddiqi . I will use 10% in all future calculations. I like to be conservative. Especially considering this property was built in 1967. A plus is that it got a new roof 5 yrs ago. 

Honestly never heard of the "1% threshold". 

As for terms, I had intended on a offering with a discount on the interest rate. But the balloon loan I had not thought of. That is a good way to keep both parties in the deal. As you read above, I am looking for properties that cashflow. This is the first steps for my business and want to build a reserve of cash for security. 

Seeing as I have your attention and you have freely advised, I have another one for you. I don't have an llc quite yet but I plan on doing so soon. How do I structure my equity deals under my llc umbrella? would I set up a limited partnership with each deal (if it is financed with an equity investor) and hold the llc as the general partner? Just curious as to how this works. I am in the process of locating a credible and suggested attorney in my area to guide me through all this. And the deal in the works.

I would do a deal where they get a quarterly check for how much profit was made! With a 15-25yr ballon payment! Or stay in the deal for longer ! And structure in the contract with a mgmt payment  of about 6-8percent mgmt fee!

Also Kyle seller likes two offers he fix something for what he asking or u fix them for a lower prices ! That way not offending him but giving him a choice and say in the deal! Helps seller to choose what’s better and makes sense for him!

If I had my old man backing me and it is positive cash flow it is a deal.

Good luck.

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Originally posted by @Account Closed :

The 1% rule doesnt apply on older plexes with maintenance issues.   On these you need the way better than 1% rule.......................hahahahahaha.

The 1% rule is for singles in decent condition,  and are tenanted by good people who dont live with DRAMMA!

 why the "hahahahahhaha"?
no one said this is an older plex(1967) with maintenance issues. Also no one mentioned the quality of the tenants...

Basit Siddiqi, CPA
917-280-8544

This post has been removed.

@Kyle Dutson

Does the seller know you are creating an LLC in which he would lend to the LLC?
just asking because if he doesn't know - it may or may not scare him off. I would tell him asap if he doesn't already know.

You should speak with an attorney about the entity structure.
I think it may be more advantageous for you to set it up as an LLC with you as the managing member and the investors as members. This may be the same thing as the LP formation but you may be afforded liability protection also. Again speak with an attorney on this matter.

Basit Siddiqi, CPA
917-280-8544

Thanks for the pointers @Christopher Shawn eady two offers is a great idea.

@Basit Siddiqi Yea, I am honestly still pretty ignorant on the legal ins and outs of llc's and lp's. I am jumping on this one early because it was in my face and just started to act. I planned on having the llc all set up first but.... I will speak to a lawyer ASAP. Why may the llc scare him off? just curious. Also, I plan on making a career of this. So was mainly inquiring on how I would set up the many deals like this in the future with my investment company. I guess the lawyer will be my best source of info and fill me in.

as for @Account Closed it is a 67' multiplex with a new roof 5 years ago. I am doing a walk through on tues and will check further into the operating features. I do anticipate higher maintenance costs. But honestly, as of yet it looks to be in pretty darn good shape. 

no offense look at lots of webinars and podcast! But most importantly a must! Find a lawyer or attorney who himself has rentals properties  ! That  way he knows both sides landlord and a attorney!

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Dad worked his whole life and gets a 4g return on his liquid assets. He knows little about investments. And wants nothing to do with any kind of effort besides giving money and expecting a return. He mentiones partnering with a freind in the same boat as him to limit exposure. If all goes well I could count on him and his buddy for future investment. This I hope will build a base and portfolio to refer other investors to in order to raise capital.  Gotta start somewhere and learn as you go. 

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@Account Closed I have noticed that the majority of your posts on BP are negative, antagonistic, and abrasive. Why is that? Also, I am not a "kid", I'm a grown man with two kids of my own. I have fought wildfire most my life and want to make a change and spend more time at home. Not all situations are related or remotely the same. I am an intelligent man who does his homework and refrains from taking unnecessary risk. The fact that it is my father has nothing to do with it. It only provides more leeway on partnership terms. Other than that, he is simply an equity investor. It is my job to provide him with the best service I can. It is my mission to create a company that provides investment opportunities that produce competitive returns for the layperson. I am passionate about my mission and end goals. Failure is not an option. 

Typo edit: previous post "Dad worked his whole life and gets a 4% return" 

A pic of the property. New roof and new windows. Currently getting reno's on the 3 empty units.

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Do you have any comps in that general vicinity that can provide us with more of a baseline?

@Account Closed for someone who just joined BiggerPockets a couple of days ago, you sure have a lot to say, yet you show little to nothing about yourself on your profile. You say you want to bring people down to earth as justification for your negativity but you really don’t understand the culture of BiggerPockets. 

Are you even a real estate investor or did you just find this site and want to spout off your opinions like any other fool on social media? Because if your goal is to look like a fool, then you nailed it.

Before continuing to spew negativity and unwanted opinions, why don’t you let the community know who you are and what your experience in real estate is so that we can know whether to listen to you or not. Here I’ll show you how it is done, my name is Shiloh. I am a husband and father and I am a respected child and family therapist in my community. I have been investing in real estate over the past 7 years. I have several businesses and I own 40 properties with a current monthly revenue of over 25k. I hold meet ups in my community of Mesa, Arizona free of charge to share with others how to get started and be successful in real estate. I use BiggerPockets to network, learn, and encourage others to be successful in life. Everything I have stated is verifiable through an internet search. There, now that you have seen it done, why don’t you share with us more about yourself before you continue to comment.

Another BP thread gone wild!

Came for the multi-family info, stayed for the drama.

*grabs popcorn*

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