If you have a good deal the funding finds you - MYTH?

30 Replies

Hello BP, I have a dilemma.  We have all heard the subject line a hundred times and yet I dont believe this to be true (in my short experience).  Here I am a newbie trying to secure my first deal in Omaha, Nebraska, trying to find funding for this deal.  I have been turned down by two banks now, portfolio lending types interested in rental property, because I essentially dont have enough money saved up.  The down payment is being provided by investors who will get a good return in two years and agreed to provide an additional 5k for operating expenses in case of surprises.  The seller accepted the offer Monday morning 11/27 after we offered Sunday night.  I realize that I have the cart before the horse a bit but I had no way to know I would stumble on such a great property.  In short, HELP!  I dont wanna lose this property.  

Property: 4-plex in Omaha NE

Asking Price: $150,000

Property Tax (annual) = $2240 ($187/mo)

Down Payment: 20%

Loan Amount: $120,000

Loan Period: 15 (20 yr preferred)

Interest Rate: 4.5%

Monthly Mortgage Payment (using BP mortgage calculator): $917

Built in 1900, conversion 4-plex owned by land lord for 40 yrs who is retiring. Well maintained and in excellent condition in B-/C+ neighborhood. Whole building/house (all 4 units) run on one A/C unit and one Water heater/Furnace which is controlled by a locked thermostat that is set to 72 year around. Not an ideal setup but all current tenants have zero issue with this (I have asked each directly). Landlord charges flat rate to account for these expenses with zero issues from tenants. Has clean basement that has a washer and dryer with coin operated setup. Huge attic not being used for anything. Roof to be replaced in next week by seller/land lord. Windows in various levels of upgraded status but no originals. Vinyl siding in excellent condition, 5+ years of life on them easily.

Income:

All units 1 bed/1 bath

Unit A --> $700

Biggest unit, has bonus room and dine in kitchen, has only off street parking spot, 15 year tenant (month to month), i think the rent could be increased to 800-825

Unit B --> $600

Standard 1/1, Tenant leased until May/2018, I think rent could be increased to 650 after lease

Unit C --> $500

Standard 1/1, 7 yr Tenant (month to month), only unit that would need any rehab and not until (if) tenant left, i think rent could be increased to 600-650 after mostly cosmetic rehab (shag carpet and wood paneling)

Unit D --> $550

This is actually a studio but listed as a 1/1, has Murphy bed that will be removed and wood floor refinished from bed damage (minor), recently vacant but was renting for 550 but would possibly lower to 450 to fill quickly

Additional Expenses:

Landlord pays Gas/Electric and charges flat fee to cover costs. I have accounted for 5% vacancy, 7% repair, 5% CapEx, and 10% prop mgmt (although I plan on doing it myself initially to help me learn the ropes).

50% Rule:

Cash flow = (Income)*50% - (Monthly Mortgage Payment)

Cash flow = ($2,750) *50% - $917= $457

2% Rule:

1.75%

@Daniel Thomas are you contributing any money to the Downpayment? Basically this is a 4 unit and is therefore actually considered residential, as such you can’t borrow any of the downpayment in 99 percent of cases.

If this was commercial it may be different but residential is much more stringent, but the trade off is better rates and terms.

I wondered about the down payment @Caleb Heimsoth thx for clarifying. Welp, i dont have 30k for the dp so thats a bummer. Is there any other options for me or is it over?

that looks like a solid deal. if you don't have the capitol saved up, the next best idea would be to wholesale it, if it is truly an amazing deal. 

I would run your numbers with Hard Money in place, and reach out to some of those lenders. 

Deren Huang, Real Estate Agent in OK (#173779)

If your contract is assignable you could essentially wholesale it for a fee. That sounds like a decent deal unless it’s a bad part of town. I’d probably be interested if I️ bought in Omaha lol.

If it’s not assignable then you can explore having him resign but that would be tricky. Your other option is to find a commercial lender who will lend on it. That’s probably your best bet.

Or you could ask for owner financing and use your investor as the money down (but they’d have to be okay with second position). You have options you just have to get creative

your partners need to go on title with you and qualify for the loan if that is were the down payment money is coming from in this scenario.

and yes In my mind its a myth that money will find you.. can it happen yes.. its it likely when you are starting out with no experience or money  NO..

this is why you should work on the money and partner side first then go shopping.. don't want to do a ton of work then cant close... you get frustrated and disappointed.. plus when you have your money in hand you can negotiate harder.

@Daniel Thomas

I have never heard of funding finding you if you have a good deal. There is no such thing as money suddenly appearing once you find a deal.

You said you "think" rent could be raised.

Consider what the bank is looking at right now. They are looking at CURRENT rent.

This is 2350. 

If you use the 50% rule minus your mortgage That comes out to a monthly cash flow of $258.

You budgeted 5% capex on a property built in 1900? It has been owned by the same person for 40 years. I can only imagine how much deffered maintenance there is on this place. 

Since you don't have the down-payment, partner with someone that does. Split the deal and put them on the note as well. Will make bank financing much easier.

I will also caution you, this is an OLD building and regardless of what the owner tells you it sounds like there is a LOT of stuff that has to be done. The $30k downpayment is just the beginning in my experience.

My cardinal rule that has proven to be accurate time and time again=If I am having a hard time finding funding then I do NOT have a good deal. Financing should be one of the easiest parts of a transaction. Finding the deal is the hardest part. That's the way I look at it.

Hope this helps. 

Thx @Caleb Heimsoth @Jay Hinrichs @Deren Huang

It is in good neighborhood that is being revitalized. Being new i am limited on what i know of partnering or assignment. Id prefer to keep it somehow but something is better than nothing.

@Daniel Thomas - Your gross income is incorrect on here... that's going to affect your numbers.  You have listed a gross rents monthly as $2750.  Even if you assume Unit D can be filled at $550/mo, your gross monthly rents are $2350... not $2750.  Since you haven't raised rents yet, you can't justify a purchase cap rate off of money that is "projected" to come in.  Especially considering one tenant has been there for over 15 years.  I wouldn't expect them to happily pay $100+ more per month.  You'll have to deal with a lot of vacancy if you immediately want $2750/mo.

EDIT:  Looks like someone already made the same point I did :)

Matt Lefebvre, Real Estate Agent in NH (#070207)
603-554-2309

Thanks @Luka Milicevic It was kept in excellent condition but i agree it is an old building. You offer valuable advice and i appreciate it. I have a lot to think on!

Originally posted by @Matt Lefebvre :

@Daniel Thomas - Your gross income is incorrect on here... that's going to affect your numbers.  You have listed a gross rents monthly as $2750.  Even if you assume Unit D can be filled at $550/mo, your gross monthly rents are $2350... not $2750.  Since you haven't raised rents yet, you can't justify a purchase cap rate off of money that is "projected" to come in.  Especially considering one tenant has been there for over 15 years.  I wouldn't expect them to happily pay $100+ more per month.  You'll have to deal with a lot of vacancy if you immediately want $2750/mo.

EDIT:  Looks like someone already made the same point I did :)

 Thank you, I'm aware of the current rental. I copied and pasted from my workups and missed that adjustment. I would want to increase rent gently for the long termers naturally while getting them into a short, 6month?, Lease to lock in some flow. 

Hi Daniel,

Have you considered moving into the unit that is vacant and then using an FHA loan to buy the property using 3.5% down payment? Once you live in it a year you could move out and then rent the unit out. If you wanted to, you could refinance the loan to a traditional mortgage, and then use that same strategy to buy another multifamily and move into one of those units.

Originally posted by @Craig Stasnbury :

Hi Daniel,

Have you considered moving into the unit that is vacant and then using an FHA loan to buy the property using 3.5% down payment? Once you live in it a year you could move out and then rent the unit out. If you wanted to, you could refinance the loan to a traditional mortgage, and then use that same strategy to buy another multifamily and move into one of those units.

 I would love to house hack but i have a wife and 2 kids and my wife said no way lol.  It wouldnt be possible in this property cuz the 4th unit is a studio.  

Originally posted by @Caleb Heimsoth :

If your contract is assignable you could essentially wholesale it for a fee. That sounds like a decent deal unless it’s a bad part of town. I’d probably be interested if I️ bought in Omaha lol.

If it’s not assignable then you can explore having him resign but that would be tricky. Your other option is to find a commercial lender who will lend on it. That’s probably your best bet.

Or you could ask for owner financing and use your investor as the money down (but they’d have to be okay with second position). You have options you just have to get creative

 My agent is telling me we would have to write up new offer with new buyer name and info, not sure if that's accurate.  I'm way into unfamiliar territory with this stuff now.

@Daniel Thomas , I would advise you to be very cautious with your pro forma rental rates and your vacancy percentage projections.  Urban Village/Harvest and others have brought a LOT of new units online in that area and it has made it more difficult to get quality tenants quickly.  I have a lot in midtown and leasing has been more difficult across the board recently, including C class.  Rents on paper don't equal real money, and even if you get your target number, it may take longer than you projected, leading to higher vacancy %.

I would also mention that this may not be as fantastic of a deal as you think.  Conversions like this one built in the early 1900's always trade at a discount to built for purpose stuff, especially considering the shared utilities.

I like the gentrification going on in that area, but I don't like the fact that there are so many new units becoming available.

Good luck!

Originally posted by @Owen D.:

@Daniel Thomas, I would advise you to be very cautious with your pro forma rental rates and your vacancy percentage projections.  Urban Village/Harvest and have brought a LOT of new units online in that area and it has made it more difficult to get quality tenants quickly.  I have a lot in midtown and leasing has been more difficult across the board recently, including C class.  Rents on paper don't equal real money, and even if you get your target number, it may take longer than you projected, leading to higher %.

I would also mention that this may not be as fantastic of a deal as you think.  Conversions like this one built in the early 1900's always trade at a discount to built for purpose stuff, especially considering the shared utilities.

I like the gentrification going on in that area, but I don't like the fact that there are so many new units becoming available.

Good luck!

 I appreciate your insight on this.  The age and shared utilities facts are "unique" and I certainly agree with you that they are not typical.

@Owen D. excellent post that is actionable to the exact area other than all of us from all over the US commenting on this in general terms.

If I could vote 3 times for your post I would and if I was @Daniel Thomas   I would be buying you lunch today or a cup of coffee :) 

Originally posted by @Daniel Thomas :

I wondered about the down payment Caleb Heimsoth thx for clarifying. Welp, i dont have 30k for the dp so thats a bummer. Is there any other options for me or is it over?

 Get a commercial loan instead of a loan in your name or get a hard money loan or get your private investors to bring in more money to buy it cash. You can also try to get the seller to finance it. 

Thanks @Jay Hinrichs !  I just know that I've experienced some leasing pain that I was not anticipating recently, and I'd hate for a newer investor to underwrite using rents and time on market data from 8 months ago that is no longer valid.  I am hearing from larger PM companies (not just my own) that leasing has definitely softened due to increased saturation of apartments in midtown, and this is also the worst time of year to get stuff leased in the midwest (OK, maybe January/February is the worst).

I was able to get really good rents and things rented quickly this spring and early summer, but the length of vacancies started getting longer the later we got in the year, and I have a couple units in the same area that have been vacant for 30+ days with rent reductions/concessions coming.  

Hard to know this stuff unless you are already active in that particular part of town. 

Originally posted by @Jay Hinrichs :

@Owen D. excellent post that is actionable to the exact area other than all of us from all over the US commenting on this in general terms.

If I could vote 3 times for your post I would and if I was @Daniel Thomas  I would be buying you lunch today or a cup of coffee :) 

 AGREED 100%!!  I am learning so much from all of you and this property.  I just hope I have some money to show for it afterwards!

lastly as a general comment and to tag along with @Owen D.  repurposed old buildings can be a real long term cap ex drain.. so caution.. unless your buying in San Francisco or some other VERY expensive market that those are the norm..

most of these types of buildings sell for far less than replacement costs and there is a reason for that.

I think the real question here is how subjective we are when we talk about the deal in "find the deal and the money will follow."

I, for one, do NOT view this as being anywhere close to being a "deal". You're essentially paying retail for this property based on the purchase price being listed as 150k and the ARV being listed as 150k. How is that a deal?

Returns alone don't make it a deal. The second you turn the key after you buy the thing, you're underwater. I say that because as soon as you go to sell it, you'll be taking a loss when you figure the closing costs of the sale and the fact you're gaining zero in equity.

So if you're wondering why a bank or someone else isn't lining up to lend you money, that would be my first thought - money does typically follow when you have a good deal, but that is NOT a good deal.

Most investors view a "deal" as purchase plus rehab coming in at 65 to 70% of the ARV. So if you were to get this thing under contract for 105k, then you'd see the money follow. This is simply not a good deal.

Originally posted by @Owen D.:

Thanks @Jay Hinrichs !  I just know that I've experienced some leasing pain that I was not anticipating recently, and I'd hate for a newer investor to underwrite using rents and time on market data from 8 months ago that is no longer valid.  I am hearing from larger PM companies (not just my own) that leasing has definitely softened due to increased saturation of apartments in midtown, and this is also the worst time of year to get stuff leased in the midwest (OK, maybe January/February is the worst).

I was able to get really good rents and things rented quickly this spring and early summer, but the length of vacancies started getting longer the later we got in the year, and I have a couple units in the same area that have been vacant for 30+ days with rent reductions/concessions coming.  

Hard to know this stuff unless you are already active in that particular part of town. 

 Thanks so much for your insight. You're a gentleman and a scholar!

Originally posted by @Mike H. :

I think the real question here is how subjective we are when we talk about the deal in "find the deal and the money will follow."

I, for one, do NOT view this as being anywhere close to being a "deal". You're essentially paying retail for this property based on the purchase price being listed as 150k and the ARV being listed as 150k. How is that a deal?

Returns alone don't make it a deal. The second you turn the key after you buy the thing, you're underwater. I say that because as soon as you go to sell it, you'll be taking a loss when you figure the closing costs of the sale and the fact you're gaining zero in equity.

So if you're wondering why a bank or someone else isn't lining up to lend you money, that would be my first thought - money does typically follow when you have a good deal, but that is NOT a good deal.

Most investors view a "deal" as purchase plus rehab coming in at 65 to 70% of the ARV. So if you were to get this thing under contract for 105k, then you'd see the money follow. This is simply not a good deal.

 It was listed at 170 and I got it for 150. That's my fault for labeling it wrong in the post. The arv I kept static because as it is there is no rehab to really do having 3/4 of the unit filled. You could do something in the 4th but it doesn't really NEED anything. The property does have comps for around 170. The rental income is low but insight from above posters is worth considering.  

Still seems a little light on the discount to call a "deal". But 150k for a MF thats worth 170k and needs no work probably is a pretty good discount in this market.  There is definitely a premium you have to pay on properties if they don't need any work.

But I would still say thats why you're getting some push back from banks. Numbers look a little better given the additional 20k in equity. Still not what you would consider a great deal though.

Again, if its worth 170k, then a good deal would be about 120k. Put down 20% of that or 24k and they're doing a loan of 96k on a 170k property. Thats a bit easier to get a lender to bite on than 120k loan on a 170k property. 

The better that LTV, the easier it is to get the loan. But sometimes that first investment property loan with a bank can be the hardest. They've got a rolodex full of reasons why they don't want to do the loan. Don't be afraid to go back to them and ask again. Ask why they don't think this deal is a good risk to them.

The more you learn about the ways they think, the better off you'll be in the long run. And you'd be surprised how a little extra effort like that will get them to change their mind. 

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