Does this make sense?!

Question

I want to give some stats and my idea before I make a verbal offer on a property. If anybody reading this could double-check my ideas and let me know if there is a better idea out there, I would be so grateful! I do not have any capital right now, as this will only be my second investment property, so I am hoping to convince the seller to owner-finance the down payment. I know there are some assumptions in my math, but I'm making it as close-to-reality as I can:

8-plex (commercial financing)

Asking Price:                                       =                                                                                $290,000

Down Payment: 25% of 290,000       =                                                                                    $72,500

Mortgage of 217,500:     5 yr loan, amortized over 20 yrs @ 5% =                                           $1,435

Second Mortgage held by seller of 72,500:  5yr balloon, 6% interest-only payments =           $362.50

Gross Monthly Rent  ($55,000/12)                                                                                =          $4,583.30

Monthly Insurance/Taxes + Prop.Management (1833 + 275)                                       =           $2,108

RENT - EXPENSES (2 Mortg.+Insur.+Tax+Prop.Manage)    4583.3-3905.5           =        +$677.8/mo

This does not seem like a very good deal to me.  Did I mess something up?  Or maybe my numbers on the monthly taxes and insurance are wrong?  Well... I'm going to go get more information but since I took so much time typing this up I'll go ahead and post it to see what you guys think. I guess what I'd really like, since I'm not sure about those numbers anymore, is whether there is another/better strategy for getting me into this commercial loan deal other than having the seller finance the down payment?

Thanks!

Dan Wallace · Answer

I don't typically finance multi-family projects but you have a lender that will allow you to inject no cash to the project? No equity injection in this type of deal does not seem to be prudent lending terms. I did not confirm your numbers and could not tell if you included a vacancy assumption consistent with this property historically or based upon local vacancy levels. Depending on your vacancy factor, reserves, etc I would think this property may not cash flow adequately with the owner carry.

Chris Jackson · Answer

great thoughts, corby. thanks. the price that works for me with the numbers is buying at 275000. I am confident that the building would appraise around 330000. I know you don't buy based off of appreciation, but I do know that the area is being improved and built up a lot and that tend will continue, so I am confident that I will be able to refinance in the future and the value will go up. it is interesting what you said about capital improvements because I do not have much capital right now, so that worries me a bit.

Corby Goade · Answer

I don't think those numbers look too bad, but that's considering that you're only accounting for 5% vacancy. I would guess that 5% for repairs is not likely going to be enough. I don't know your area, but that might be low for an 8 plex with these types of rents. You're assuming that you can refi in a year, which means you are confident that you can get the value of this property up by 25% in 12 months? Do you have plans and funds to do that? This being an 8-plex, you have to force appreciation via capital improvements, savings to your NOI and raised rents. If I had this deal on my plate, I'd be interested, but I'd be talking to a commercial lender to see what I need to do to get my NOI up and refi asap. The last thing you need is to have five years pass and not have enough equity to refi and either sell at a loss or deal with foreclosure. Best of luck!

Chris Jackson · Answer

So I ran more numbers and got the facts from the management company.  It looks like I'll make about $1500/mo from the 8-plex.  After I take out 5% for vacancy, 5% for repairs, 5% for CapEx, 8% for prop.management, and considering 6% interest-only payments to the owner for owner-financing the 25% down I'll need, I would still clear $300 a month.

That feels tight for me since this is an 8-plex we're talking about - but after a year when I refinance the place I assume that I would be making more money each month, right?  Does anybody know what sorts of commercial refinancing loans are available out there (or at least typical)? What do you guys think about those numbers now that I finally got my act together?

Brent Coombs · Answer

Did you allow ANY dollars for vacancy costs, maintenance or capital expenses?

(Please re-submit your analysis, including those numbers).

@Chris Jackson, I tend to agree with you: "This does not seem like a very good deal". Cheers...

Joe Villeneuve · Answer

The best you could get is a 5 year mortgage?

Arlan Potter · Answer

it seems that taxes and ins are high, as well as your maintenance estimate. I also believe it is also tight to use a property manager when you are making payments on loans.  I own  a bunch of multis but we self manage. At least for the ten years that we are making payments.

If you can use a propery manager and still net close to $100/month per unit, then it sounds good.

Does this make sense?!

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