newbie needs help analyzing 6-unit

[Kristen Wall]

Hi all,

I'm new to all this and trying to figure out if there is a creative way to make this a good deal, or if I'm trying to do the impossible in this case.

I am looking at a 6-unit. The cap rate is 8.1%, the units are full and have longterm tenants, and expenses are a little under 50% of income. The asking price is $190k, and the monthly gross rents are $3000. I don't think it will appreciate much in the next 10 years.

I thought it looked promising because
1) the gross rents are more than 1% of the purchase price
2) the cap rate is (just) above 8%
3) the tenant base seems stable and of good quality

However, with commercial loan financing, things go south. I don't understand if that's because I am missing something about how to find a good deal, or because I can/should find better financing.

My current financing options:

1) 15 yr, 6.5% rate, 30% down => cash flow is $140/mo; debt covg is 1.1; ROI is 2.7% (very bad)

2) 20 yr, 5.5%, 30% down => cash flow is $380/mo; debt coverage is 1.4; ROI is 8.1% (still kinda bad, right?)

How can I tell earlier in the analysis process what kind of financing is actually workable? Is there some potential for this deal to be good, or is it a dud?

Is there another financing option here that I haven't considered? The owner won't finance.

Thanks so much for your help and insight!

Kristen

[Joel Owens]

Hi Kristen,

I love the multifamily questions as it is one of my specialties.

3,000 / 6 = 500 per unit a month

3,000 X 12 = 36,000 Gross expected income yearly

Factor in 50% costs

10% management
10 vacancy
30% operating and expenses (if landlord pays utilities go 40%)

Now when the number of units goes up the different categories move a little but the total percentage stays roughly the same.

So lets say landlord pays zero utilities and that there is no immediate repairs needed to the property.

You would go 36,000 /2 = 18,000 NOI for a 10 cap which is 180,000 purchase price.

You basis points for rate is in the 5's to 6's. That is because you want a I am guessing a 15 to 20 year loan term?? and what you are quoting is not the amortization correct??

You can land a 7 to 10 year term in the low 4's and banks will do a 75% ltv and let the seller carry back a 10% second. Have the seller carry a rate in the 3's so you can blend the rate down. Watch out for any pre-payment penalties (defeasance) on the loan.

Sounds like a possible if you can get the right financing lined up.