Does this deal make sense?

Question

Just wondering if this deal makes sense (cents$$) or not? It's a 26 unit MF complex. 23 out of 26 currently rented. Would require 20% down and seller financing 10% of purchase price for a total of 30% to get commercial loan. What do you think? My preliminary numbers says it's a decent deal, but not sure. Thanks.

Price = $ 990k

Gross rent = $ 179k

Current expenses runs about 46%

NOI = $ 96k

Price = $ 990k

Gross rent = $ 179k

Current expenses runs about 46%

NOI = $ 96k

Tou V. · Answer

I don't have any experience managing large multi units.  I've just been dealing with a few duplexes, which so far has been fine.  I'd definitely be using a PM though.  The current expenses are with PM charges being 10%.  Part of me is saying it looks okay, other half of me is saying I could do better.  Thanks for the great advice.

Steve Babiak · Answer

I'm surprised that nobody mentioned unit mix - how many 1BR, 2BR, 3BR, etc?

Chris Winterhalter · Answer

@Tou V

Is this your first deal?  Where is it located?

Like @Ryan S. points out we need more information about the building to make an assessment about the deal.  I don't even like talking about expense rules until you can figure out if the area is solid and you have a sufficient amount of demand to keep the building filled.  Building condition is huge....you need to properly assess the building condition with a good inspector and local contractors.

Ryan Swan · Answer

Are there any major deferred maintenance items that might require repair immediately? ie new roof(s), new HVAC system(s), new plumbing, foundation, etc.

Are the 3 vacant units in turn-key condition, or will they require work to make rentable?

I think Joel Owen's point about self managing vs property manager is a HUGE consideration. I own a 7 unit apartment complex and it's quite a bit of work...magnify that to 26 units and you're looking at almost a full time job, especially if you have high turnover.

Joel Owens · Answer

The lender will want to know your experience with multifamily. If that is limited they will look more to your health with equity and net worth and liquidity to offset lack of experience.

It's great if you have all three. If you do not have even 2 out of 3 but just one then it's more risky for the lender.

Does this owner self manage?? I could see that at 46% but they have bought themselves a job. If you don't self manage you factor in the 8% management or 10% to be safe. Heck throw in that number anyways as if you start out self managing you might switch to a PM later.

Talk is cheap about buying properties with little money down. This was done more in 2009,2010 when markets were frozen. Some people with considerable experience might get away with it as they can show a track record and offer other properties with significant equity up as collateral for owner finance deals. Banks won't touch or come close to no money down deals. They have bank regulators breathing down their necks and must underwrite loans conservatively or lose their jobs or worse yet be accused of fraudulent activity by the feds for not following protocols and get into legal trouble.

Tou V. · Answer

The owner pays for water, sewage, and garbage.  According to seller that's included in the 46%. He did give me a breakup of all costs and it came in at around 46% for the last 2 years.  For the past 2 years, they've been around 24-25 units constantly rented.  Let's say if costs is 55% (to be safe), would it still make sense?  How do people without a lot of money buy these multi units then?  I'm always hearing investor buy millions dollar properties with little down.  I have enough for the down payment and closing, but not another $100k.  Might have to set my sight lower, like in the 500k range if it's going to require too much capital.

Joel Owens · Answer

Tou does seller pay water etc. or do tenants??

46% is light. I would go 50% expenses and then 60% if landlord pays utility.

Lenders generally look for net worth equal to sales price and liquidity after cash down of 10%. So in this case about 100,000 reserves liquidity after putting 200,000 down cash.

The lender may or may not allow a seller held second. You should be able to get a 75% to 80% ltv without the seller held second.

23 out of 26 CURRENTLY rented. This will be your issue getting a loan from a lender. What has historical occupancy been the last 24 to 36 months?? If this is a turn around with recent high occupancy look for about 50% down from a bank because of more risk.