How do I evaluate this?

Question

Hi all,

This community is amazing, I hope you can help me!

The owners of the property next door are up and leaving. They have not listed the property yet but the asking price compared to the current (undermarket) rental income doesn't add up. It currently works for them because they bought the property 20 years ago for a small amount of money and put in their sweat equity. I'm not sure how to evaluate and then respectful make them an offer which is prudent for me and might work for them.

They are open to owner financing at 6% interest, that's attractive, but would also like 25-30% down and ~$7k per month income. The asking price is $1,349,000.

It's a 5 unit bringing in $9k a month. Expense info from the seller is $3500 a month for tax/insurance/utilities etc. Tenants pay their own utilities. I estimate that if all the units were at the market rate the income would be $12.8k, plus there are a couple unused spaces that could also be rented as storage/studio space for ~$1k.

I own one short term rental property that is currently being renovated before being put to use but it's value is ~$400k. I could swing a ~$100k downpayment without using that equity.

I don't know how to balance and evaluate all these factors! What scenarios should I run in the rental calculator? What strategies should I pursue?

Thank you in advance!

Denise Supplee · Answer

Hello,

I'd focus on the numbers rather than the asking price. Run the deal based on current rents, then again based on what you realistically think rents could be after improvements and turnover. The owner financing is attractive, but I'd make sure the payment still leaves room for vacancies, repairs, and other surprises.

One thing I've learned over the years is that a property's potential has value, but I try not to pay for all of that potential upfront.

G. Brian Davis · Answer

The first thing I'd do is separate what the property is earning today from what it could earn someday.

Right now, it's bringing in about $9k/month. The market rents, storage income, and other upside opportunities are interesting, but I'd be careful about relying on those to justify the purchase price.

One thing I've learned reviewing deals is that future upside is great, but existing cash flow pays the bills.

I'd run multiple scenarios: current rents, partially improved rents, and fully stabilized rents. If the deal only works in the best-case scenario, that's useful information.The owner financing is attractive, but I'd focus less on whether the offer is "respectful" and more on whether the numbers work for you. Sometimes a seller's price and a buyer's numbers simply don't line up, and that's okay.

I'd be curious what the property's actual NOI looks like after setting aside realistic reserves for maintenance, vacancy, and capital expenditures. That would probably tell me more than the asking price.

Drew Sygit · Answer

Why are you letting the seller dictate terms?

To make this work, start with current rents and work backwards to determine how much you can:

Pay as a sales pricePay as a monthly payment

Then negotiate, negotiate, negotiate...

Fernando Chavez · Answer

Hey @Caroline C.! I would run two pro formas, one as-is vs one at stabilized rent. Then only use the stabilized rent one if you have a solid path to lease it up, say within the next 12-18 months or so. The 6% owner-financed option is attractive compared to today's commercial rates, but there may still be an opportunity to negotiate further to make the numbers even better. The structure in my mind matters more than the price. Best of luck!

Bill B. · Answer

If you don’t have $250-300k downpayment the owner financing is your only option and saves you at least $12k/year in interest.

Problem is even if they make the mistake of accepting only $100k down your $1,25M loan at 6% for 30 years. (Again if they make the beginner mistake of not putting a 5 year balloon on it. What are the odds they and you are alive in 30 years?) your payment is $7,500, plus $3,50 current costs (assuming taxes don’t go up in your market because of sale might be a big assumptions.) you’ve got $11,000/months in guaranteed expenses.

So if you get lucky and nobody moves out, everybody pays, and nothing breaks, your $100k investment brings in negative $2,000/mo.

Step 2. You get lucky again and everyone’s on MTM lease, there’s no local laws regarding rent control, your aide everyone’s rent 20%. Everybody stays, everybody pays, nobody asks for any repairs at the higher rent. Now your $100k investment brings generating negative $200/mo.

Step 3, you skip the first 2 steps put the 100k in a bank CD and make $300/mo guaranteed. :-).

You just have to figure the odds on your 33% rent increase being realistic, how many months of vacancy it will cause, how much the turnover will cost. Imagine only 3 move out and it only takes 1 month to turn it over and 1 month to find a new tenant, and the turnover only cost $10k/unit. (Assumes they haven’t been there long and previous landlords updated the units constantly, otherwise 20-30k?). So you’re out 6 months of rent ($1,800x6=$10,800.00), plus $30k in turnover, maybe $1,200 in utilities just to keep the math easy.). So you’re out of pocket $42k. That’s 14 months of the increase eaten up. So for those 14 months it’s the same as if you didn’t increase rent. (Minus $2,000/mo) Hopefully all 3 renew or you have new vacancy and turnover costs before you finished paying off the last one. This is of course assuming you manage all the tenants, so you’re buying yourself a job. And the sellers don’t know about tenants or building problems.

Without seller financing a 5 unit is commercial financing so far fewer buyers than a 4plex. If I KNEW the building was perfect and the tenants were great and would pay the increased rent, the tenants would accept $100k down and NOT have a balloon. You might get me to pay $1-1.1M.

Ps. Did their numbers include roof/plumbing ages, landscaping, snow removal, etc? (I was reminded you were in CT, another reason I wouldn’t be a buyer. But you’re already there.). If they aren’t even bothering to list it for sale. Just give them a low written offer and be afraid when they accept it. Good luck.

Ryan Surjnarine · Answer

Sarah — this is a great question and you're already thinking about it right. A few scenarios I'd run on a deal like this:

1. Current rents only (worst case)
At $9K gross - $3.5K expenses = $5.5K NOI/month, or $66K annual.
At 6% interest, 25% down ($337K), the loan would be $1.01M.
Monthly P&I on a 25-yr am: roughly $6,500.
You'd be netting about -$1,000/month in year 1.

That's your worst case. Important to know it bottoms out around -$12K/year.

2. Market rents achieved (best case)
At $12.8K - $3.5K = $9.3K NOI/month, or $112K annual.
Same loan structure: about $30K positive cash flow annually.
Real cap rate at $1.35M: 8.3%, which is strong.

3. Realistic ramp (most important)
Assume rents reach market over 18-24 months as leases turn over. Most leases give you 60-90 days notice.
Average NOI during ramp: maybe $7.5K-8K/month.
First year you're slightly negative. Year 2 you're cash flowing. Year 3+ is real money.

4. The owner financing question
6% is genuinely attractive vs. 7.5-8% commercial financing. But the 25-30% down requirement plus $7K monthly debt service is steeper than a traditional loan would be on the same property.

Quick math: $7K/month × 12 = $84K annual debt service. At market rents ($112K NOI), DSCR is 1.33 (solid). At current rents ($66K NOI), DSCR is 0.79 (won't cover the debt).

So the owner financing math only works if you can move rents to market quickly OR negotiate the monthly payment down.

5. Strategic offer
I'd consider offering: $1.15M-$1.20M with the seller financing they want, OR $1.27M with traditional financing at 7.5% if they'll budge on price. Seller financing has real value to them (deferred capital gains, monthly income) so the price difference is justified.

The unused spaces are worth investigating but I wouldn't underwrite them into the deal — treat any ancillary income as upside, not base case.

What's the local rent market doing? If rents are still climbing in your area, the ramp time matters less.

Vijay Friedman · Answer

@Caroline C.

For a 5-unit, I’d evaluate this more like a small commercial/multifamily deal than a residential rental. Start with current NOI, then run a separate stabilized NOI using market rents only if you have strong rent comps and a realistic timeline to increase rents.

The seller financing at 6% is attractive, but the price still needs to be supported by the income. I’d ask for the T12/P&L, rent roll, leases, taxes, insurance, utilities, repairs, CapEx history, and confirmation of any legal/use restrictions for the extra spaces.

I’d be careful using future rents to justify today’s price unless the path to stabilization is very clear.

Blake Hernandez · Answer

That is a tough one. Even at a million your down payment is 200k.
Just look at it as one unit in stead of 5. You are paying 269,800 for a unit that brings in about 2k a month. Use that as a base line and look around your market and see if that is a good deal or if you can do better.
Also you can use a mortgage calculator to see what you will be paying and how much goes to interest and principle.

How do I evaluate this?

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