I am looking to buy a 2, 5 unit residential building for 400k. The owner is selling it as a package. The gross rent for both buildings is 84k and Noi before debt is 65k without accounting for reserves or vacancy. It seems like an incredible deal.
I would like to know if I have to do a commercial loan for this. I feel commercial loans aren't ideal since they have ballon payments and prepayment penalties, and Im assuming that would spread my depreciation over 39 years instead of 27.5
Is there a way to get a conventional loan either with a small bank, or portfolio lender that would maybe have friendlier loan terms?
It is also very important to me to be able to to a cash out refinance or HELOC on the property. If I took a commerical loan would I be able to take cash out of it similar to residential properties?
Thanks a lot guys.
Jonathan: Sounds to me that the NOI is too high for that amount of rent. The 50% rule applies for small commercial properties so a more realistic NOI would be 42K. Yes you would have to get a commercial loan for this deal but the depreciation is still 27.5 yrs not 39. Your best bet is a small local bank and you need to go meet with several of them before you make the deal as the cost of the loan makes a significant difference in your investment return/cash flow. Good luck.
I agree. Always figure NOI at least 50%. You need o look at long term expenses.
Havent bought commercial, but have always been told to jump up to at least 8 for it to make sense.
Definitely want to go with 50% of Gross Revenue for expenses.
$400,000 Purchase Price
$84,000 Gross Revenue = $583.33/unit in monthly rent
$42,000 in expenses
$42,000 NOI = 10.5% Cap Rate
If you put down 10% (some lenders might require more. If you move into one of the buildings you might be able to get away with 10%) your monthly payments at a fixed rate of 6% (commercial is higher) for 30 years your annual payments would total $25,816.56.
$42,000 - $25,816.56 = $16,183.44. Your initial Cash on Cash Return based on the seller's numbers is 40.45%.
Yes, you do have to get a commercial loan. Commercial loans are specficially for multi-family properties with 5 units or greater. No way around this really.
This looks like a great deal but there are a few things I'd look into. Is the building really old? Is it 100 years old, frame, and two-story? If so, your expenses might be a little higher. Do both roofs have life on them? It will cost you roughly $15,000 to do both roofs. How old are the hot water heaters? They last 6-10 years. They cost approximately $650 to replace. Is there any knob and tube wiring? Are there active code violations? What kind of area is it in? If it's in a rough part of town your occupancy rate might be lower than normal. Is the $84,000 based off actual numbers or is it based on rents and occupancy that the buyer believes is obtainable with a new owner (pro-forma rents)?
Keep this updated. Looks like a great deal. I'm curious to see what happens.
Thanks for the responses,
@Daniel Miller It is 110 years old and 3 story.
I am going to view the property on Thursday to get an idea for the amount of repairs needed and type of neighborhood . It is right across the street from an elementary school so im assuming that's a plus! Needless to say im skeptical about the age of this building. It cash flows like a beast so I guess that makes up for it.
I recently spoke to a few com. lenders and they generally all have the same terms. 25% down. 5year fixed 20 amort. I dont really want to put 25% down. 15% would be ideal but I dont mind 20%.
These two requirements from a lender has me scratching my head.
- Name and contact information of the Attorney or Title Company you expect to use in conjunction with the purchase
- 9.We will eventually require evidence of insurance naming our bank as Mortgagee (after loan approval)
Do I need to get a title company on my own? evidence of insurance? I thought the bank gets this information for me.
Also, since this is a short sale, how would a person default on this property if it makes so much money? Cant be high interest rates because they would have refinanced years ago.
Letting you get the insurance is a good thing. It means you can shop around. Same for the attorney as well since not all charge the same. For the property I'm closing on next week ( for details see my response to your other post) I contacted the current insurance agency and was quoted $5500 but current owners pay $3500 a year. Turns out the agency couldn't get same insurance company to cover it so they had to source it again. So I decided to contact another commercial insurance agency owned by a guy that goes to church with me. Quote came back today from him: $2920 /yr with same coverage. I chose him. I may not have gotten that deal if the bank had chosen for me.
You never can guess why people can't seem to do easy things. Maybe previous owner spent all the rent revenue on gambling and couldn't pay the mortgage. Hard to say.
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