Working a 5 unit multifamily deal, 4 duplexes and 1 triplex - Need advice from the veterans!

Multi-Family and Apartment Investing
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Working a 5 unit multifamily deal, 4 duplexes and 1 triplex - Need advice from the veterans!

Franklin Anderson
Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes

I am working a 5 unit multifamily deal - 4 duplexes and 1 triplex. All units are currently occupied with the average tenant being there over 3 years. Current rent rates are slightly low and should be raised at each tenant turnover. I have been approved for financing at 80% LTV, 5%apr, 15yr term, 3yr refi/baloon. The owner is willing to sale the properties for payoff plus 2014 taxes $954,900 ($188k/ea plus $14,900 taxes). They are extremely well built units (all brick), needed known repairs will be new roofs within the next 3 years - estimated cost to be $20 - 25k. Last unit sold for $200k in 2013.

  • Current rental income is $9,400/mnth $112,800yr, at 85% occupancy it drops to$7,990/mnth $95,880/yr.
  • Combined yearly taxes are $14,900
  • Estimated Insurance $5,000/yr
  • Estimated Maintenance Cost $750/mnth $9,000/yr
  • I will be required to pay all closing cost and appraisals - estimated $8 - 10k
  • I will be required to put $60k down and use a current property to make up the remaining 20% down - which will be refinance.
  • Loan amount will be $871,254, 5%apr 15yr am, 35 month maturity - $6890/month, $82,678/yr
  • I am assuming no appreciation - loan balance in 5yrs if all goes well should be approx $615k, add the $60k down, possible sale for $940,000 = $265,000 equity

We currently own a small single family rental home and one owner occupied multitenant commercial property.  This is a big deal for us.  The biggest unanswered question her is appraised values - if the properties appraise below the payoff the bank may consider a shortsale at which time I feel the deal would look way more attractive.

My gut says the cash flow on this is too tight.  One big problem and we are out of pocket.  Would love to hear the more experienced investors advice on this.  All help is very appreciated.

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Account Closed
Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
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Franklin Anderson you said you'd hate to let this go? Why? First rule of investing is not to get emotional and buy a bad deal. This is a bad deal. Move on and spend your time finding one that actually makes you money! The company I work for owns 9,000 units. We look at hundreds of deals per year and usually only buy 7-10. You have to pass on deals that don't work, no matter how you feel about them. You are in this business to make money.
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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
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    @Franklin Anderson just for clarification, is it 5 units or 19 units?  I'm thinking 19...

    If your assumptions for income and expenses are correct, the net income is $66,980 at 85% occupancy and $83,900 at 100% occupancy (which never happens for long, there is always some type of vacancy when you look at these over time).  The note payment is $82,678 so you are at negative cash flow and I don't see anything in the numbers for utilities, advertising, property management, and capital expenditure reserve. With those numbers, this deal doesn't throw off a bad return, it throws off NO return.  The real value is significantly below the stated price.

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  • Franklin Anderson
    OP
    Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes
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    @Brian Burke thanks for your willingness to help. It is 5 units - 4 duplexes and 1 triplex (10 rentals) at 85% occupancy the rental income would be $95,880/yr. We would self manage the properties, utilities are paid by the tenant, and this area requires little to no advertising for tenants. All that being said If my math is correct I am still cash negative. Hate to let this go...what value would you put on the property to make this work? I am pretty sure the bank is willing to short sale.
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  • Flavio Zanetti
    Investor · Andover, MA · Member since 2015 · 269 posts · 67 votes
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    @Franklin Anderson I am not sure I see positive cash flow here...

    My numbers are as follows: 

    Your loan is going to be $6890 a month or $82,678 per year.

    Current rents are $9,400 a month or $112,800 per year with 100% occupancy. Depending on how great this neighborhood is, for an investment with this size, I would not consider anything above 90% - hence, $8460 a monty or $101,520 per year.

    Taxes: $14900 per year.

    So far, you are only @ 3942 (@18842 - @14900) positive and you will still need a new roof in a few years @ $20K.

    Granted, we are not even factoring in utilities, maintenance, insurance (your quote might be too high I am not sure)...

    In my opinion, the only play here would be to buy this place and cosmetically change units and hope for appreciation if you cannot get the price to come down...

    Also interested in hearing (reading) other BP'ers as well...



    Flavio

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  • Kyle H.
    Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
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    Originally posted by @Franklin Anderson:

    @Brian Burke thanks for your willingness to help.
    It is 5 units - 4 duplexes and 1 triplex (10 rentals) at 85% occupancy the rental income would be $95,880/yr.
    We would self manage the properties, utilities are paid by the tenant, and this area requires little to no advertising for tenants.
    All that being said If my math is correct I am still cash negative. Hate to let this go...what value would you put on the property to make this work? I am pretty sure the bank is willing to short sale.

    Doesn't 4 duplexes + 1 triplex = 11 units, not 10?  Are you missing one rental unit in your calculations?  This could easily help your yearly cashflow...

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  • Franklin Anderson
    OP
    Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes
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    @Kyle H.  You are correct, 11 rentals, but the rental income is the same.....it was late and I miss typed. 

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  • Greg Carr
    Residential Real Estate Agent · Fort Worth, TX · Member since 2014 · 53 posts · 42 votes
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    I think he means 5 buildings, but 11 units.

    4 duplexes = 8 units. 1 triplex = 3 units. How does that make 10 units? Did you mean 11?

    The deal is pretty tight. I agree with Flavio.

    Maybe try running your numbers again, showing the seller your situation and negotiating for a lower price. That roof is going to put you in the negatives, and if it starts leaking you could be looking at interior damage to deal with as well.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    Franklin what do you mean the bank would be willing to short sale??

    You were talking like this is the regular owner of a property. IF the sellers will agree to a short sale and under what terms is the first step. Next you have to get the bank to agree to the short sale and all junior lien holders against the title.

    This could be second mortgages, mechanics liens, etc.

    Basically at the sellers asking price they are wanting a 6 cap for the property. Absolutely nuts and no way would I look at an asset like that for those numbers.

    Another key is you mentioned multiple buildings. Are these spread out or all grouped on the same street?? One of the down falls to being together on the same street is you are at the mercy of the other investors who own 2 to 4 units and how they manage and run their buildings.

    This is why I do not like smaller buildings and I would only consider buying a 100 unit and up in the future. I want to control the whole area and tenant base to insulate my investment. This is also why I will not buy into condo type developments or ( fracked ) developments where you can buy 60 units in a 300 unit complex etc.

    The seller may or may not want to do a short sale dependent on if they can claim insolvency ( their liabilities exceed their assets ) so that they do not have to pay phantom income on the forgiven debt to the IRS.

    Before going any further you need to find out how much crap is on title and then if the bank would be willing to deal. If not this is a deal I wouldn't even look at. Short sales take a lot of time so the property purchase price needs to reflect a higher cap rate for your trouble. In other words if you can buy a property now for an 8 cap in your market then this property needs to be bought at a 9 cap or better.

    The reason is if you buy now debt is hovering around the 4 range. Say you work on this and the  deal by a miracle works out but takes 3 months to get short sale approval and another 1 to 2 months to close. By then rates have risen from 4 percent to 5 percent. Now you have lost 100 basis points of return on this deal. Now if you buy at a 9 cap and have debt at 5 you have 400 basis points of spread. If the markets heats up further and 5 months from now you get 7.5 cap for the property for the short sale approval and debt at 5 you know have 250 basis points of spread for the return.

    As you can see this makes miles of difference in how the asset will perform and throw off cash.

    If this is a local bank that owns this loan sometimes you can barter with them. Tell them you might buy it at a 7 cap but want them to give you a below market rate loan for 7 years at 3% or something with a 30 year amort. to offset the higher price you are paying.

    No legal advice given.

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  • Randy Gridley
    Involved In Real Estate · Meridian, ID · Member since 2014 · 3 posts · 1 vote
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    Using a my quick simple formula for even considering income properties of any kind is as follows.  100% current (never future) annual rent income times 60% divided by the percentage rate of return say for instance you want 5% rate of return then this property would be worth to you $1,353,600 and the owner would have to pay all other encumbrances  Higher than 5% rate of return you want the lower the sales price for the property.  If there is a lots of immediate deferred maintenance (which it looks like there are) to do then you would want to subtract that from the total sale price above of $1,353,600.   This formula gives you a vacancy rate of 5%, property taxes, yearly maintenance, insurance, mortgage payment to fit formula above.  If the formula works for this property then do your due diligence, and make an offer subject to due diligence time frame.  Get a title company involved to make sure what is showing up on title chain other than bank loan.

    Even though I am a Realtor, I would advice you to seek a Realtor or real estate attorney or both to make an offer.  Do not get any other kind of attorney except real estate attorney and get one that is worth their wait in gold, check around.  I have used real estate attorneys on many of my personal rentals and commercial properties.

    If you can't even get close with this formula, my advice is to walk away and pursue other properties.  There are lots of deals out there you just have to find them.

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  • Douglass Benson
    Investor · Mason, MI · Member since 2014 · 151 posts · 152 votes
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    Why have anything so tight? This isn't a business where the deals get fantastically better over time.  Unless you are in a hot location where there is considerable appreciation you have to face that cashflow is the ONLY benefit you can derive from this deal.  Let only your calculator do the talking.  Like poker, there are good "folds" and this might be one of them.  

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  • Account Closed
    Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
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    Franklin Anderson you said you'd hate to let this go? Why? First rule of investing is not to get emotional and buy a bad deal. This is a bad deal. Move on and spend your time finding one that actually makes you money! The company I work for owns 9,000 units. We look at hundreds of deals per year and usually only buy 7-10. You have to pass on deals that don't work, no matter how you feel about them. You are in this business to make money.
    8Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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    Sounds like someone may have buyer-itis.  I have had this affliction before.  Sleep on it, take a breath and listen to those more experienced than both of us. Now that I have done this landlording thing for a while, there is not way I would do all that's involved with tenants and toilets for a 5% return. Ever.  The 5% return may even be in question.  Factor in management costs (even if self-managing) and the return is 0 at best.  Factor in water heater replacement or whatever and it's negative.  Gotta remove the emotion and pass on this under present terms. 

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  • Franklin Anderson
    OP
    Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes
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    Everyone, Again I am blown away by how much everyone wants to help, Thank you!

    @Joel Owens, I have inside information that the bank may be willing to short sell but I know the seller will not want the short sell.He thinks very highly of these units, feels they are worth $200k each and he thinks the $188k payoff is a deal.They are 5 separate buildings on the same street.Agreed I would be somewhat at the mercy of the other investors.

    I do have buyer-itis, want to do a deal, but I have had a gut feeling even before the numbers this would not work…..

    I am not emotionally tied to this deal I just hate to see it pass. This guy really needs to sell this property.

    Are these possible action steps feasible?

    • Would any recommend moving forward with the appraisals, cost will be approximately $3,000.If they come back low and with the new value the numbers look better make the offer.
    • Request a possible 20 - 30yr term rather than 15yr lowering the debt service, creating positive cash flow?
    • Shopping this deal around to cash investors – with no debt service would this deal be attractive to larger investors happy with the 5%-6% return.Would a hedge fund possibly be interested in this property at $200k each, $1mil, at 6.6 Cap?
    • Walk and live another day?

    Thanks again for all the help!

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    "This guy really needs to sell this property."

    This statement isn't true by what comments you have posted about the seller so far.

    He might WANT to sell his property but he doesn't NEED to sell it.

    You have to get the sellers at a point where they HAVE TO sell. Then you can use leverage to get your price.

    This just seems like a waste of time. Move on to other deals. You can give your card to this seller and say if your situation changes please let me know.

    You could also ( but this requires a bunch of cash) try to buy the first position note at a discount from the lender/bank and then proceed to foreclose on the current owner if they are not paying the debt in full and on time according to the note provisions.

    How involved that would be would depend on if you are in and judicial or non-judicial state and redemption periods if any pre-foreclosure or post-foreclosure.

    No legal advice. 

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  • Flavio Zanetti
    Investor · Andover, MA · Member since 2015 · 269 posts · 67 votes
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    You are 100% true @Account Closed 

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  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
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    @Franklin Anderson this deal isn't worth spending money on it until you and the seller agree to a price that actually works and the bank agrees to that price.  Then it's worth the cost of an appraisal.

    30-year amortization is an option if you want to increase cash flow.   It won't fix the income, and the level of income relative to price seems to be the askew.

    Hedge funds wouldn't want this deal.  A $1 million deal is too small for those guys.

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  • Franklin Anderson
    OP
    Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes
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    Thanks @Brian Burke you have been more than helpful!

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  • Franklin Anderson
    OP
    Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes
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    Wanted to give an update on the duplex/triplex deal. I moved forward with an appraisal on one of the properties, the triplex, and it came back much higher than I expected. Appraisal came in at $235k. Rental income is $2,650/mnth. Although the owner would prefer to sale all 5 properites at the same time, I could buy just this property. Price would be $190k plus 2014 taxes of $3600. My financing is pre approved for 80% LTV for 15yrs at 5% with 35mnth maturity. P&I mnthly will be $1350.

    If the triplex appraised for $235k then the duplexes will easily appraise for $200-210.  Purchase price for all 5 is $1m.

    What are the thoughts on purchasing just the triplex?

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  • Account Closed
    Investor · North Saint Paul , MN · Member since 2014 · 78 posts · 3 votes
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    @Franklin Anderson 

     with just that Triplex, your rent ratio is 1.39% which is not bad at all. It would be much better if you could shop for different Financing for something like 4% amortize over 30 years to increase your cash flow. 

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  • Franklin Anderson
    OP
    Investor · Williamson, GA · Member since 2015 · 15 posts · 2 votes
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    @Tommy Oan

    We are going to purchase the triplex.  I thought the numbers looked better, I really appreciate the feedback...really helps to hear other opinions.

    The other four will all appraise at $220 and we could purchase at $190 with rent at $1800/mnth, the cash flow is just not there.  We are going to keep looking for deals with better cash flow.

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  • Tim B.
    Investor · Cottage Grove, OR · Member since 2013 · 12 posts · 4 votes
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    i think you need to keep looking for better financing.

    paying that much in closing costs just to have to refi & pay them again in 36 months seems nuts to me.

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