How do I fund this deal?

5 Replies

Hey BP!!   I have been a real estate investor for a little over a year now when i purchased a four plex. It has gone pretty well and I am now ready to move on and purchase some more units. I just found someone selling three 4-unit buildings (12 units total). He is asking 350k for each building and it is buy all three or none. Just from questions asked to him briefly, 2/3rds of them are updated and the others are not. It also seems like the management is poor and the rents for location are pretty low. I think there is really good room for increasing my equity and cash flow from the get go.

My real question comes down to how to fund this?  I know a lot of people are 100% financing this sort of thing but how do you do this.

Do I do 1 commercial loan, 1 personal loan, or three personal loans, or something else?

How do you overcome your fear of taking out a million dollar loan?

How do you determine whether this is a good deal or not? Cap rate or cash flow or both? Or neither?

I can provide better numbers tomorrow when he sends over the financials.

So here are the numbers provided by the seller.

12 units

Gross rents 88,700

All expenses 33000

Asking price 1,050,000

When figuring NOI, do you use the actual income from the year previous or what they say -10%?

I am figuring the cap rate is bout 4%

How old are the units? What's the state of every unit? do they need lots of work for maintenance? What's the location? Is it class A, B or C?

Using Bankrate.com mortgage calculator, if you got a 1 million dollar loan at 5% interest, the payment would be $6600 per month.  Your annual debt service would cost $77200.  Using the income they say the property produces, that is negative cash flow before taxes, insurance, and maintenance.  There must be better deals out there.

Looks like after expenses it is around $380 per door, not at all bad if you own it outright but with a 5% loan you are at -$163 per door.  Not that this matters much because the banker will not lend you the money knowing this information.  You need to find out what the comps are for those buildings and see if there is any dealing to be done with the seller.  For a turn around on rents, supposing they are not month to month, will be in the range of 2 years and raising rents by $163 per unit will only find you at the break even point with no reserves for capex.  you would have to raise rents by $263 per door just to get $100 per door profit. Don't fall in love with the deal before the numbers tell the truth.

Some people reading this may be trying to wrap their heads around the opportunity or what you are trying to do. Posting here one expects advice and general support. I don't know the deal or the potential you may see for upside. I'm in NYC so these cap rates are not unfamiliar.

BUT Ian ..............................

I suggest you familiarize yourself with commercial financing criteria or take an investing course. In a deep breath pass!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.