Pocatello, ID · Member since 2015 · 27 posts · 10 votes
Hi BiggerPockets heros. A friend found a 22 apartment complex in Idaho where the owner is ready to retire. It is not on the market, and has signed an exclusive with my friend and given him 60 days to figure out financing. He is asking $450,000 for the property. The property brings in a Net Income of $4,500 a month after all expenses (not including mortgage). The rents have not changed in over 10 years, so those numbers should be a bit higher to reflect the value of the property. This number includes subtracting for management, repair costs, saving for major replacements, vacancy, taxes, etc. This owner is willing to carry the note on the property with a $75,000 upfront payment.
Standard financing is not available to my friend due to marks on his credit for medical bills etc.
What are some creative ideas you have for making something like this work? Thanks.
What is the current monthly draw for "saving for major replacements"? also how much of that $75,000 do you have to put towards this? is his owner carry contingent on a balloon payment? if so, in how many years and how much?
My guess is, after mortgage, you will be cash flowing about $2000 / month then if not less depending on the terms he wants. that's about $90 / door / month cash flow. i don't own a complex that size but i believe most investors here wouldn't touch it unless it was $100 / door. but if you two are fine with that, i would seek out any family member or friend that would loan you the money, just realize you would have to pay them back with interest, that will eat away at that $2000 making it less.
Personally, I think the numbers are on the thin side. A lot rides on your ability to raise rents while keeping the occupancy high. What is the condition of the property? Any major CAPEX needed or on the horizon? You are already getting a solid offer of seller financing with only 75K down. You need to preserve some liquidity so you shouldn't inject every penny you have.
Perhaps the owner would be open to a staggered payment of 25K for 3 years? That may help him on the tax side, but you had better be confident you can swing those payments before making the offer.
Consider a tenants in common approach (TIC) and TIC Agreement allowing him to do management and buying a number of them over time. Eat the elephant one bite at a time! Good luck :)
Thanks for all your input. @Aaron B Lee, this is the only property owned by this retired school teacher, and he "managed" it himself. He only held back $2400 a year for maintenance, and held nothing for major long term replacement. His rental rates also have not changed in a decade. He has been trading rent for one of the units for a person to respond to calls and needs of other tenants instead of using a professional management service.
He also has not advertised or done anything for new tenants except word of mouth from existing tenants. This has given him a 10% vacantcy rate. There are also 3 commercial units of which 2 are vacant.
In re-calculating the numbers, my friend has added $900 a month for professional rental management (10% of rents) , $455 a month for long term replacement needs, and $1250 a month for proper maintenance. He also run the numbers with changing the average rental per unit from $343 to $410 which includes a 5% vacancy rate instead of 10%, and still does not consider the 2 unrented commercial units.
Running the new numbers gives a cap rate of 10.09%
@Darryl Dahlen, that is an interesting idea in doing 3 bulk payments of $25K for the first 3 years. The owner is not investment savvy and is concerned with tax implication of selling out of the property. I'm sure he would consider other strategic options.
@Billy Gulley I will deffinately look into TIC. Not familiar with it.
These are the number from the current owner now. He has not been running it very professionally. To get a much more accurate figure, my friend has adjusted maintenance, replacement, management, and increased average rents. He may be able to negotiate a better deal with the owner due to showing proper expenses and building maintenence.
These are the number from the current owner now. He has not been running it very professionally. To get a much more accurate figure, my friend has adjusted maintenance, replacement, management, and increased average rents. He may be able to negotiate a better deal with the owner due to showing proper expenses and building maintenence.
Your financing numbers are way off. No way you get 360 month amortization on this deal at 5.25% with zero skin in the game for a dinged credit borrower. You need to rerun the senior secured debt at 20 year amortization at best, more likely 15 year. Also, a seller second at 360 month is very unlikely, and certainly not at 5.25%. Any seller worth their weight in salt is going to want a much higher rate than the senior debt (junior debt is riskier, and therefore should command a higher rate) and the likelihood he'll want to amortize that over anything greater than 10 years is low.
That being said, if you can even cash flow 1 dollar with zero skin in the game the CoC return is fantastic. (Which is also why it's unlikely to work out that way).
@Lawrence Sudweeks Raising rents from $343 to $410 - 1. You sure about that? Both of those seem absurdly low to me for furnished, all utilities paid units, and I'm in a fairly low income area. 2. You ready to upset a bunch of tenants? Not saying it doesn't need to be done, but expect higher than historic vacancy for a while.
And if it's got 10 years or more worth of deferred maintenance, I'd set aside way more than $455 a month to cover them.
I'd be a little wary in this situation of your friend (who just coincidentally happens to have a shaky financial foundation) trying to convince you too much that this is a deal. Run it worst-case-scenario, then add an extra 5% 'worst' in - if it still make money you can live with, you might have something.