is this normal for a big multifam?

Question

I'm looking at a 450 unit property in an area I like, offered at 7.9% cap. 2.1 mil NOI, comes out to 26.5 mil. 20% down= 5.3 mil

debt service on a loan that size runs, at 5.5% 30 year, around 117k, leaving only 40-50k cashflow per month. That TANKS the COCR, so who is paying 5.3 mil for 40k-50k cash per month, especially if it's split up between multiple partners? I understand there will be an upside down the road as rent grows, or if the property can be aquired at a higher cap, or if rents can be forced up... but is this really the norm that an investor or potential syndicator can expect?

Joe Hughis · Answer

@Robert Lorenz - Given your numbers, this deal makes sense all day long.  Your numbers would create a DCR of 1.45, which would make it possible to get 80% LTV.  Furthermore, even with borrowing at a higher leverage your COCR after debt-coverage is still a healthy +9-11% (from your numbers).  Throw in rent growth and the potential of property value growth, this seems to be a no-brainer,  as far as building a real estate portfolio of stable / long-term commercial property ownership goes.

Brian Adams · Answer

@Robert Lorenz just my preference, my best deals have been off market.

No offense, but I doubt no one is watching this market.

Michael Le · Answer

Yes, if that's the type of property you're buying and with those terms. If the property rents can be forced up, why wouldn't you factor that in? Why leave out such a big part of your value and then wonder why the numbers aren't as impressive?

But let's say you just want to buy the property as it is. Firstly, you should be able to get better rates than 5.5% right now. Secondly, using the rough numbers you provide (and even using 5.5%), you're getting roughly 10% COC over 5 years. That seems pretty decent to me for a yield play.

Robert Lorenz · Answer

what could the expected split be, reasonably? I don't dare ask for 50%, do I?

Robert Lorenz · Answer

also, I'm not really sure what the COC expectations are for deals of this size, most of the people in my network are rehabbers or sell on lease options/land contracts where they're easily into the 15-20%+ range (much higher in some cases, especially with mobile homes).

I'm going to submit an offer, just waiting on the broker to return an email :)

Robert Lorenz · Answer

lol I'm sure there are eyes on it, but it isn't under contract yet...

Alex Deacon · Answer

@Robert Lorenz Robert my biggest concerns are 1. make sure you leave enough room for repairs and such. That item will kill you on any deal. 2.Where are you abel to secure a 30 year note on a commercial deal? Typically they are 15-20 amortized?

Bruce Petersen · Answer

In my market I'm done with buying on a proforma basis but as @Michael Le mentioned, your loan terms seem crazy high.  I'm not seeing anything better than a 6 CAP right now for a stabilized property.

What is your COC expectation?

Robert Lorenz · Answer

@Brian Adams why does it matter if it's off-market? If it's in a tertiary market that no one is watching, that happens to have 5% vacancy rate and 4% unemployment  (the market not the property) isn't that good enough?

Brian Adams · Answer

@Robert Lorenz you should be able to get lower financing on this asset. I am buying a 556 unit deal and my rate is sub 4.

Also your COC should also account for the down money, plus closing costs, and all money required to close the deal.

If this deal is an off market value add deal and you need someone who has taken a deal this size down before, keep me in mind as I am looking for my next opportunity.

is this normal for a big multifam?

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