My first deal deal on a quad 9.5 cap ( thoughts and suggestions)

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I'm need some help understanding a deal I'm working. It will be owner financed which is a help to him because he is offloading to get into a new business. I need help understanding the Cap rate to look for and to run a comp analysis for surrounding units in the area. There are several ways to force appreciation into the unit so I see a great upside with it. I don't want to get caught staring at a shiny object.

With this being said how would one structure a seller finance deal on a quadplex for a short term? Down payment by keeping the same income moving to the seller until I refi? Need some help here on this one and some ideas.

Operating Income: 5,434
NOI- 16,766 per year
Asking 175k

What do these numbers look like?

"What do these numbers look like?"

They look incomplete! lol

What's the gross income? What comprises your $5,434 number? And what is that number? What are you factoring for expenses?

@Colton Sibley I'm not sure I'm able to follow the numbers you have provided nor your sellers goal.

Please provide the following.

-Gross rents (monthly)
-Total expenses (monthly)
Note: It may be better to break this down into each category of expenses for the BP folks to provide even greater feedback.
- The monthly payment the seller wants (this is possibly what you are asking for.)

Then also expand on what the sellers/your goals are. With that we should be able to help more.

Like @Austin Fruechting said the numbers look incomplete. If you have all expenses and income that would help a lot. Does the seller have a current mortgage? If so, how much and what are his payments? You could set it up on a master lease option. Basically you pay him a net amount every month and any income you make on top of that is your spread. After x months you then get financing. 

Why are you not getting financing up front with rates as good as they are? 

Assuming you mean a 4 unit building when you say quad, then that is residential property, not commercial property ... residential property is valued by sold comparable properties, not CAP rate. So, you will need to run the comparable market analysis of similar 4-plexes of similar size, unit mix, and nearby comparable neighborhoods, and what they sold for to determine fair market value ... and then you can determine if $175k is a good deal on the property or not ... the cashflow analysis that you have started to put together is also important as it will affect your returns, but it has absolutely no bearing on the fair market value for this residential property.

You also want to consider the quality of the tenant base in that neighborhood and the long term historic average rates of appreciation and rent increases ... those are likely not that stellar if 4-plexes are selling for $175k (~$60k/unit); as a matter of fact that is likely way below replacement value meaning that the neighborhood actually has negative appreciation rates. This does not mean you can't make money there, it just means that you need to factor that in to your total return projections and exit strategies (you need to create multiple profitable exits as options for you to choose from).

Some people may say that you could pay more for a property, even more than fair market value, if you get attractive enough seller financing terms which creates the kind of cash flow you want. I am not one of those people. To me, if you overpay for the property, even with great financing terms, then that can limit your exit strategies as you would not likely be able to sell for the same purchase price (or ideally more) if you need or choose to. 

Sorry fellas. Error on my part. 1st Problem trying to get a post on BP before you hit the sheets!

Here are what the numbers look like and the info:

Asking $175,000. The Seller does not have a note, it is free and clear.

Central HVAC heat pump. all unite are individually metered. 

Current Rents (Under Market Value): 2 units at 450 and 2 units at 475 ** Market value is 525

He has escalation clause for 2018 for a $25 increase across all units for monthly rent.

Yearly Income: 1850 x12= 22,000/ YR

  • Expenses (yearly):
  • Water/sewer: $1800
  • Garbage: $480
  • Lawn Maintence: $350
  • Taxes: $1667
  • Insurance: $1137
  • Total: $5,434/ Year

Net Income: $16,766

I cannot recieve conventional Financing until February due to my job. I am a RE agent and working on full commision. My 2 years at full commision will not kick in until that time therefore I wont be qualifying with my 33% tax bracket. So my problem here. 

I believe this deal is great starter due to the fact he will seller finance it to me until that time I can conventionally qualify. 

Im jogging for ideas on putting a deal together. Thanks for the responses this is my first time getting close to a finish line.



Above advice is very good.  I am not a real estate agent but have extensive experience in this area.  Starting out, you will be well served by spending some time with a real estate agent with experience in this ares as well as your CPA.  A comparative marked analysis is the starting point. With this you can plug in all of the numbers and come up with the answer. But, don't forget to have the property inspected!

I'll assume as a realtor, you know this is a good price for the property/area.

Option 1: would be to put it under contract now, but defer closing. Also, I don't believe it is truly two years you need to wait, but rather have two years of taxes filed. Thus you may be eligible for the loan you want in January (depending on when you are able to file taxes - likely still February).

Option 2: Seller wants to sell and back away now. You could construct seller financing so it works for both of you.

He is currently (if numbers are accurate, note you don't have anything for cap ex or standard maintenance), receiving $16,766 per year. That is $1,397.17 per month. If he wants to continue making the same amount until you pay him off, I would suggest making the mortgage for 12 months, just in case you have problems, but here are some example terms.

Amount: $140,000
Payment: $1,397.17
Interest: 4%

With that information, you could calculate the amortization/future value at any time. It turns out with that info, you would be on a 122 month amortization schedule.

Some people would say that you can't obtain seller financing at that rate. I've done it several times. The key is to ask. If you have to pay more, that is also fine because it is a reasonably short duration. Note: by definition of providing him the NOI, you will not receive any cashflow while paying down this note

Ok, here's the bubble burst. Taxes will go up when you buy unless it's already assessed at $175k (check with your county on how they assess based on new purchase price). Lawn maintenance seems very low for South Carolina unless there is no yard and it's just landscaping. Also, there is no maintenance costs, which will run 10-15% of the gross rents. You don't have a replacement reserve (5%), Also, admin costs (bank fees, accountant fees, city license and inspection fees, etc). Last is that you will have vacancy, so you need to calculate that. On a 4 plex I always use 10% of the gross. 

Here are my numbers: 

Potential Income = $22000

vacancy = $2,200

Economic income= $19,800

Expenses:

Taxes = $1667 (likely to be closer to $2000)

Water/sewer= $1800

Garbage = $480

Lawn = $350 (likely higher - get a quote)

Insurance = $1137

Maintenance = $3000

Admin = $440

Replacement reserve = $1,100

Expenses: $9974

Income = $9,826

When I run my numbers I also use a management fee of 10% of the collected income. One added income thing you can do is add coin laundry. That likely will add $50/month of income. 

@Todd Dexheimer 's analysis seems pretty spot on to me. When I read your post @Colton Sibley I projected 55% expenses, and possibly up to 60% expenses based on your information.
At $22000 annual rent and 55% expenses that gives an NOI of $9,900... nearly identical to Todd's.
At 60% that's an NOI of $8,800, which would be close to Todd's analysis after some of your expenses may rise (taxes, lawn/snow)

@Colton Sibley So I think I'm the same boat as others, quick summary of what you're missing: vacancy, break/fix maintenance expenses, cap-ex holdbacks and *maybe* a property management expense. Depending on where it is you might also have funky snow removal costs. And that's assuming that property taxes won't increase at the time of sale and that your insurance costs would be identical. Neither is assured. Of course, they *could* be lower as well. Bottom line: you're missing a lot of costs. That's not to say it's a "bad" deal, it just isn't what you think it is.