Feedback on potential 16-unit purchase

5 Replies

What's up BP!

I have the opportunity to partner 50/50 on a 16 unit purchase in Norfolk, Va with a friend and fellow investor. My skillset and experience is 95% residential, so I am hoping to get some feedback and opinions here. The deal, prior to inspections, is very solid on paper, in my own opinion (I am from there) and the opinion of a friend who is a top commercial agent in the area.

Details:

$750,000 PP

Seller financing 5.5% (Interest Only for 10 years, total note 30)

30% Down **

Current NOI is 52k

We could get the NOI to 60k right away with a $50 per unit rent raise as they are underpriced quite a bit at the moment. Plan is to make improvements in the 50k range and raise over the course of 6 months to an avg rent that would bring NOI to 72k and then re-fi. All tenants are month to month, so raising the rents is a bit easier and then lock in 1 year leases.

There are some bonus opportunities i.e. spreading water bills to tenants as well as airbnb opportunities in 2 of the units as it is on the water, but we are not factoring that in right now.

My questions:

We have the seller financing option, and the ability to do private for the 30% down second at 8-10% and 2 points. The total debt service would be basically a wash with current NOI, and cash flow would be low even with the higher NOI, but it'd be 100% OPM. What do you think about this strategy?

Is there a concern with a market shift and a deal like this, wanting to re-fi in 12 months or so to pay off the debt, lock in better rates and begin cash flowing at approx a 9.7% cap and the local market avg is 6.5-7%?

Thanks in advance and I am hoping the replies open up more questions and feedback.

You need to get the ask way down so this building gives you the CF you want. You are distracted by other peoples money and the seller financing. Instead you should be pressing for price reduction and a better deal. OPM and SF is rarely the unicorn people think it is going to be.

Originally posted by @Bjorn Ahlblad :

You need to get the ask way down so this building gives you the CF you want. You are distracted by other peoples money and the seller financing. Instead you should be pressing for price reduction and a better deal. OPM and SF is rarely the unicorn people think it is going to be.

Thanks for feedback. 

I don't think I am distracted, but to each his own, this is why I posted for feedback... at no point am I raving about SF and OPM, and am certainly open to other avenues. I don't need the cash flow right now, and would like to keep my capital available for flips. So the Seller financing and OPM is a tool to accomplish that and make it work without bleeding cash until a re-fi.

The ask is down IMO, buying at way under price per door avg for area and buying with relatively conservative plan to go from 7cap to 9cap in under a year.

@Chase Maher

Chase: Great to e-meet! I'm an active investor in Norfolk and am very familiar with the market.

I'd be very cautious entering into a "break even" investment. Norfolk class C assets can have maintenance costs that dramatically vary year to year. You'll need a large reserve fund to absorb unforseen costs.

You'd be better to buy the deal using bank debt -- I'm happy to introduce you to my contact at TowneBank.

I'd argue market cap rates are closer to 7.5%. Have you modeled the purchase and exit?

I've gone this route before, here are some things to look out for while trying to refi out of OPM. 

length of ownership in months vs. banks requirements

less than 12 months most banks will only do LTC at 80%.  

less than 24 months most 5% banks won't talk to you, you can work with a mortgage bank and get about 7%.

depending on the appraisal value and putting down 30% you will be ok for a refinance but having them appraise for 30% more to take out the full OPM may prove difficult.  But every deal has different partners so the remaining return is what it is.  

having done this twice I will say that buying for cashflow is king. Either way it will be a great learning experience for you!

@Chase Maher You listed the NOI without more detail about what makes that up. What are the average rents currently and what kind of expenses are included to come to the NOI?

You say that rents are below market and can be raised. Have you done a rent survey of competing area properties to verify that.

I would also caution you against the 100% financing unless you have a bunch of reserves to handle potential issues. Speaking of that, where is the $50k in rehab coming from and do you have a breakdown of exactly what that money will be spent on?