Hello BP Family!
I'm looking at a deal in Baldwin Park, CA for a 26 unit multi-family home. This is my first time reviewing a deal and was hoping someone can help me with some of my questions.
1. On the marketing sheet for this deal, it is calling for a 5 year hybrid mortgage. Why would it not be a 30 year loan?
2. Does anyone know the vacancy rate for Baldwin Park?
3. What is the typical expense rate in the area? What is the typical % of operating expense over the effective gross income?
4. What is considered a good debt coverage ratio?
5. What is Estimated Principal Reduction and why is it added to my total return before taxes?
If someone can help me answer these questions and let me know any additional information to look for, I'd really really appreciate it! Thanks!
I can't answer all your questions.
1) Commercial property loans are typically not 30 year loans. They are typically 5, 7, 10, 12 year with 20-30 year amortization schedules. There could be interest only years within those terms or it can be a hybrid product as you mentioned. It depends on the loan product offered by the lender. If the hybrid loan product being offered is not to your liking then search for another commercial loan product. If the loan amount is large enough it may qualify for Freddie Mac or Fannie Mae agency debt or contact your local\regional bank for loan products.
2) Ask the listing broker if they can provide a submarket report from ALN, CoStar, or YardiMatrix. The broker may have subscribed to these data services. If you have a professional property mgmt company they maybe able to provide these reports as well.
3) Other BP members can correct me if I am wrong, but there isn't a typical expense rate for an area. I think this is where local knowledge is good. A rule of thumb is 50% rule. If NOI is 50% of Net Rental Income (not GPR) then that's generally a good indicator the asset manager\owner is running things well. Devils are in the details so due your due diligence.
4). Lending institutions generally use 1.25 DSCR to underwrite. That's the benchmark in the underwriting I've seen. The higher your proforma DSCR the better. Do your sensitivity analysis to see how far the occupancy can dip before the DSCR goes below that benchmark. Others BP members, please chime in if they see otherwise.
5) I'm not sure of the context of the question.
Thanks! I really appreciate it! In terms of my last question on Principal Reduction. on the Annualized Operating Data, It shows what my NOI is, less loan payments and ADD estimated principal reduction to get to my total return before taxes. I don't understand what the estimated principal reduction is and why we would add it to my total return.
With your questions it seems you may not be ready for a Huge deal .
I'm just trying to learn still, not buy. I just found a deal and I'm trying to analyze and learn from the BP family what is considered a good deal. This deal is for $6M.