8 unit opportunity, curious as how to finance best

14 Replies

Been negotiating and gathering info on an 8 unit building in Clayton, MO, a very affluent area of St Louis.  

Rents are at 5,400 monthly and could be brought up to around 8,000-8,200 with about 70k in repairs.  Great value add.  I'm looking at it to buy and hold myself.  

The seller wants 640k.  I haven't yet agreed to that.  My last offer was 550k.  At this point, he is open to financing part of the deal at prime interest rate.  Right now I believe that is around 5% although he had mentioned 7-8% is what he thought it was.  Regardless, he will carry anything over 400k.  He wants 400k at the sale.  

My dilemma is how to structure this thing with no money down and keep a positive cash flow, even if that means I have to manage it for awhile.  Would it be better to go for conventional or commercial to obtain these objectives? What might a strategy be to refinance this thing best?  Appreciate suggestions from those more familiar with this process!

DW

@Dan White first I will talk to local bank, see if they will accommodate Seller financing as commercial loan. 

So lets say they will found you to 67% of $600k, that's about 400k at closing in cash to the seller. 

Then the seller can carry back the rest at 5%, balloon for 10 years, you can ask for IO for the first year too. Amortization 25-30y. 

Note: the local bank may want you to have some skin in the game so it is likely that you will need to put 10% out of pocket. 

If the property returns 96k per year and it costs you $670k it may not be cash flow positive at 100% financing.  That is taking in account that you mentioned NO money down. 

The No money down would be a possibility if the ARV is high and you refinance the property. basically a BRRRR.

From the numbers of the cost and income at say 5%-5.7% interest rate I don't think the property will cash flow before Tax if your debt is $670k. 

did you run the numbers in a calculator, working out the NOI etc?

Another way to look at it, if it is possible, is to Carve out one unit out of the 8 and sell it to reduce debt on the remaining 7. But that "Condo Conversion" would be depending on many other factor.  The layout of the building, the construction, and of course the City.


@HadarOrkibi , this is very insightful and much appreciated.  I have considered carving out a condo or multiple condos as that is what the building across the street did.  They are apparently renting the condos out as corporate rentals.  i'm not sure if they struggled to sell them as condos if that may have been their initial exit.  it is tuff, after all, to find condo comps.  that could be a good thing or bad thing i suppose.

It's going to be very tough to finance this with $0 down through a conventional or commercial lender.

Your best bet is to find private money to put up the $470k for acquisition + rehab and then refinance once the property is fully stabilized and pay off your private money lender.

If you get rents to $8k you'll be around $48k NOI so at a 7% CAP the property would be worth $685k.

At a 70% LTV refinance you'll pull $480k out to pay off your lender/closing costs and have $0 into the deal.

This is obviously assuming the seller is carrying anything above the $400k as you had alluded to.

Also I don't know the going CAP in your market so this is all just a hypothetical BRRRR example.

my plan is looking like a BRRR is the best solution, IF the lender will allow NO money down or IF they will allow a 3rd private loan/family member to chip in the 10% or whatever I need for "skin in the game".

from there, after 70k initial capital improvements to get the rent up, I would be 'all-in' (purchase of say 640 + 10 closing + 20 finders fee + 70 repairs) at 740k. from there I would hope for an ARV appraisal of 925k to 100% cash out. What do you know about influencing the appraisal when there are not any recent comps (mostly because no one is selling)? Do they look strictly at ROI/ CAP rates?

Originally posted by @Hadar Orkibi :

@Dan White first I will talk to local bank, see if they will accommodate Seller financing as commercial loan. 

So lets say they will found you to 67% of $600k, that's about 400k at closing in cash to the seller. 

Then the seller can carry back the rest at 5%, balloon for 10 years, you can ask for IO for the first year too. Amortization 25-30y. 

Note: the local bank may want you to have some skin in the game so it is likely that you will need to put 10% out of pocket. 

If the property returns 96k per year and it costs you $670k it may not be cash flow positive at 100% financing.  That is taking in account that you mentioned NO money down. 

The No money down would be a possibility if the ARV is high and you refinance the property. basically a BRRRR.

From the numbers of the cost and income at say 5%-5.7% interest rate I don't think the property will cash flow before Tax if your debt is $670k. 

did you run the numbers in a calculator, working out the NOI etc?

Another way to look at it, if it is possible, is to Carve out one unit out of the 8 and sell it to reduce debt on the remaining 7. But that "Condo Conversion" would be depending on many other factor.  The layout of the building, the construction, and of course the City.

this is very insightful and much appreciated. I have considered carving out a condo or multiple condos as that is what the building across the street did. They are apparently renting the condos out as corporate rentals. i'm not sure if they struggled to sell them as condos if that may have been their initial exit. it is tuff, after all, to find condo comps. that could be a good thing or bad thing i suppose. 

Originally posted by @Hadar Orkibi :

@Dan White first I will talk to local bank, see if they will accommodate Seller financing as commercial loan. 

So lets say they will found you to 67% of $600k, that's about 400k at closing in cash to the seller. 

Then the seller can carry back the rest at 5%, balloon for 10 years, you can ask for IO for the first year too. Amortization 25-30y. 

Note: the local bank may want you to have some skin in the game so it is likely that you will need to put 10% out of pocket. 

If the property returns 96k per year and it costs you $670k it may not be cash flow positive at 100% financing.  That is taking in account that you mentioned NO money down. 

The No money down would be a possibility if the ARV is high and you refinance the property. basically a BRRRR.

From the numbers of the cost and income at say 5%-5.7% interest rate I don't think the property will cash flow before Tax if your debt is $670k. 

did you run the numbers in a calculator, working out the NOI etc?

Another way to look at it, if it is possible, is to Carve out one unit out of the 8 and sell it to reduce debt on the remaining 7. But that "Condo Conversion" would be depending on many other factor.  The layout of the building, the construction, and of course the City.

 my plan is looking like a BRRR is the best solution, IF the lender will allow NO money down or IF they will allow a 3rd private loan/family member to chip in the 10% or whatever I need for "skin in the game".

from there, after 70k initial capital improvements to get the rent up, I would be 'all-in' (purchase of say 640 + 10 closing + 20 finders fee + 70 repairs) at 740k. from there I would hope for an ARV appraisal of 925k to 100% cash out. What do you know about influencing the appraisal when there are not any recent comps (mostly because no one is selling)? Do they look strictly at ROI/ CAP rates?

Originally posted by @Brian Garrett :

It's going to be very tough to finance this with $0 down through a conventional or commercial lender.

Your best bet is to find private money to put up the $470k for acquisition + rehab and then refinance once the property is fully stabilized and pay off your private money lender.

If you get rents to $8k you'll be around $48k NOI so at a 7% CAP the property would be worth $685k.

At a 70% LTV refinance you'll pull $480k out to pay off your lender/closing costs and have $0 into the deal.

This is obviously assuming the seller is carrying anything above the $400k as you had alluded to.

Also I don't know the going CAP in your market so this is all just a hypothetical BRRRR example.

 Thanks! Can I ask why you chose 7 cap?  is that what you feel is a good investment on multi in your area? 

Originally posted by @Dan White :
Originally posted by @Brian Garrett:

It's going to be very tough to finance this with $0 down through a conventional or commercial lender.

Your best bet is to find private money to put up the $470k for acquisition + rehab and then refinance once the property is fully stabilized and pay off your private money lender.

If you get rents to $8k you'll be around $48k NOI so at a 7% CAP the property would be worth $685k.

At a 70% LTV refinance you'll pull $480k out to pay off your lender/closing costs and have $0 into the deal.

This is obviously assuming the seller is carrying anything above the $400k as you had alluded to.

Also I don't know the going CAP in your market so this is all just a hypothetical BRRRR example.

 Thanks! Can I ask why you chose 7 cap?  is that what you feel is a good investment on multi in your area? 

Just picked it out of thin air to use in the example. You need to know the going CAP rate in your area.

Originally posted by @Brian Garrett :
Originally posted by @Dan White:
Originally posted by @Brian Garrett:

It's going to be very tough to finance this with $0 down through a conventional or commercial lender.

Your best bet is to find private money to put up the $470k for acquisition + rehab and then refinance once the property is fully stabilized and pay off your private money lender.

If you get rents to $8k you'll be around $48k NOI so at a 7% CAP the property would be worth $685k.

At a 70% LTV refinance you'll pull $480k out to pay off your lender/closing costs and have $0 into the deal.

This is obviously assuming the seller is carrying anything above the $400k as you had alluded to.

Also I don't know the going CAP in your market so this is all just a hypothetical BRRRR example.

 Thanks! Can I ask why you chose 7 cap?  is that what you feel is a good investment on multi in your area? 

Just picked it out of thin air to use in the example. You need to know the going CAP rate in your area.

 Cool. and i think intuitively that 7cap would be very good in this area.  so you think that is the biggest determining factor in the appraisal?  

@Dan White they know how to find the comps and will talk to brokers...

also you can get some broker opinion for the ARV. you can share it with your lender if you like what you see. Considering its commercial they will probably use the NOI / Caprate income approach.

If you can get a family member to help you out, you may want to consider keeping this internally.

Originally posted by @Matt J. :
@Dan White Anything over 4 units will need to go commercial financing, at least here in WA State. Good luck with it.

 True in MO as well pretty sure.  Thank you Matt

Dan, you have several places to negotiate. Obviously the price-you are at 550 he is at 670. He wants 400 at closing.........what if you can only reach 300? He wants interest rate of 7-8% you were thinking 5. I would base everything off todays rent not future rents if you spend the 70K. Great if that number can be relied upon and if not, you will have a not so fun time if you overpaid, or agreed to bad terms. Do the usual stuff; inspection, financials, leases, rent roll, and  any agreement with the seller have your RE savvy lawyer read every word with you and explain every intent. Seller financing can be wonderful but count your fingers.

Something I always do when researching a property is simply key the address into a browser and sit back and read. I have found, police reports, code enforcement issues, once I found a rent roll!! Names, amounts and phone numbers!(it was out of date but still), tenant discussions and feed back, and best of all I found recently expired listings-so much for off market offerings-those things can drastically affect the sellers negotiating power.

All the best!

@Dan White Rent comps are around 1100 for 2-bed apts in the area it appears. Plan on some tenant turnover time (6-months). If you have experience in commercial deals and a current portfolio with good numbers, you can probably get private equity for your down pmt and a local commercial bank will finance the rest. 100% financed. Otherwise it’s easiest to bring in a 25% equity partner into the deal and pay a small preferred return to him/her. It will be hard to raise 400k in pure private money unless you have a large network of private investors. Sounds like the numbers could be too tight if you have 700k into it and gross monthly rents are 8800.