Purchasing a multifamily complex

[Noah McBride]

Hey everyone,

I am still new to the real estate investing game, but I have been indulging myself in it for a couple years and I feel like I have an opportunity I don’t wanna pass up. My question is I found a multifamily complex of 10 duplex’s where they are asking for 2,000,000. I got the rent roll, but am waiting on the P&L. I feel their evaluation isn’t too far off, but the rent roll is $17,800 a month. How should I go about offering a deal that makes sense and how do I fund it?

[David Monroe]

@Noah McBride I have a couple of important questions to ask:

• When was the property built?
• What's the condition of the assets, inside and out?
• What's the vacancy?
• What's the neighborhood like?
• Why are they selling?

I can tell you without seeing a P&L that the net operating income, NOI, is probably around $117K using an 8% vacancy and 40% operating expense ratio, OER. If the owner is paying the water & sewer and the property is older than 20 years then I would change the OER to 50% lowering the NOI to around $98K.

Have you looked at the market and determined if there's room to raise rents or lower expenses. Keep in mind that you always have to adjust your insurance, management, and property taxes post sale for your proforma.

The struggle I see with this asset is getting a loan that will support a 1.25 debt service coverage ratio or higher. If you don't know what that means, the NOI must exceed the annual debt service by 25%.

If this is your first property, you will either need enough liquidity to equal the loan amount for a lender to aprove you, or will need to partner with someone that does. If the partner has a good track record, you could get a non-recourse loan but you still have to personally guaranty via the bad boy clause in the loan documents.

As far as raising the money for the purchase, you would need to raise approximately $575,000 to cover the down and closing costs at a $2M price point, take inventory of your relationships, put a package together that shows why this is a good investment, and start calling your relationships to get an appointment with them. 

You want to try and over subscribe the ask by 10-20% just in case you have 1 or 2 back out. I wouldn't ask for less than a $25,000 minimum investment.

If you are raising money in this way, and it's more than 2 or 3 friends or colleagues investing with you, you will need to hire a SEC attorney to draw up your disclosures, PPM and operating agreement for the LLC you'll create for the asset.

I know this sounds like allot, and it's why most people start with smaller properties or partner with someone experienced. 

Not knowing anything about this property yet, this doesn't sound like a very good deal, unless your strategy is strictly cash flow for a long term hold, and the property supports it.