Case Study 11 unit Midwest property. Is this a good deal? advice?
Rental Property Investor · Burlingame CA, San Francisco Bay Area · Member since 2015 · 45 posts · 14 votes
Case Study 11 unit Midwest property. Is this a good deal? advice?
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Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes
7yOriginally posted by @Darius Falahkhir:
Hi All,
I wanted to get your professional opinion on this property that I'm thinking about putting in an offer on. This quite possibly may be my first commercial property deal, and I'm just a bit nervous about pulling the trigger on it. Any comments or words of advice will be truly appreciated!
Here is the info:
C-class property in a C-class location
seller will take 350k
11 units total: 10 units 1br/1bath , 1 unit 2/1
all 1br are occupied, 2br is vacant
$50/month for coin-op laundry
average rents for the 1br $455, 2br vacant but can rent for $550
room to increase rent of 1br to $500-550, possible to increase 2br rent to $600-650
current monthly income $5150
tenants pay own electric
landlord pays $70/month community electric
landlord pays water $450/month
insurance $170/month
loan: 5 year balloon, 20% down, 5.25%, 25 year amortization= $1677.89/month
NOI: $29,900
Annual taxes $9411
closing costs: ~$8000?
setting aside 5% vacancy, 5% cap ex, 5% repairs, 8% property mgmt leaving a monthly cashflow of $813.36 and 12.51% cash on cash return on investment.
What do you guys think?
What type of commercial loan structure can you suggest that may work well for this situation?
-Thanks!
Your 5% estimates are too low for class C, especially low-c earning only $550/mo for a 2BR. I would normally use 10, 15, 10, 10 as a minimum unless there were unique factors (like newly renovated/constructed), and go up from there. 5% of 550/mo is only $330/year/unit - that could get swallowed up in a single service call for a malfunctioning furnace. Also for managing $550/mo units, you'll be hard-pressed to find a PM that will charge less than 10% who won't nickle and dime to you make that up otherwise.
The proforma rents are only slightly higher, but percentage-wise its 10% higher. Why are rents not at that level right now? When you turn over the units to get that extra $600/yr/unit, how much will you spend in repairs/improvements and vacancy to get the units up to $600/mo quality?
20 Replies
- 7yAlex BekezaBusiness MemberLender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Investor Property Loan5308 Reviews - Rental Property Investor · Burlingame CA, San Francisco Bay Area · Member since 2015 · 45 posts · 14 votes7y
@Alex Bekeza Yes! It is a local bank.
- Rental Property Investor · Fremont, CA · Member since 2018 · 21 posts · 8 votes7y
@Darius Falahkhir Congrats !! .
I would suggest using 45% of gross income as operating exp in this scenario. I also suggest to take the new property tax (which might incr based on the purchase price) into account while calculating operating exp. If it's 100% occupied then considering 5% vacancy is standard (I usually prefer using 10% as vacancy). If not please use the actual economic vacancy while calculating NOI. Did you get a chance to check what are the prop mgr charges in that area ?. if you haven't, consider using 10% as prop mgr fees.
In order to incr the NOI after purchase, if possible may be you can start with passing back the water expenses to tenants. It will make tenants more responsible both in using water as well as promptly reporting water leakages if any.
- Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes7y
Originally posted by @Darius Falahkhir:
Hi All,
I wanted to get your professional opinion on this property that I'm thinking about putting in an offer on. This quite possibly may be my first commercial property deal, and I'm just a bit nervous about pulling the trigger on it. Any comments or words of advice will be truly appreciated!
Here is the info:
C-class property in a C-class location
seller will take 350k
11 units total: 10 units 1br/1bath , 1 unit 2/1
all 1br are occupied, 2br is vacant
$50/month for coin-op laundry
average rents for the 1br $455, 2br vacant but can rent for $550
room to increase rent of 1br to $500-550, possible to increase 2br rent to $600-650
current monthly income $5150
tenants pay own electric
landlord pays $70/month community electric
landlord pays water $450/month
insurance $170/month
loan: 5 year balloon, 20% down, 5.25%, 25 year amortization= $1677.89/month
NOI: $29,900
Annual taxes $9411
closing costs: ~$8000?
setting aside 5% vacancy, 5% cap ex, 5% repairs, 8% property mgmt leaving a monthly cashflow of $813.36 and 12.51% cash on cash return on investment.
What do you guys think?
What type of commercial loan structure can you suggest that may work well for this situation?
-Thanks!
Your 5% estimates are too low for class C, especially low-c earning only $550/mo for a 2BR. I would normally use 10, 15, 10, 10 as a minimum unless there were unique factors (like newly renovated/constructed), and go up from there. 5% of 550/mo is only $330/year/unit - that could get swallowed up in a single service call for a malfunctioning furnace. Also for managing $550/mo units, you'll be hard-pressed to find a PM that will charge less than 10% who won't nickle and dime to you make that up otherwise.
The proforma rents are only slightly higher, but percentage-wise its 10% higher. Why are rents not at that level right now? When you turn over the units to get that extra $600/yr/unit, how much will you spend in repairs/improvements and vacancy to get the units up to $600/mo quality?
- Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes7y
@Darius Falahkhir . What are your goals with this asset? Buy and hold for cashflow or Buy for value add then exit? If your goal is value-add, then there is not a lot of "meat on the bones" on this investment, unless cap rates really compress after your purchase.
The price range seems fair. And you are getting good deals from the bank on your mortgage.
Good luck.
- Rental Property Investor · Burlingame CA, San Francisco Bay Area · Member since 2015 · 45 posts · 14 votes7y
@Henri Meli, my goal would be to buy and hold, increase the rents, and keep for cashflow. Hopefully increasing the rents would increase the value of the property as well.
Can you explain what you mean when you talk about the cap rates compressing after my purchase?
- Investor · Morrisville, NC · Member since 2012 · 1k+ posts · 673 votes7y
@Darius Falahkhir The market price of a commercial asset is generally dependent on two numbers. The NOI (Net Operating Income) and the CAP Rate. (CAP).
Price = NOI / CAP .
If CAP Rates go down (compress), assets become more expensive.
Let's look at an example: An asset that produces $100k in NOI will be priced at $1,250,000 when CAP rates are 8. ($100k / .08) . The same asset will be priced at $1,666,666, if CAP rates were to go down to 6.
So, if the CAP Rates in your area go down, your asset becomes more expensive.
How do you know cap rates? Talk to a broker in the area and get a feel for what assets are selling at.
Hope that helps.
Good Luck.
- Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes7y
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joel Florek:
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
I think rates have gone up a tad is probably why he is asking..
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
As @Matthew Olszak stated your reality of expenses is way off.. your projecting best case.
I would take 60% of gross for back of napkin and if it still works then do a deeper dive.
those type of C class properties are going to have lots of turnover.. and your probably not going to turn a unit for 300 bucks. not to mention your probably not going to move one out and one in..
I like these for locals who self manage and can really stay on top of them.. could be pretty risky from Burlingame
Always take into consideration that the market prices for risk.. and your risk here is tenant stability and how they treat the units.
- Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
I think rates have gone up a tad is probably why he is asking..
Still getting quoted at the low 5% range on my properties for recent refinances and my upcoming refinance in a few months.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joel Florek:
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
I think rates have gone up a tad is probably why he is asking..
Still getting quoted at the low 5% range on my properties for recent refinances and my upcoming refinance in a few months.
whats the apr ? rate is one thing apr is how you compare apples. but either way that's great most folks seem to be looking at 5.75 to 6.00 now.. congrats on having a nice priced lenders. do you live in the foot print of the banks.. that makes a big difference as well.
- Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
I think rates have gone up a tad is probably why he is asking..
Still getting quoted at the low 5% range on my properties for recent refinances and my upcoming refinance in a few months.
whats the apr ? rate is one thing apr is how you compare apples. but either way that's great most folks seem to be looking at 5.75 to 6.00 now.. congrats on having a nice priced lenders. do you live in the foot print of the banks.. that makes a big difference as well.
The biggest thing was competing every loan. All my bankers know that I have a few banks quoting me for any loan that is being provided. Has helped them sharpen their pencils and get me better deals. These are small or regional banks which are more aggressive on their commercial loan terms than the larger national players or smaller conservative banks. I usually talk to a dozen or so banks to understand which will be a good fit to get me the best deal and be flexible on the terms. Closing costs on my $270k loan last fall were about $2k and on my $550k loan they were only $1.5k.
What is the difference between APR and the annual rate Jay?
This would be a hard pass for me.... why? You're out of state and turn over is going to take you to the cleaners...
Shoot for better return on less doors and pick something easy to manage. A nice duplex, a nice condo/townhouse... and get a couple. You're happy with 85 dollars a door (adding back in cap ex/vacancy/repairs) you could do that easily w/ out the hassle of these low rents...
Random example, literally 2 seconds on redfin to prove a point:https://www.redfin.com/MO/Independence/17409-E-41s...
https://www.redfin.com/MO/Independence/4001-S-Redw...
Rent Comp
https://www.apartments.com/cedar-ridge-apartments-...
Even at list, 20% down and 6% interest this would be less than 600, and probably rent for 700+. Self mange and consider HOA prop mgmt fee... Get them for closer to 55-60.... good to go.
Are there even better options, absolutely .... this was just to illustrate my point and something quick/easy to find.- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joel Florek:
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
I think rates have gone up a tad is probably why he is asking..
Still getting quoted at the low 5% range on my properties for recent refinances and my upcoming refinance in a few months.
whats the apr ? rate is one thing apr is how you compare apples. but either way that's great most folks seem to be looking at 5.75 to 6.00 now.. congrats on having a nice priced lenders. do you live in the foot print of the banks.. that makes a big difference as well.
The biggest thing was competing every loan. All my bankers know that I have a few banks quoting me for any loan that is being provided. Has helped them sharpen their pencils and get me better deals. These are small or regional banks which are more aggressive on their commercial loan terms than the larger national players or smaller conservative banks. I usually talk to a dozen or so banks to understand which will be a good fit to get me the best deal and be flexible on the terms. Closing costs on my $270k loan last fall were about $2k and on my $550k loan they were only $1.5k.
What is the difference between APR and the annual rate Jay?
you have a honey hole keep dipping your bucket into those banks.. APR is when you add in all the up front costs.. so for most folks
they pay 4 to 6k in closing cost from mortgage brokers etc.. so when you add those fee's in that's the APR which is slightly higher than the note rate.. so the fact that you paid some fee's your apr is SLIGHTLY higher than your note rate.. the only thing to be cautious about with smaller commercial banks is if you have 5 year calls.. those can bite you.. now I am not predicting this in any manner. but that was one of the main drivers of the last credit crisis was that the banks would not roll over the loans at the 5 year call. and then other banks were not loaning that lead to perfectly performing assets being foreclosed on .. especially if said small bank failed and a hedgefund bought all the notes.. they proceeded to foreclose on them like no tomorrow. AGAIN not saying this will happen in the next recession but investors should be mindful that not all 5 year call notes will get rolled over and there may not be aggressive lenders out there or the rates will be significantly higher.
- Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Jay Hinrichs:
Originally posted by @Joel Florek:
Originally posted by @Alex Bekeza:
If you don't mind sharing. Where are you getting the 80% LTV at 5.25% on a small balance commercial deal like this? Local Bank?
Alex, Do you ask because you think this is good or bad terms? All my 3 properties with small balance commercial loans have had 80% LTV 20yr Am, rates from 4.5% to 5.25%, and 3yr or 5yr balloons. All local banks and financing done in the last year or 2. They have both also allowed me to have subordinated debt via a seller 2nd position note.
I think rates have gone up a tad is probably why he is asking..
Still getting quoted at the low 5% range on my properties for recent refinances and my upcoming refinance in a few months.
whats the apr ? rate is one thing apr is how you compare apples. but either way that's great most folks seem to be looking at 5.75 to 6.00 now.. congrats on having a nice priced lenders. do you live in the foot print of the banks.. that makes a big difference as well.
The biggest thing was competing every loan. All my bankers know that I have a few banks quoting me for any loan that is being provided. Has helped them sharpen their pencils and get me better deals. These are small or regional banks which are more aggressive on their commercial loan terms than the larger national players or smaller conservative banks. I usually talk to a dozen or so banks to understand which will be a good fit to get me the best deal and be flexible on the terms. Closing costs on my $270k loan last fall were about $2k and on my $550k loan they were only $1.5k.
What is the difference between APR and the annual rate Jay?
you have a honey hole keep dipping your bucket into those banks.. APR is when you add in all the up front costs.. so for most folks
they pay 4 to 6k in closing cost from mortgage brokers etc.. so when you add those fee's in that's the APR which is slightly higher than the note rate.. so the fact that you paid some fee's your apr is SLIGHTLY higher than your note rate.. the only thing to be cautious about with smaller commercial banks is if you have 5 year calls.. those can bite you.. now I am not predicting this in any manner. but that was one of the main drivers of the last credit crisis was that the banks would not roll over the loans at the 5 year call. and then other banks were not loaning that lead to perfectly performing assets being foreclosed on .. especially if said small bank failed and a hedgefund bought all the notes.. they proceeded to foreclose on them like no tomorrow. AGAIN not saying this will happen in the next recession but investors should be mindful that not all 5 year call notes will get rolled over and there may not be aggressive lenders out there or the rates will be significantly higher.
Thanks for the clarification. And you are 100% correct on being careful. I focus on buying stuff that cashflows well to start and has a lot of room to improve the property simply through better management. That being said by the time my notes are coming do for refinance the financial picture looks a lot better than when I first picked up the properties. This way I can afford a higher rate should that happen, and of course, it has been slowly happening.
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes7y
You leave out an important piece of information - the location. Some smaller towns are in deep decline in the Midwest. And the depth of the tenant base isn't particularly good. I stay away from these tertiary cities, even though they are in my backyard. Your rents are very low, so I suspect your potential acquisition lies within a declining economic area.
- 7yAlex BekezaBusiness MemberLender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
@Joel Florek Sounds like you've got a good system figured out.
-I asked because I was hoping @Darius Falahkhir would share the name of the bank. I like to make note of local banks terms when I come across them in case it made sense to reach out to them for a client in that area at some point. The terms are good, especially for an out of state investor who presumably doesn't already have accounts there.
-As far as small balance commercial loans go those are great terms. Like @Jay Hinrichs pointed out. Rates tend to be a little higher on average. Small Balance Commercial floor rates tend to start in the 6% range and go into the 8% range. However, the class of loan programs I'm talking about don't balloon. They're 30 year terms, fully amortized. For all of the reasons Jay mentioned short term balloon products aren't my first target for clients.
-If you're really only paying $1,500 for a $550k loan and the interest rate isn't swollen with YSP then I have to assume those bankers have pretty sweet salaries. Considering that is around 1/3 of a point. Its unheard of. I keep my origination fees flexible to compete but that's not even in the ballpark of industry standards. 99% of us work on commission alone. Not a penny until the loan closes. That being said, if your looking at motivations, we obviously have a way higher incentive to get the loan closed charging a reasonable fee.
-Allowing some subordinated debt via seller financing is somewhat common in small amounts (10% or so) but I'm always impressed when an investor pulls it off!
-I can only assume that you are one awesome borrower to work for and must make it easy for them to get these loans closed.
Happy New Year! I'd be happy to sharpen my pencil to present a loan scenario in 2019!
Investor Property Loan5308 Reviews - Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes7y
I would say your NOI is around $25-30k, which makes the deal look ok, but you did not mention the market you're looking at, so it is hard to determine if you are over paying or getting a great deal.
Also, your profile says San Francisco, but you are looking to buy in the midwest with a local bank. Are you sure you can get a loan from a local bank?
- Rental Property Investor · Burlingame CA, San Francisco Bay Area · Member since 2015 · 45 posts · 14 votes7y
Hi @Todd Dexheimer the property is located near white oak off blue rock rd and the 27.
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