Hello! I could use some help analyzing/ negotiating terms for this deal. Any creative financing ideas are appreciated! The seller is willing to do owner financing with a down payment.
I think I’d rather do owner financing on the down payment and refinance out in 3-5 years into another portfolio loan.
Here are the numbers.
Asking price $410k
One 6 unit, One 4 unit.
Monthly overhead excluding mortgage principal and interest- $1905
$400k financed at 4% interest on a 30 year amortized note- $1910 P&I
Cash Flow= $1385 (this does not meet my criteria)
This property is under value in rents, and owner pays water at the Six unit which cost $500/ month.
Conservatively rent can be increased to $5800 and I’d like to bill back units for water. Subtracting that $500 expense and the new rent the cash flow will be $2485/ month. This meets my criteria.
Estimated value of all 10 units is $450k.
How do I balloon out of the owner financing in 3-5 years with still no money in the deal? Do I just need to pay down the additional equity or possibly the new income will help the value allowing me to pay off the owner the down payment without bringing cash to the table? What am
I missing? Could I position this is in a better way?
@Lauryn Meadows , a few thoughts on this:
- An expense ratio of $37% is VERY low and I'm skeptical.
- Water/sewer looks very high. I'd expect 1/2 that maybe. Check with the town and see what other similar properties are paying. There might be a leak or perhaps tenants are washing cars / filling kiddie pools, etc.
- Is it usual in your market for tenants to pay water/sewer? If not, this could put you at a competitive disadvantage.
- How did you estimate the $450k value? The 6-unit will be based on NOI / Cap Rate, the 4-unit is based on comps. How does this break down? Depending on that, it may make sense to sell off the 4-unit and keep the 6.
- You're not going to get a commercial loan at 4% for 30 years with only 2.5% down. Just not going to happen. Figure at least 25% down, 5.5-6% for 25 years. Start shopping around to lenders.
My back-of the envelope math puts you closer to $1000/month cash flow. Of course, I'm missing a lot of specifics. This still puts you at ~12% CoC ROI, which isn't terrible, but only $100/unit/month. That's far below my criteria.
- If the seller owns the property free-and-clear, maybe you can do 100% owner financing. Offer full price, 6.5% for 30 years. Run your numbers and see how that works. If it's close to $100/unit/month, it's probably worth it for you, since you'll have no money in the deal.
- Otherwise, you can see if the seller will finance the 25% down payment. A few things to consider, though. The bank may not like that you're 100% LTV. Also, they'll want you to have 6 months of reserves, so you'll have to come up with that cash.
I have a multi-family in Ohio and thought I would try to pass on water bills to customers as well. After my wife researched it for a while we decided not to.
The meters were quite expensive, plus all the plumbing had to be redone. There are a few companies that simply divide up the bill 4 ways (or however many) and send them a bill. This often leads to arguments and fights about “I heard her shower running forever and I was out of town”.
You can add a $100 line item on the rent collection for water, or simply increase rent and heavily advertise that.