Can't make rentals cash flow without cash

8 Replies

I've listened to podcasts about using other people's money for RE investments, but once I figure loan payments, we can't make the properties cash flow well without more free and clear cash. Example: $990k 9-plex, gross rents are $7000/mo with room for growth, minimal expenses. It's a better than average deal in terms of turn-key, location, etc, and I realize we're below 1% to start. $90K cash, $500k from a comm lender at 7.2% + 2pts, $400k private lender at 4% no fees/expenses. Once I figure loan payments, it cash flows at about $275/m. With 6-8% rent increases over 1-2 years, we're at $580/m. Hardly seems worth it. It definitely works better if we get all private lending at 4% (that'd be nice). Maybe we're not finding the right kind of "other people's money?" Thanks - appreciate your input.

@Julie Noone the only way to really make it work in many of today's markets is finding an off market distressed property owned by a tired old LL. Then you come in, rehab units and rent at higher rates. You have to know what you are doing and be very thorough, even existing long term leases can be a liability, but the payoffs can be pretty good.

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@Julie Noone First I would look at your primary financing. A commercial loan at 7.2% and 2% sounds similar to bridge financing terms on a distressed property. You mention the deal is "turn key" - I assume it's in good shape, no deferred maintenance, 100% occupied at or close to market rents. If so You should be able to go to local community bank and get at least a 70% LTV loan (possibly even 75-80) at around 5% interest, for a 20 - 25 year term. Those are roughly the terms I'm seeing in my area for smaller multifamily deals.

Then use the private lender to fund the remainder of the down payment and repair costs etc. I would agree with @Timothy M. 4% is a very low interest rate to pay a private lender. I think you should assume closer to 8%...unless you already have someone (a friend or family member?) lined up who has agreed to it.

I also agree w/ @Taylor L. that your purchase price may be the issue and at $990,000 you're paying too much for the deal. I'm not sure which area you're in but there are a lot people asking and paying for deals in top markets that are in the 4 - 5 cap range - just to park their money somewhere safe and gain some tax benefits. Typically they are high net worth individuals or groups (sometimes international) willing to buy something all cash and accept a minimal COC return for nice building w/ little maintenance etc. Typically those deals do not work for smaller investors using creative financing and acquisition strategies. That's why most of us target value add deals in B and C class apartment space.

Lastly, in my opinion I would be careful projecting/expecting a rent growth of 6-8% because of where we are in the market. Again I don't know which area  you're investing in but that sounds a little aggressive.

Good luck. 

Originally posted by @Timothy M.:

400k private lender at 4% with no points/fees? Err... that individual must not like making money.

in the real world that is Mommy or Daddy or grand  parents and maybe a rich uncle..  fact is 100% or so leverage on most any asset is not going to cash flow unless you buy absolute dumps and repurpose them.. or you can get rents to really rise over a short amount of time. 

@Julie Noone

I'm working a similar deal right now. Personally, I don't think the financing structure is as big of a deal in this situation as the actual deal itself. If you're buying a basically turnkey deal with almost all other people's money it more than likely won't cashflow.

I.M.E. there needs to be some sort of significant value you can add to it in a short period of time. (Raising rents). On the one I'm working that I said is similar, our price per unit 55k compared to the 110k you're paying. We're also raising the rents $250/month per unit within the first year.

So my "Long story short" version of what I'm getting at is that you're paying too much for the place and don't have much value you can add from what it sounds like. I personally like to pay a little less for a place than I probably should due to seller motivation and have a clear and concise plan on how I can quickly and effectively turn over the units fast in order to generate more income and raise the value of the building for when I sell it.

The cap rate on the property is 7.3%, before financing expense. So, yes, the price is too high. But It is an unusual property: desirable area, no deferred maintenace, long term tenants, a waiting list to get in (55+), and leases are structured where tenants incur greater expenses (snow removal, interior repairs including appliances).  The 4% is a from a high net worth investor who wants to park some cash for a few years.

We let this one go though. Thanks for the input everyone!