How should I finance this deal???

Question

Here's the deal:

I'm buying a 29 unit building for $820,000

I have the first in place at: $620 at 6.5%

I have a second in place for $50k at 6%

I could get another loan for $150k at 16%

If I did it this way it would be a no money down deal. But the net net cash flow would only be $1000 per month after everything.

Or I could put in the $150k and the property would then net: $3300 per month after everything.

What would you do and why?

Matt H · Answer

I'll supply a little more info:

The building is grossing $15,600 per month. I'm factoring in 50% for expenses even though I know there not that high as I have another building in the same city I run.

But at 50% that leaves $7800 per month NOI.  
(rounding these number off by a few dollars)

I have the first in place at: $620 at 6.5%       $4,185

I have a second in place for $50k at 6%        $325

I could get another loan for $150k at 16%     $2,040

Total debt servicing:                                    $6550

Net cash flow:                                             $1250 per month

That's with no money down. I think this looks pretty good.

Allcash.....I'm not sure where you're coming from on this. This is like the best deal in the whole country right now! I haven't found anything in a city this size (120k population) for $28k and change a door. And with no money down my returns in infinite in this scenario. Just debating if I should leave that $50k I already put down into the deal or take it out.

I don't like that 16% money either so I'm thinking that I'll leave my $50k in and then pay off the $100k 16% money asap.

Dealfiles.....Ya I could put in the $150k now but I have two other deals coming up that I have to close on. So I'm thinking of borrowing some 16% money very short term until my other deals close, just so that I have enough to close my other deals. Then pay off any 16% money I've borrowed for this deal.

Account Closed · Answer

The one piece of information you didn't supply is if the $150k represents your total cash on hand.

If your numbers are accurate, it would seem you have found the rarest of all beasts, a true no money down deal that still cash flows. Make sure you have considered everything, especially taxes. The one thing many investors DON'T take into accout is a vacancy and repair allowance. You WILL have vacany and you WILL need to make repairs.

Without a track record for the property you will need to make your best guess for vacancy and repair. I would use about ten percent to start, meaning that I would reduce the total amount of rent you expect to collect in a year to 90% of the total possible gross rent. This is conservative, but realistic.

If after double and triple checking your numbers you still arrive at a $12,000 annual NET positive cash flow, you may want to go ahead and take the no-money-down route. Just keep a good chunk of that cash on hand to cover the things you CAN'T foresee.

Frank Adams · Answer

16%! Are you on crack? There's no way I touch any 16% money (except as a lender) even on a good deal. BUT, the bigger question is WHY EVEN BUY THIS PLACE?

It only throws off 4.8% on a cash on cash basis. If your numbers are NET (you've considered vacancies, repairs, major replacements, etc) then it's a p**s poor return. If your numbers are GROSS then it's a sure fire money loser.

I know you've posted on here a lot, and I thought you were a pretty experienced investor so there may be something here that I'm not seeing. But I don't touch a deal that's this thin, regardless of the leverage. A slow month and you're under water, a slow year and it'll be time for a fire sale.

all cash