I'd like to first say that I am working with my father on this deal. It is a 66 unit apartment complex with garages for extra income. He is actually doing the accounting and management full time for the current owner, who is ready to retire and travel. Our only issue is the financing aspect, which we would like to avoid pursuing seller financing.
I'll get right to the point; here are the numbers (calculated without P&I):
Purchase Price- $5,000,000
Monthly Income- $49,800
Monthly Expenses- $21,800
Monthly Cashflow- $28,000
Annual NOI- $336,312
*This is just an extremely condensed format of a 4 page income statement. I have accounted for maintenance, turnover, payroll, bad debts expense, insurance, marketing, and various other miscellaneous expenses. The only expense that I did not include is the principal and interest.*
I would like to poke around to see if there are any options other than seller financing or traditional financing. Traditional financing of the full $5M at 4% would turn the annual NOI into around $52,000. This is feasible, but we would like to explore other possibilities.
I am extremely interested to see what anyone has in mind for this deal. I would be happy to include anything that may be missing or unclear.
Thank you all very much for what you do for this community and Happy New Year's!!
@Austin Freeman I doubt you'll get 4% on a commercial loan like this. I have a simple 5 unit complex, and I'm paying 5.75% on a 20 year term. So factor that in too. You didn't mention how much you're putting down, but 25% down is standard for a smaller commercial loan. For a larger loan, definitely could be more.
I have a similar deal at $4.25m that I am closing on very soon with a local bank @ 20% down. Personal guaranty
0.5% loan fee
5 year fixed
20 year amortization
The Freddie Mac Small balance loan looks like the best deal, but I think can be more challenging/time consuming to get the loan. I may look into refinancing into this a year or two down the road
Local banks can be negotiated with on a deal like this, don't immediately take what they offer you. Loan fee and interest rate are negotiable to a point.
That seems a bit high for a rate for something like that. All my stuff is at 4.75%-4.85% or so with 20-25% down.
Also, that cap rate is 6.7% which is a little bit on the low side, especially if there is no way you think you can improve it with higher rents or lower costs. It may be on par for your area, but it is a little bit lower than I would look for.
@Austin Freeman So, I'll be the Negative Nancy and say that you're way way waaay off base. Most commercial loans are going to be either a 20 year or 25 year amortization period and the rates aren't going to be 4%. Not to mention you'll have to put something down which will lower the monthly payment and there will be some hefty fees associated with any 66 unit purchase. Any many times the loan that you will get will be 5-7 years with a balloon payment. You can refinance but it will be at the prevailing interest rate at that time. Why that is a challenge is that you don't exactly pay down a mountain of principal during that 5-7 year stretch. And there's no gaurentee that rates will be 4% (which I don't think you could get now anyway) in the future. What happens if rates are 6% in 5 years or 7%? What will the new balance on the loan be at that point? How will refinancing at that point (lower balance but potentially higher interest rate) impact the profitability of the deal?
My quick numbers using my terms above:
Annual cash flow - $29,471
Mortgage paydown in first year - $124k
Mortgage paydown at end of 5 years: - $685k.
Total first year return = $153,471
First year return on down payment of $1,000,000 = 15.3%
This does not include the minimum $145k or so tax deduction you'd get for depreciation each year, or the huge tax deduction you'd get with the new bonus depreciation tax laws if you did a cost segregation.
@Austin Freeman I agree with @Chase Gochnauer on this one when he says the Freddie SBL program is the best deal. I can speak from experience that a Freddie SBL loan takes about 55 days to close, but other than that the process isn't much different from a bank loan. On top of that, the program offers 30-year Amortization with up to 10-years fixed options with Interest Only capabilities. Chase and Austin, feel free to reach out to me if you have any further questions on the Freddie SBL program. I am a straight shooter and will give it to you straight. Thanks
@Austin Freeman , I agree with others that 4% is not realistic.
Just wondering, why would you want to avoid seller financing? You could use seller financing to reduce your downpayment, thus increasing your CoC returns.
Freddie Small Balance is definitely the way to go. We just closed a 10 year term 4.34% interest rate on a similar size loan.