Warm my cold feet?

Question

I've been working on a deal to buy a 4-plex for the last 3 months. With numerous bank related issues pushing the calendar date farther and farther.

The deal starting at $182,500. Was negotiated down to $180,000 with the seller paying all closing costs. Eventually, once the property was appraised by my bank, at $140,000, the seller dropped her price to $170,000, closing costs not included.

The seller bought the property at auction for under $80,000 a year ago.
The property is currently generating $2640 a month in income.

I'm pretty happy with the purchase agreements. The bank is lending me $100,000, I have to put $40,000 in with the bank, and $30,000 out of pocket to the seller. Ignoring other fees. I'm using a HELOC to fund all out of pocket expenses, so this is basically no money down. (heloc is prime +1)

Other similar properties are on the market for over $200,000, and are not selling. I think this is due to appraisal values coming in low.

I'll be generating positive cash flow, and yes, the seller will be making a home run in her flip. Took her 1 year to sell, and had a fully occupied building the whole time.

I just wont want to get stuck with a bad deal because I am eager to get the lending closed and see cash flow.

Jon Klaus · Answer

Ben, I know you are financing the whole purchase between the bank loan and a HELOC. In reality, it's still putting $70k cash down. I think I'd consider another way, though. Since you plan on living in one of the units,, why not get an FHA or FNMA mortgage? The appraisal? Get the seller to come down to appraisal, or get another appraisal. I'd play hard ball with the seller.

It looks like this deal could be done with FHA for 3.5% down. I'd look hard do that and use the HELOC for another deal where cash will get you more of a discount.

It looks like this deal could be done with FHA for 3.5% down.  I'd look hard do that and use the HELOC for another deal where cash will get you more of a discount.

Ben Bakhshi · Answer

Jon, I will look into that option with my lender.

Ben Bakhshi · Answer

I did some more research. There is a vacant but renovated comparable on the same block that is pending sale. Asking price was $199,000.

Also, another reason that it is more valuable is that I am basically willing to pay that much and the cash flow is significant enough for me to make the move.

Ben Bakhshi · Answer

SFH's are selling for between $50-125k in the 4 mile radius. I'd be pretty satisfied with 3 SFHs, but the problem is that I cannot so easily finance multiple properties as opposed to a mortgage on a single 4plex.

Ben Bakhshi · Answer

I guess what makes the property so much more valuable is the CAP rate, and the fact that I am leveraging into the property. I plan to do a cash out refinance in the next 1-2 years and pay down my HELOC.
 
I forgot to mention that I will be living in one of the units, at least for a year, due to terms of owner occupancy mortgage. Assume that I am paying rent like any other tenant is for now.

Insurance is $1,400 per year.
No management fees.
I will be paying for water, at about $200 a month.
I've agreed to let one tenant stay with no increase in rent, he is an old man and is paying market prices right now.
2 other units are rented for at least another 6 months.

I don't know exactly how to estimate the taxes, but I can give a very high estimate of $6,000 a year, according to redfin. If it's 1.5% then I'd be paying $2500 a year.

Jon Klaus · Answer

Ben, what makes this property so much more valuable than the appraised value?  Other properties on the market for $200k+ don't matter if they aren't selling.  Uwe has estimated the expenses to calculate cap rate. Do you know the actual expenses?

Uwe S. · Answer

$2,640 monthly gross income x 12 = $31.680 yearly - 50% expenses ($15.840) = $15.840 NOI calculated, so a 10% CAP = $158,400.

Expenses include 10% vacancy, its the best you calculate not so optimistic. I for one calculate each propertie with 55% expenses, old properties (higher than 35 years old) with 60 or even 65% expenses.

-Uwe

Ben Bakhshi · Answer

How do you figure 10% CAP at $158k.

Uwe S. · Answer

Ben you will buy a house that appraised by your own bank at $140k for $170k and this with no money down? Sorry but I cannot warm your cold feet at the moment.

Only the numbers (rental income) looks nearly ok, with a 10% CAP house would be worth $158k in my mind.

-Uwe

Warm my cold feet?

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