Would you do this deal?

50 Replies

@Bob Prisco Hi Bob, a lot of reasons I say yes on this deal. Loan pay down, appreciation in a market that will be getting railroad access to Boston soon, depreciation on taxes, and cash flow.

I’m not sure about your calculations, but I certainly appreciate your insight. Thanks!

@Bud Gaffney question is will that appreciation take hold I. Taunton within the peak 10 year hold period. The commuter rail will have a big impact on the area but not sure Taunton will be first in line. I’m bullish on lots of areas in MA, especially around the trains but Taunton isn’t one.

If u are talking the 1900s brick or Big wood multi stuff in that area I think u are looking at LOTS of deferred maintenance. Ask me how I know :)

We made money on a 14 unit mixed use purchase and rehab on a 1.13M exit with same initial gross moving the gross to 140 and NOI to low 70s but capital expenses were a significant challenge on a hold.

Do you have a crew? Are u property managing? I’d trust @Michael Ealy far more than me, but he brings a lot to the table. I’d be careful. It could work but it may be a lot of work for the money.

Michael Ealy is very successful in his Ohio market.  Bob Prisco is also in the Ohio market.  These markets are very different from the North East or West Coast markets.

If I had that opportunity in my market (assuming at least class C and in at least fair condition) I would have an offer sheet to the seller within the hour.  You do not define what "well below market value" is, but if they are below market value you are obtaining initial equity at zero cost.

RE is very market specific and I am an advocate of the 50% rule that Michael used and suspect his initial cash flow projection is fairly accurate.  However, his calculation did not allocate for any appreciation which makes a lot of sense if your market is Ohio and appreciation above inflation is typically achieved via value adds.  This is not the case for many other markets.   Seeing that your loan would be fixed rate, even modest rent appreciation quickly changes those cash flow projections.

My caveat if you purchase, I do believe Michael's numbers are quick calculation ballpark accurate.  You must be in a position to withstand the negative cash flow that Michael projects in the event that appreciation is not immediately forthcoming.

Good luck

@Hunter Plescia we’ve always done 15/15 year loans in multifamily. Cash flow is lower no doubt but you gain equity faster end and are able to pull out money again if needed. Cash flow isn’t always the most important thing but it depends on the vehicle and type of investment. For 3 units he’s prob better off following your advice unless he can forgoe the cash flow to build equity and build for the long term.

@Bud Gaffney .

So... I’m curious and playing devil’s advocate here.

I’m assuming he/she owns these free & clear. Doing some quick math your monthly payment ranges in the $6000-$7500 range depending upon the final term and rate agreed upon.

So why would someone who is brining in over 10k a month hand it all over to bring in about $4000 less.

I tend to belong to the “if it sounds too good to be true...... it is” club

@Bud Gaffney - did you mention expected taxes, insurance and/or utility & landscaping bills? If so I didn’t see it. Where I live in NJ the taxes on an asset like this could be $20,000-50,000/year. (Yes and that’s one reason why a non profit bought the apartment building I had my eye on because nobody wants to pay 50,000 of taxes on a $1.7m 14 unit apartment building. Water and sewer are at least 150/mo per unit. Landscaping, snow removal and other charges quickly eat away at profit. Will you hire a pm company or part time handyman and/or showing agent? I’d also be very concerned about deferred maintenance. Older properties can have structural defects, hidden water and fire damage, end of lifespan plumbing and electrical systems, clogged sewer lines, aging driveways, roofs, windows and siding. Look for wall cracks especially someone that may not have been patched like a closet.

Also check how long he’s been trying to sell property. That can give you leverage on either better financing terms (it’s possible he wants income without a big cap gains hit) or clue you into the value isn’t as good as you expect. Check/call local commercial agents to see if they can find you a similar or better deal for at least 10% less?

@Bud Gaffney Based on the limited information, one can only determine the PI.  We would need to know the TI portion to make a sound judgement.  Then their is the rest of the equation that @Michael Ealy estimated at 50% (which would include your TI). If you had better information, we could make a more accurate analysis. Is there a value add? Can you improve the property, and thereby the cash flow/ARV? Is there an option of adding units, expanding existing units. I would say to look for the value add scenario. Look at the deal from all angles, figure out your CAPEX (dependent on age of components in/on houses), Vacancy (local averages), Repairs (PM can estimate), Management Fees (PM can supply info). Is it a C class neighborhood? If so, those numbers go up. What's the Section 8 rates in the area for similar rentals? That might be something to consider.

1.06% is sufficient to make it work, especially if it's a good area. The rest you can leave to appreciation and inflation. A mediocre deal now will be a knock-out 10 years from now due to inflation and appreciation.

@Bud Gaffney selling it for the amount they financed and seller financing is a double red flag. Seller financing isn’t always a bad thing but if the “marketing of the property is pushing it” then it often means they’re desperate to unload. If they’re desperate.... 9999/10000 chance it’s a bad deal.

@Gabe S. They’re not desperate at all. They just have many properties and are starting to unload some of them. It’s a smart move if you have a property paid off, don’t want to be a landlord anymore, and can collect money/interest for 30 years without having to deal with any tenants.

@Gabe S. Also they avoid capital gains taxes. Many positives from a seller stand point to finance the deal. If you are in a blessed position to do so of course.

@Bud Gaffney Everyone makes REALLY good points. I'll just add, if it's too good to be true it definitely is. Get your inspections done and don't hesitate to walk away from it. I'd rather walk away from 10 good deals then buy 1 bad deal. On the other hand, if it cash flows and is a strong ROI then there's 1 more piece can you sell it and make money. Have your exit strategies lined up.

Good luck. 

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