20 unit portfolio - advice /help

[Jason Grimm]

Hey guys. I'm a rookie investor/agent mostly interested in multifamily for cash flow. I came across this 20 unit portfolio on my local MLS, and reached out to the listing agent. They said they would be willing to do seller financing for 24 mo with a down payment probably between 100-150k. Instead of throwing in the towel due to lack of money, I thought I would throw this out to BP and see if somebody can point me in the right direction, whether that's hard money, partner, etc. The numbers look good, I just don't have the resources or experience to come up with such a significant down payment. Any advice or help would be awesome and greatly appreciated.

[Simcha Davidman]

@Jason Grimm you definitely have options. What percent is the $100-150k?

Based on your assessment is it worth it? Is there a value add component here, or is it being purchased below market value? This is really important here because you need to (re)finance the property within 24 months to get them out - you didn't state what the LTV is, but if you pay too much for it up front, you will not be able to get a large enough loan to pay them off later.

But yes, if you think this is a deal, follow through! There are a lot of options. If you have strong convictions about this purchase, I'd recommend trying to find more debt (hml, preferred/mezzanine, etc) even if it costs you a bit more, because you'll end up with a larger piece after you refinance and get rid of these pieces of the capital stack. But again, this is assuming you will be able to refi at a high enough value and LTV to do this.

Good luck!

[Jason Grimm]

Thanks, @Simcha Davidman. After running some numbers, the NOI is approx $90000 annually, and local cap rates between 6 & 8%. Currently all units are occupied and the average rent is 480/mo. Low for the area, a 2/1 typically goes for 650/mo. Based on using 1 month's rent = 1% of value, that would make it "worth" 960k. ARV with rents to market rate would boost that number to 1.3M. It's listed at 1.25M, which doesn't seem like a deal. Monthly NOI would be appx. $7500. Once I subtract the monthly debt payments, I could be barely cash flowing, if at all. That would leave little to no room to make any improvements or save for cap ex. Even saving 1000/mo I wouldn't have enough to refinance out after 24 mo. But this is all estimated until I find out what the seller is actually willing to go for. Have I missed anything?

[Simcha Davidman]

@Jason Grimm that's a great start (not for the deal, but for your analysis).

Banks don't look specifically at the 1% rule. They look to NOI/cap rate. So, if NOI is $90k, the property is worth approximately $1.125m (at an 8% cap) and $1.5m (at a 6% cap).

Now, you wrote that the "Monthly NOI would be appx. $7500" - do you mean currently (based on seller's info) or do you mean after you bring rents to market. I ask because the $7500*12 months = $90k. So,we just have to make sure that you can drive the NOI higher.

Let's work through an example to make this more clear.

We have $90k NOI / $1.25m purchase price = 7.2% cap rate at purchase (obviously, this does not take into account your closing costs and operating/capex reserves that technically bring your returns down, but no biggy). Now, assume that you will refinance at a 7% cap. Assume further that you're down payment is 10% of purchase price, or $125k. That means your seller-financed loan is $1m.

Typically, you will refi at 75% LTV (depending on your market and the property, you may very well be able to get 80% or even 85%, so speak with some lenders/mortgage brokers to a get good idea of what will be available down the road).

In order for you to pull out the $1m to refi, the property would have to be valued at $1.333m ($1m/.75 (75% LTV)).

In order for you to increase the value of the property $84k (the difference between $1.333m and $1.25m (I'm rounding here)) at a 7.2% cap, you have to drive NOI higher by approximately $6k/year, or $500/month.

So two things - does that seem reasonable based on what you know of the property and the market? You stated that rents seem well below market, so this looks easy. But are the expenses they're giving you accounting for real life expenses? A lot of times, sellers will present properties with higher NOIs by removing expenses.

The other thing is - will you really be able to refi at a 7.2% (or lower) cap? If the market is really 8% cap, then in order for you to pull out $1m, you have to drive NOI higher by approx $6700/year. Still not a lot of money.

I guess the last comment I have (for now) is that you won't be able to pay off the loan from cashflow. The only way to do it is a refi, and generally that will require adding value.

This seems like it could really be a great deal - if you can really increase the rents by $170/month. That's 35%! I'd say be really careful looking at the expenses (and if you go to the property, make sure you get a good sense of all the deferred maintenance and required capex).

Let met know if you have any questions or this was not clear! Sorry it's so long winded, I love talking!

[Dennis M.]

sounds like a D class asset with rents that low it I could be wrong

[Oliver Carey]

A portfolio blanket loan would work 80% PP 4% interest 30 yrs Fixed or 10-15 yr ARM Hybrid as long as each property is valued at $50k+

[Jason Grimm]

@Simcha Davidman Thanks for the thorough breakdown. @Dennis M. The numbers I used for NOI were based on an average rent of $480. I'm still waiting to hear back with the actual rent numbers and what sort of monthly payment the seller would go for. I actually used to live in one of the apartments about 11-12 years ago and paid $435/mo. My wife and I moved back to the area about 3 years ago and could only find a single apartment for rent in the area. It was a 2/1.5 in B-/C condition, and was listed for $650. The apartments in question appear to be in better shape than the one we tried to rent, but are owned by a mom & pop type. It's a series of 2,3 & 4 unit buildings, built in the '80s, all in good shape with repairs being made regularly (as far as I can tell). A walkthrough would clear this up. The listing agent said to make an offer. Let's assume I can come up with an offer number that actually cashflows. I'm concerned about the steps moving forward. I don't have the money for the down payment, and can't think of a way to come up with by myself in the foreseeable future. I would definitely need a partner of private money to do this deal. Aside from asking on BP, I don't know where to look for those funds. And I'm nervous about my offer being accepted without any prospect for actually being able to purchase. I suppose I could write in a financing contingency to cover myself (any other tips for contingencies?) but IF my offer were accepted, how much time would I typically need to close? Can I build in a fund-raising timeline in the contract? How long for due diligence, etc? Thank you for your help.

[Jason Grimm]

@Oliver Carey Interesting. Would you mind fleshing that out a little?

[Simcha Davidman]

@Jason Grimm typical contracts on commercial properties would allow for 30 days of due diligence and then another 30 days until closing. That gives you 60 days to find the downpayment. However, with seller financing, they may be specifically interested in a faster close because there is no mortgage you need to deal with. It's all what you negotiate.

As far as finding the money, it really depends who your network is. Do you know local investors, or non-local investors? Talk to your family and friends and everyone you meet about what you do. When they express interest, you're like, actually, I have a great deal I'm working on right now! (This is not legal advice and you should have a basic handle on securities regulation issues.)

But before you start selling the deal, you need to be confident with your numbers and make sure the deal actually works. Not just cashflow, but also the ability to refi down the road. If you have both of those, then put your offer in and see what happens.

Also, even once your offer is "accepted" you still need to negotiate and execute the PSA (purchase and sale agreement, aka contract). That could take anywhere from a couple days to a couple weeks. This is all before the timeline actually starts, but you can still network with potential partners and/or investors during this time.

[Andrew Syrios]

I think in this case, you would need to get some partners involved. Do you know anyone with money that might invest in your deal? Maybe put together a packet on the properties (and your experience) and start asking them out for lunch.

[Sudhanshu Singha]

@Jason Grimm Did you try buying a portion of the portfolio? If financing is getting in the way of buying the entire portfolio, then maybe buying 6-10 units might be a better idea. Another thing to consider in your analysis is that maybe the owner is renting the units below market value to have a high occupancy rate and low turnover of tenants.