Two-Family Analysis (making an offer)

[Dave Kennedy]

Lets assume you have $1500 in cash after all opex (maintence, taxes, utilities, insurance) is deducted. $100/unit income also deducted.

What are you willing to pay? Do you just plug it in according to debt terms?

$1500/ mnthly payments
30 yrs
6.0%
= 237k loan value.

If you are putting 10% down then the maximum offer is 237k/.9 = 263k.

Am I doing the math right?

Also, what if you expect the property needs some work. Update kitchen and baths. Lets assume $20,000 in renovations.

Would you deduct that from your max offer and call it "deferred maintenance"

So 263k - 20k = 243k is maximum offer

Am I on the right track?

Thanks!

[Peter Giardini]

Dave... I know there are some really smart guys on this board that will provide some pretty great answers... but here is my two cents...

I like to do all of purchasing or refinancing using small local lenders. The costs for doing this is usually higher interest rates... but the benefits are much greater.

1. They understand income producing properties.

2. You can purchase/refi in an LLC thereby avoiding what I commonly refer to as a proctology exam during underwritting.

3. These lenders are as concerned about this property cashflowing and you should be...

and here is where my response to your question comes in...

Almost every commercial lender is going to want you to demonstrate that the building can not only cover the cost of operations but that is has enough "income" remaining to cover the debt service. Usually lenders are looking to cover the debt service (commonly referred to Debt Service Coverage Ratio) 1.25 times. Meaning that after all of the operating expenses are paid, that the debt service could be paid for once and then one-quarter again.

While I have not taken the time to run your numbers, I am pretty sure that the $1,500.00 would not cover a mortgage on $243K to $263K mortgage 1.25 times. In fact, it may barely cover the debt service one time.

I hope this makes sense?