First Deal -- 5 Unit in small college town

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First Deal -- 5 Unit in small college town

Lin Yang
San Francisco, CA · Member since 2017 · 5 posts · 1 vote

Hi BP,

First post! I'm hoping you guys can help a newbie out. I'm looking for my first rental investment and stumbled across this one in my small Midwestern hometown. It seems like an amazing deal -- so I want to run it by you all in case I'm missing something.

Property Details

Listed on MLS for $185k; on market for 249 days

5-units: 1 efficiency, 3 1-bedrooms, 1 2-bedroom

All units currently leased to students through Aug. 2017

3 blocks from local 4-year university that ranks top 15 in the state

Roof <2 years old; all furnaces <10 years old

Annualized Net Operating Income

Rent: $32k

Vacancy: 3% or $1k

Property mgmt: 10% or $3.2k

Taxes: $6.4k 

Water + other utilities: $2.3k

Insurance: $1.2k

Maintenance: $1.5k

NOI: $16.4k

Financing

I'm hoping I can negotiate the price down to $160k and put down 25% $40k 

Cash on cash return: 40.24%

Apparently the roadblock for this property has been financing since it's a 5-unit and would require a commercial loan. I'm calling up local banks tomorrow AM. If I can't find one willing to lend to me, between my savings and a few other folks who might be interested in the deal, I could offer cash.

Questions

  • What other factors should I take into consideration?
  • If I do purchase in cash, what's a reasonable discount? $5k - $10k?
  • If I do purchase in cash, should my goal be to refinance it to free up my capital?

Thanks for everyone's help and patience ahead of time.

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  • James C.
    Rockledge, FL · Member since 2016 · 493 posts · 427 votes
    9y

    Lin,

    You might want to look at the price of 4 units in the area vs. 5 units. Because 4 units can be resi financed, they sometimes command a premium over 5 and 6. If that's the case, maybe turn your efficiency and a 1BR into one unit, and up the rental so the cash flow is similar. To do that you could look at a 203K loan, which would only be 5% down (you could put more down), or some form of purchase/rehab loan. I would up vacancy to at least 5% if not 10%. I also don't see any CAPX in there (10%), which should be there.

    The reasonable discount for cash is whatever the seller will take. If they are having trouble getting it financed as a 5, and they want to sell, then give them a price that makes YOU go " I WANT TO DO THIS DEAL!" and see what their response is.

    Cash-refinance depends on which tribe you follow. Some would say "No leverage" some would say "Lever it up", so that is entirely dependent on your business plan (you do have one, right?). I like between 70-80% leverage, that allows me to sleep at night and re-invest.

    Hope that helps.

    Jim

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  • Lin Yang
    OP
    San Francisco, CA · Member since 2017 · 5 posts · 1 vote
    9y

    Hi Jim, 

    Thanks for the advice. Really creative suggestion on the conversion. I'm looking at a few other multi-units so I'll keep all this in mind. 

    Cheers! 

    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    9y
    Why go for Cash? Local banks will usually like commercial in thier local communities and we found commercial easier. it is all cash to the seller anyway and you will need some reserves.
    0Reply
  • Jerry Ellis
    Rantoul, IL · Member since 2017 · 45 posts · 15 votes
    9y
    I've been talking to a lot of bankers lately getting ready for deal making which includes commercial. One common question I get is if I have experience as a landlord. I've also been asked several times regarding who's going to do the maintenance. What I've done is purchased a composition book and write down a list of questions to ask. It shows them that I'm organized and have thought things out. I've had better results with in person meetings than phone or email outside of setting up the meeting. I kind of look at this as a job interview. I need to convince them that I'm a good risk just like a potential employee would try to convince an employer that they would be a good employee. Having prepared responses to the experience and maintenance questions has helped. Near the end, I ask them, "Is there anything you can think of that I didn't ask about?" I'm looking for partners, and people I can work with. These relationships are important to me so I interview them as well. Good luck!
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