Newbie...anyone want to help evaluate my first large deal?

Question

hello, I hope to be someone who can contribute to others in the future, but now would appreciate any eyes on my first major opportunity.
8 homes in small country town...total package price for the homes is 170, but I will offer 150. the seller has had these homes for many years and wants to cash out. The tenants love this guys houses (he has over 60) and there is a waiting list for his homes. today, they are 100% rented with my long term tenants (over 10yrs). Home conditions are 'good'..most he has updated with central air and very good maintenance. What I love is the monthly rent income is 3200 per mo. I have calculated PM fees, general maint, ins and taxes. I would finance 75%, meaning my cash in is 40k. By all reasonable estimates my pre-tax annual rent is $20k. Reading other posts I feel good about the 2% rule here, but for some reason the IRR calculations don't like this deal..So I am confused, to me, I am putting in 40k and earning $20k annually...How could this NOT be a good deal? What am I missing here? FYI, I am not banking on appreciation and assuming 95% occupancy
Any thoughts greatly appreciated!!!
thank you

Rich Weese · Answer

If you can get owner financing, there are some good reasons to be excited about it.
1. Seller must feel good about properties or he wouldn't agree to have them as security for his money
2. Retains your institutional borrowing ability for additional properties.
3.I just negotiated an owner financing at 5%. The best I could find was 4 1/2 elsewhere. The 1/2% extra was well worth it because of the terms.
Rich

Will Barnard · Answer

Steve, you are not missing anything in your numbers, you are better than the 2% rule here which equates to practically guaranteed cash flow. Your return is great and it sounds as if the assets are sound and functioning well.

The only thing I would look into here is the sellers situation. Perhaps an owner carried note could be negotiated in here to better serve both of you. Seller gets tax deferral, has long term income stream without management, and you get easy simple financing.

Joel Owens · Answer

Some investors over the years of paying down debt service will simply keep rental rates low or raise at rates below market.

This way tenant turnover is very low to non-existent and re-conditioning costs are minimal.The landlord also knows the pay history and tendencies of each tenant being long term versus finding a new tenant to start a history with.

Will Barnard · Answer

Others have pointed out the low per door rent rate. You mention that these were "houses" so I find that $400 per door for homes is very low. In fact, bad neighborhoods for apartments get $400, so I wounder if perhaps these units are under priced in rental rates which is why they are 100% occupied all the time.

Is there are room in the marklet to raise thjem to $450 or more?

David Beard · Answer

I strongly agree with Steve that this deal needs to get you 2.5% due to the very low rent amounts on these houses. (Even though the rent is low, the roofer will charge you the same,etc.).

That would cap your buy price at 128k.

Also, do you actually have a commitment from a local bank to lend on these small <20k proerties, or are you assuming the financing is there? I'd be surprised, but maybe in a small town...

Will Barnard · Answer

Steve, Rich made some valid points as to why you should look at negotiating owner carried terms and there are many other reasons too. Again, if the seller is confident in the value and quality of his properties, then holding them as security is verification of that.

As to having to pay higher rates, that will depend on your negotiating skills. I have seen buyers negotiate principle only payments which equals 0% interest! No institutional lender can beat that. of course that is not common, but just to point out that anything can be negotiated depending on your skill level and how motivated the seller is.

I would be willing to pay a point or two higher than the standard rate for owner notes simply because of the ease of the transaction and the ability to keep my institutional lines open if needed for future.

Steve Babiak · Answer

The rent per unit is $400 per month (take 3200 and divide by 8 houses). The 2% rule works nicely for rents right around $500 per month; when rents are below $500, a higher percentage is needed; conversely, when rents are above $500 a lower percentage can be used.

At $400, expect to be above 2%! Probably more like 2.5 to 3 % should be used for these lower rent amounts.

Better to run your numbers just using the 50% rule for properties where rent is not right around $500 per month per unit.

Joel Owens · Answer

You pay whatever you negotiate.If you feel your negotiating skills could use some polish then work on them by reading and learning more.

I would find out WHY the tenants love this guy.Also deferred maintenance.The seller could have been putting off things for years.

I did a seller finance deal with very no money down.I had 1/2 month escrow for title and taxes and then title policy to pay for.

That's all I had in it.

Steve if you pay a slightly higher rate with less down then you can leverage your cash.It all depends on what you are trying to do.Every possible deal has multiple ways to structure it each with it's own pluses and minuses.

Steve D. · Answer

Thanks guys, really appreciate the thoughts...Will, your thought on getting the financing from seller is interesting, but how does it benefit me...wouldn't I pay him a higher interest rate as a rule?

George P. · Answer

you added the insurance and the upgrades (the big ones), right? the tenants seem happy, make sure you talk to them and understand why. then keep/improve upon whatever makes them happy. that's the best thing.

Newbie...anyone want to help evaluate my first large deal?

Newbie...anyone want to help evaluate my first large deal?

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