Would you do this deal?

Real Estate Deal Analysis & Advice

Would you do this deal?

Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes

Hi all!

Would YOU do this deal?

$1,000,000 for 3, 3 families.

Total GROSS rent $10,600/month

Owner financed $1,000,000 at 3-4% over 15-20 years.

Seems like a no brainer. Let me know your thoughts please.

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Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes

6y

Originally posted by @Bud Gaffney:

Hi all!

Would YOU do this deal?

$1,000,000 for 3, 3 families.

Total GROSS rent $10,600/month

Owner financed $1,000,000 at 3-4% over 15-20 years.

Seems like a no brainer. Let me know your thoughts please.

Bud,

I own about 1,000 apartment units (and have acquired way more than that - I sold a significant portion of my portfolio over the years). Some of my best deals are owner financed deals.

To answer your question...without any other information, I will have to make some assumptions. I've been investing since 1999 and actually made more money during the Great Recession of 2008-2009 because I am very conservative with my numbers...so I will make some conversative assumptions.

Assuming, this a C area, I would assume your expense ratio is 50%. Expense ratio is the operating expenses as a percentage (or ratio) of your gross collected rents.

Also, you gave a range of interest rate and range of amortization period. Let's assume the worst case - 4% interest and 15-yr amo. That means your monthly P&I payment is $7,396.87 or $88,762.44/yr

If you gross $10,600/mo that's $127,200/yr

x (1- 50% expense ratio)

= $63,600/yr Net operating income (after all the expenses like taxes, insurance, repairs, replacement reserves, vacancies, etc)

You deduct your mortgage payment and you get a NEGATIVE CASFHLOW property (-$25,162.44/yr)

So, the answer: NO, it's not a GOOD deal and I wouldn't do it.

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Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Nick Rutkowski Thanks Nick!
0 Reply
Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Bud Gaffney net is always about 40 50% of the gross. Also again I am spoiled, 20% ++ is what keep.
I hope this does well for you and triples in value :)
1 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Bob Prisco Thanks Bob! :)
0 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
6y
@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.
1 Reply
Bud Gaffney
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Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Jonathan R McLaughlin Thanks so much for the insight, Jonathan! Greatly appreciated. Have you invested in Taunton before?
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
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
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Pankaj Sharma
Investor · Spring City, PA · Member since 2019 · 56 posts · 41 votes
6y
@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.
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Russell CazeaultPro Member
Contractor · Osterville, MA · Member since 2018 · 41 posts · 30 votes
6y
@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
2 Reply
David ShortPro Member
Flipper/Rehabber · Fishers, IN · Member since 2014 · 71 posts · 47 votes
6y
@Bud Gaffney
Try and put separate mortgages that total 1,000,000 so if you want to sell a non performing unit you can separate and not lose your financing.
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Bud Gaffney
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Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@David Short Great insight. Thanks David!
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Bud Gaffney
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Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Dan Heuschele Great insight Dan! Thanks a lot.
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Natalie Schanne
Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
6y
@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?
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Kristopher KyzarBusiness Member
Rental Property Investor · Norfolk, VA · Member since 2017 · 260 posts · 174 votes
6y
@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.
2 Reply
Remington LymanBusiness Member
Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
6y
@Bud Gaffney Yes I would probably do this. That is a great rate for owner financing and it does not seem like you are over paying
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Andrew Moullin
Wholesaler · Colorado Springs, CO · Member since 2019 · 39 posts · 24 votes
6y
@Lien Vuong great point!
1 Reply
Payton Pearson
Member since 2019 · 114 posts · 111 votes
6y
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.
1 Reply
Mosh Kor
Lender · New York, NY · Member since 2018 · 6 posts · 6 votes
6y
@Bud Gaffney
Sounds like a good deal especially if comps affirm his asking price. I’d be interested in that.
0 Reply
Gabe S.
Vienna, VA · Member since 2015 · 41 posts · 15 votes
6y
@Bud Gaffney. Owner financing in this market is a HUGE red flag. Even at those rates.
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Bud Gaffney
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Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@Gabe S. Why?
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Gabe S.
Vienna, VA · Member since 2015 · 41 posts · 15 votes
6y
@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.
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Bud Gaffney
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Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@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.
1 Reply
Bud Gaffney
OP
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
6y
@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.
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Jeb Brilliant
Rental Property Investor · Long Beach, CA · Member since 2015 · 623 posts · 155 votes
6y
@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.
1 Reply
Andrew Moullin
Wholesaler · Colorado Springs, CO · Member since 2019 · 39 posts · 24 votes
6y
@Michael Ealy dang! 👏🏾👏🏾👏🏾👏🏾 well put
1 Reply
Seth Murray
Architect · Sequim, WA · Member since 2019 · 20 posts · 2 votes
6y
@Dawn Brenengen
Thank you! I will check it out.
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