All Forum Posts by: Andrew Fernquist

Hey George,

I won't comment on whether or not you should do this, but it did look like the expense math was a bit off. Summarized based on your projections below, but you may also be missing some other things like gas/electric/trash/sewer/lawn care/etc. (unless everything is completely the responsibility of the tenants).

For the cap rate, cap rates are calculated as Net Operating Income (NOI) / Purchase Price, so the mortgage or no mortgage doesn't really play here. The cap rate based on what you've I think listed as your NOI ($13,889) comes out to 11.3%, while your cash-on-cash return would come out to around 21.5% (NOI - Debt Service) / $ invested (assuming the same NOI figure)

That said... I'd take a hard look at what's being listed in your run down as "Net Rents" as it doesn't look quite right.

Gross Rents: $15,900

Expenses:

PM @ 10% = $1590

Vacancy @ 5% = $795

Repairs @ 5% = $795

Cap Ex @5% = $795

Ins = $900

Prop Tax = $1104

Total Expenses: $5,979

Some things missing: Water, Sewer, Trash, Contract Services

Net Operating Income: $9,921

Debt expense (@ the rate/terms you mentioned): $6300 yearly

Net Proceeds:

$3621

~10% CoC (assuming $35k invested)

Happy to chat 1:1 if it's helpful. I'm in a similar boat of figuring out the best path forward.

Cheers,

Andrew

Hey Luis,

That's a good question. When you say "improvements" do you mean that you've made some changes to the units or that you've actually been able to improve the NOI (either through increased rents, decreased expenses, or both)? If this is commercial my assumption is that you'd take the NOI / CAP rate to get to your value number.

@Mitchell Pollard

For me, raising capital has been the most uncomfortable piece of this puzzle – so first of all, I'd say well done! 

Do you have particular requirements for what you're looking for (market/size/returns)? I'd echo that building relationships with a broker that you trust is definitely key and this only comes from picking up the phone and chatting with them honestly about your goals.

Happy to chat more – PM me if you're interested in brainstorming or collaborating!

Could be, but I don't see a whole lot information here. Give them a call and request the OM – this could very well be a great deal, but it also could be nothing. Won't know until you start the dialogue :)

Hey Tony,

I think that's one of the big tradeoffs when it comes to recourse vs. non-recourse. You get to have a little more breathing room knowing that it's a non-recourse loan, but the lender gets some breathing room knowing they have a locked-in yield for an explicit term. That said, I think you'd want to do the math to find out what those penalties actually are and play out a "worst case scenario" from both perspectives. I have not heard of these being "negotiable" although admittedly do not have direct experience.

I spent a few minutes trying to dig up a great BP podcast episode that was with a gentleman that deals almost exclusively with fannie/freddie non-recourse commercial loans, and touches on the penalty issues. Unfortunately I'm having a hard time finding it but someone else in this forum might know it off hand. I believe the long and short of it was that for his particular business it was more advantagous to sometimes have to pay the early pre-payment penalty but I'm sure that's dependent on the overall strategy.

Hope this helps a tiny bit and I'll let you know if I can find the episode :)

Hey Cedric,

A few of things that I've seen when talking with lenders on commercial multifamily deals (ie. 5+ units).

1) Generally LTV of 70-75% (ie. a downpayment of 25-30%, depending on lender)

2) Your credit score sadly won't matter too much. More weight is given to "Debt Coverage Ratio", which is basically your ability to cover the debt obligation with the revenue from the building.

3) Overall terms are also different than typical residential mortgage. Loans are typically amortized over 25 years, but a balloon payment would be due at 5, 7 or 10 years, depending on the lender/options they give you. Essentially, you'll either need to refinance or sell prior to those marks when the loan becomes due in full

4) No recommendations on lenders, other than to say get a few quotes in your area/where the property is located. You may need to shop around quite a bit to find the right fit.

Hope this helps!

Andrew

Hey Joshua,

Investors may be putting down money to receive equity in the deal, but they're also not putting in the work to get it closed, execute the business plan, and generally manage the investment itself. Typical syndications are made up of General Partners (GPs) and Limited Partners (LPs) – Limited Partners are both limited in liability but also in responsibility. They expect a certain return on their up-front capital that they've invested in you, but what they generally seek is mailbox money.

General Partners, on the other hand, are the individuals putting the deal together, raising capital, finding the opportunities to increase Net Operating Income, etc. Sometimes GPs will put in their own capital, but I wouldn't say it's unusual to have GPs that have no cash of their own invested. This doesn't mean that they aren't putting anything into the deal – it's a lot of work to get a syndication off the ground. 

All of that said, there are different ways to structure the deal to make sure that LPs and GPs are correctly compensated for their financial and time investments. Sometimes what happens, for example, is that the LPs receive 70% of the equity in the deal while the GPs receive 30%. This helps address exactly what you seem to be worried about – that the folks investing the capital are getting adequate reward for the risk they're taking.

As to your specific questions:

1) No, I don't think it's selfish. Don't forget the value that you'd be bringing beyond just "I found this deal". It'll be up to you to raise the funds to close, work with a syndication attorney, perform the due diligence, etc.

2) Nope. See the above – you'll be putting in plenty of sweat equity.

3) I'm not a lawyer, so you should probably check with one. Personally I think that generally the answer is "Yes", you'd want to have an LLC and have that LLC be the entity that owns the building. That both helps with liability issues (assuming you're following all of the necessary steps to keep your LLC in good legal standing) as well as gives your investors the appropriate piece of the LLC based on investment levels without worrying that you're just doing handshake agreements

4) Yep – you certainly can.

Last but not least – assuming that you're looking to get into a true syndication, make sure you put aside a good chunk for the due diligence and legal fees – closing costs can be significantly higher for commercial properties and eat away at both your returns and that of your investors.

Good luck!!

Andrew

@Brian Cain - I can’t speak from experience (like you I’m also new to multi family) but it may be worthwhile to find out what his motivation for selling to see what the imposes rush is all about. Like you, i would definitely be hesitant in that situation but finding out “why” might open some additional conversation and understanding. Maybe it’s sketchy, maybe it’s all above board, but it sounds like you may not have all of the information available.

All of this said, are there other offers on the table? Based on the stats you mentioned I’m guessing you actually have more leverage than you think, given that you’re a cash buyer in a small, rural community. Don’t be afraid to walk away or push for more details.

- Andrew

Thanks, ZW! Appreciate the local insight. Are you saying that you think the ARV estimate is too high in general for the area?

Thanks, Twana!

Taxes I took from the Sangamon country website although I'd certainly call to verify since the numbers are a bit confusing (https://tax.co.sangamon.il.us/SangamonCountyWeb/ap...).

@Michael – Good point. From what I could find on the county website I was making a guess that $350 would be appropriate for ARV, but I think a call to the county would be in order to verify.

Thanks for the pointers!