All Forum Posts by: Albert D.

When financing a 8-unit apt, bank asked owner to assign leases as additional security on top of the property itself. Is it normal in apt financing or negotiable? Meaning, property alone should be sufficient collateral for bank loan and no need to assign leases and rent to bank as additional security. Anyone has any success in fending off the rent assignment with bank/lender? Look forward to your comments. Thanks a lot.

Micki M. Tyler Morgan Thank you both. This does give me some comfort with potential dealing with whole sellers. So I guess the WSLR is the temporary owner of the property now as they have it under contract? If I do diligence the normal way, should I direct all requests and questions to WSLR now instead of to original owner?

Anyone ever bought small multifamily (10-30 units) from whole sellers? I ran across couple of deals lately with great cash on cash returns, well, at least on paper. But deals are offered by whole sellers who will assign contract to buyer at close. I'm not quite comfortable with such setup as it creates additional layer of complexity in the deal and I'm not familiar with whole sale deals. Maybe they are ok and legit deals but wanted to see if anybody ever had any experience in such dealings. Any comments / stories are welcome.

@Jenny Duclair

Thanks for sharing.  Very helpful.

Jenny Duclair Congratulations! I'll close my first deal this month. Quick questions if you don't mind: do you have your inherited tenants sign a new lease with you at close or the estoppel is enough? If don't sign new lease, how the next renewal works as it'll still be in previous owner's name? Do you put property under LLC? If so local or out of state LLC and why? Many thanks.

@Brian Adams

The chart is very helpful. To clarify, the investors are LPs and your operating LLC is the GP of the SPE, LLC, which will acquire/own the targeted property, correct?

I got advice from tax advisers that one should set up property SPE in the state where the property resides and set up operating LLC in Wyoming. In your experience, does this make any difference vs. setting up SPE in DE? Many thanks.

Ronda Bogdanovic Quick question: if monthly rent is $12,332, how does rental income only come in around $76,700? Is it half year rental?

@Mackal Smith  Congrats on your success!  

The best way to evaluate a larger commercial property is the income approach.  In essence, the NOI over cap rate to derive the value.  

Net operating income, NOI, is the rental income minus operating expenses.  The NOI should be the actual NOI of last twelve months (LTM), not pro forma estimated by seller or agent.  So you will only be paying for the current actual income performance of the property but not further improvement that you'll have to work hard to achieve.  In your case, without knowing any actual numbers, I would make an assumption that the LTM rental income is around $194,400 (assuming $500 rent per month per unit, 10% vacancy, 36 units; $500x90%x12x36=$194,400).  Further, I'd assume that 50% of the rental income goes to your operating expense. That'll leave you an NOI of $97,200 a year. But when you get the actual numbers, you'll have better idea of how the NOI looks for each property.

The cap rate is NOI over purchase price.  Typically, you can look into similar properties in your area to find comparable cap rate in current market environment.  However, it is hard to find good comps at times.  If this is the case, I'd use your desire cap rate to vet deals.  For example, if you determine that you will not invest in a property that generates less than 8% return for you, then a 8% cap rate should be used in your analysis.  Without knowing your market, I'd use 8% for simplicity purpose.

Now, we have NOI of $97,200 annually and a desired cap rate of 8%.  So the value of the property so you should be no more than $1,215,000 (=$97,200/8%).

This is a simplified approach to evaluate your 36-unit.  But do keep in mind that there are a lot of variables go into the formula here so you'll have to adjust with actuals and your own unique situation.  One big item is deferred maintenance.  That can significantly change the cap rate.

Hope this helps.

@Roger Poulin, @Shane B.

Thank you both.  Already set up meetings with tax and legal advisors.  Will keep you guys posted on development.

At the meantime, I did some quick research on TN F&E tax on LLCs.  It looks like you don't have to pay F&E tax if you have passive-income properties in the LLC, which is owned 95% or more by family members.  In plain English (my understanding): If I put my 8-unit apt (which will generate passive income) in a LLC (in Delaware or TN), which will be owned 100% by my family, then no F&E tax shall be paid due to this exemption quoted below.  Sounds pretty good to me.  :)  I'll definitely run this by my tax adviser to confirm.

"Family-Owned Non-corporate Entity with Farming/Passive Investment Income [67-4-2008(a)(11)] - At least 95% family-owned and substantially all of income from passive investment income or farming. Entities having no income may qualify for this exemption if all other requirements are met."

Here is the link on TN government site:  

https://www.tn.gov/assets/entities/revenue/attachm...

@Luka Milicevic That's what I've been doing. But sounds like LLC and / or living trust provides better protection in the event of a law suit. Trying to get my head around on how that actually works and what the tax/financing implications might be. I'm setting up consultations with tax advisors and lawyers to better understand this. Thanks.