All Forum Posts by: Benjamin C.

Everything Greg said is definitely correct and probably highest priority diligence items, though I would move leases to the bottom of the list and rely on the Property's rent roll until you're further into the process. Off the top of my head, I would add on to his suggestions:

Has/Can the broker provided rent and sale comparables? You're going to want to do your own research to see how the asset sits within the submarket, but the provided(?) comparables are a good place to start. If even the broker comps aren't adequately penciling, then you can kill the deal and move on without spending too much time.

What sort of financing are you contemplating? It's going to be easily 65%-80% of your cap stack, so you should have a rough idea of what is obtainable in the post covid market. 

How are RE Taxes treated in this submarket? Because this is a multifamily asset and not a true commercial property, any big swings in RE Tax assessment are going to really affect your NOI. Maybe there's nothing to worry about here if assets are re-assessed regularly, but there a huge # of transactions where this is not the case and it kills or should kill the deal.

@Trevor Brown

What is preventing you from getting Fannie/Freddie financing? Previously I worked at a commercial lender, and they were typically quite competitive for this sort of thing.

@Joe Kooner

Something to consider is that the greater your leverage, the less likely you will be able to secure interest only financing.  Someone else can correct me If I'm speaking out of turn, but I strongly believe at the leverage + deal size you're discussing, Fannie/Freddie will only offer you at best 25 or 30 year amortization payments, rather than interest only payments, which is going to further depress your cash flow.  There is certainly alternative/subordinate financing out there that might be more accretive to your returns, but IMO that introduces unnecessary risks/headaches on your first deal.

Re: a $3MM total deal size, that's going to be a bit tougher to hit your $120k/yr net cash flow after debt service number. At 70% LTV IO (which again, I think is a bit rich), re-using the previous assumptions, you're going to be ~$91,000. You would have to widen out cap rate by 100 bps to get back to ~$120k, while keeping financing constant.

@Michael Taylor 

IMO @Mike B. is asking by _far_ the most pertinent question, with regard to the work permitting and zoning for Unit #7. Some markets are more free wheeling than others about this, and I don't know where South Chicago falls on this spectrum, but you could potentially really complicate your reversion value if the asset is not compliant. Other considerations of cash on hand and order of operations for a potential refi are of secondary importance I think.

@Joe Kooner Happy to help!

Re: 65% LTV IO financing. The back of the envelope numbers I listed assumed you were going to take out a mortgage that would be 65% of the Property's value. Something like a 10 year term, with interest only payments rather than 25/30 year amortization since it seems you're prioritizing cash flow. Depending on your risk tolerance and the deal profile, you could use more or less leverage to manipulate your returns. So to be clear, ~$1.4MM is just your equity in the deal. Purchase price + misc. deal costs will be ~$3.8MM, with the loan balance comprising ~$2.4MM of that $3.8MM.

Re: Where to find deal. It feels like a lot of first time bootstrappers look on Loopnet.com for listings, which is perfectly reasonable, although you're never going to get the first look at a deal this way.  

Costar.com is Loopnet's bigger/affiliated brother, and is a very common tool for professionals.  A lot of its coverage is geared towards very very large deals, but it's a truly massive database, so there's good information there if you have the stomach to sift through it all/pay the annual fees. 

Ten-X is a reasonably well organized and respected auction site for commercial assets, if your blood pressure can take the inevitable flurry of last minute bidding. I haven't followed it much for multifamily assets as opposed to office/retail assets, but I think it's coverage is fine. Key consideration--I think you're going to need to your financing lined up ahead of time for Ten-X given their business model.

The real answer IMO is to reach out to local brokers who cover whatever markets you're interested in and get on their mailing lists. They'll be able to get you a regular flow of deals to look at and if they're worth anything at all provide some reasonable rent/sale comps to contextualize the deal as you get closer to closing. 

@Joe Kooner

It's easy to get sucked into a deep rabbit hole of research/due diligence and really lose the forest for the trees when you're just trying to find out if your goals are broadly achievable. I've used the following assumptions, which I think are broadly reasonable, depending on your asset's location/deal profile:

5.5% cap rate
65% LTV IO financing @ 3.5%
Net Operating Income of $203,500

This gets you to necessary equity slug of ~$1.3-1.4MM after closing costs to get to $120k/annually of NCF after debt service. Obviously there are some variables that will need to change (leverage, cap rate, capex etc etc etc), and FNMA/FHLMC (or whoever your lender is) will want to see some additional liquidity, but I think this is broadly reasonable.