All Forum Posts by: Mike Davis

@Auria Styles using a HML to purchase the property, they will focus mostly on the asset. for the 1031 question @Dave Foster may be able to answer that. 

@John Bernabel you can gift 100% of the down payment of an FHA loan to your family member. Get a duplex, family member lives in one side and rents the other side out.

@Brad Jacobson if you consider the portfolio option, make sure of the portfolio property requirements, some portfolio lenders require 4+ properties before you can be considered to put them under one mortgage.

@Stephanie Nurre unless I missed this, if you used an agent / broker, the seller should have signed disclosures where they disclose if they knew about any issues with the property, sometimes the seller will put "no representation" or something to that effect. If you did this without agent/broker representation, you may or may not have not gotten this document signed.

Based on the issues with the home, I find it hard to believe the seller did not know about some of these issues.

@Nick Belsky Agreed, some do. My experience is that they only do this if the mortgage becomes delinquent, however I should have disclosed that as a heads up in the post. Thanks!

@Patrick Knapp since you know you will have negative cash flow use that to negotiate with seller to hold a second note. Get HML and structure the deal where you have positive cash flow and differ payments on the second note on the seller financing (maybe a 1-year balloon on the seller financing)

@Mariel DeVito to add to what the others have provided, getting the loan in his LLC, this does not report on his personal credit, even though he may have to sign a personal guarantee on the loan.

I see a lot of great methods investors use to determine the value of commercial property. I wanted put them together in this post for reference and I will post this on my blog also in Bigger Pockets:

1. Gross Rent Multiplier Method (GRM)

- purchase price / gross annual rent (annual rent as if property is 100% occupied), this give you the GRM. Let's you find three sales of of properties and the GRM is between 8% - 9%. You calculate the property you are considering and the GRM comes in at 6.25%. Based on the GRM method this will confirm the property you are considering is priced on the low side.

2. Price Per Door Method 

- Use three sales in the area. Sales price of property / how many units, this will give you the average price per door. Take the average price per door and multiply it by how many units the property you are considering buying. Ex. 30 units (#of units your property has) x $112,000 (average price per door)= $3,360,000. The property you are looking at is on the market at $3,129,000. Based on the price per door method the property you are considering is on the low side. 

3. Cap Rate (Capitalization Rate) Valuation Method

- This is annual net operating income (NOI) / Purchase price. $150,000 NOI / $2,000,000 (purchase price of your property) = 7.5% cap rate

Now calculate the cap rate for three other properties and take the average of all four cap rates ex. 7.5% +7% + 7.3% + 7% = 28.8%, then divide the 28.8 / 4 = 7.2% (Average Cap Rate)

- Take your average cape rate of 7.2% and convert to a decimal, .072 and add a one to the front of it (1.072), then multiply that by the purchase price of your property, 1.072 x $2,000,000 = $2,144,000. In this example, based on the cap rate, your property is priced below market value.

@Evan L Woods you can look into FHA, 3.5% down, get a duplex, live in one side and rent the other side out.

@Wendy Jiang sometimes it's best when you talk it out with yourself!! You found the bright side to this scenario by doing that!