All Forum Posts by: Nick L.

@Douglas Dowell

Great call. I just looked up the FHA 221(d)(4) program and it seems perfect for this project. 90% LTV, 40yr term, assumable, non-recourse, and the project is likely to meet all of the eligibility critera.

This makes me even more suspicious as to why a more experienced investor hasn't picked up the building yet!

@Stephanie Goodman

It sounds like a strong GC/partner would add credibility (and perhaps a balance sheet and equity) to the project. 

From the rough numbers you gave it does sound like the project is worth pursuing. Another way of looking at it is as comparable to new construction. Any developer would be glad to pay $30-50k per unit that can get $700 in rent.

This makes me think that you might position the deal to the banks as more of a construction loan than a rehab loan. You pay a couple of points more but in return the bank is willing to accept a more speculative project that won't be completed for a year and won't be fully leased for 2.

You mentioned that the building is historic. Would it qualify for historic preservation credits? Or some other source of funding such as LIHTCs?

Why do you think nobody more experienced than you has bought it by now?

I don't expect any HML would lend $2m on a single project - and the debt payments would be astronomical.

I would approach some commercial RE lenders in your area. It's a risky asset to lend on because of the lack of collateral so you will likely need a strong track record, a good amount of equity, a very solid pro forma and a flexible bank.

Woul you consider partnering with an experienced GC for equity? That might give more assurance to a bank and align the GC with your success.

@Steve Smith

I second that. It was the book that got me to understand deal analysis and value-added plays.

@Mike Migliaccio

I suggest running a "shocked" version of your deal analysis spreadsheet. Fast forward your figures to your first refi point, say in 5 years. Now apply some negative factors - maybe a 20% vacancy and 7% interest rate, or whatever reasonable scenarios you need to guard against. 

If your debt service ratio is still 1.2 or better, you're golden. If it's 1.0-1.2 you're probably ok but not great. Less than 1.0 and you should be concerned.

@David Young

 I follow @Roy N.'s logic but not his conclusion. I make the cap rate $20,456 / $150,000 = 13.6%. Clearly that is priced as a Class D property and from your description of the area that sounds about right.

You mentioned that you're investing for the monthly cash flows. Well, this type of property is all about the cash flow since the tenant population will never get wealthy enough to boost the rent and NOI. If you're willing to put in the work, put up with the grief from shady tenants and take a risk on the local economy I think this could be a solid investment. You're certainly being compensated for the work and risks.

I also like the potential upsides. The garage and laundromat might not be worth a huge amount but I'd take a property with them over an equivalent property without. 

You mentioned that you're having trouble with financing. Probably the deal is too small for most commercial lenders to be interested. I suggest calling around to find lenders who specialize in small deals. For example I know US Bank has a special program for small commercial mortgages in which they can perform an in-house appraisal based primarily on income. I believe the maximum loan amount is around $100k or $150k. This would be perfect for you.

@Joel Owens

 That is an excellent strategy that I had never thought of. Thank you!

@Dmitriy Fomichenko

 Good point, I was just speaking casually. I believe 529s and HSAs can also be self-directed.

Joel Owens great points! To your last point, in order to get say a 20 year mortgage am and term to match the primary lease term, you have to look at institutional money not banks. Which brings in higher fees etc. So there is no easy answer. To your original post, perhaps someone interested in a single national credit tenant leases should wait for a few years until the market gets jittery and then pick some up at a higher cap.

@Joel Owens

To add to your point, many fast food companies have highly specialized buildings, often in locations with low land value. So if the tenant leaves you are often stuck with an asset that's hard to rent or sell.

That said, I do think there's a place for NNN national credit tenant investments. They're just not the risk-free money that people seem to think they are.