All Forum Posts by: Nick L.

Sounds like a classic case of buying a long-term investment with short-term funds. As Lynn M. and Johnson H. pointed out you can get crushed pretty quickly due to unforeseen circumstances. Why not use hard money lending instead? It might cost more but at least that way you can structure it so that the loan will last for as long as it takes to get conventional financing in place using your 25% equity. I would consider the payments on the hard money to be insurance against getting crushed by a broker's margin call.

Leaving aside liability protection, another common reason to form an LLC is to keep your name and address out of public property records. In my area every commercial property has its owner's contact details listed online (and it has to be a physical address, not a PO Box).

My LLC appears with my registered agent's address, not my own. I have good relations with my tenants but where I live is none of their business.

What other people have said -- put that $500k into a $2-2.2m apartment or mixed-use building. The advantages are:
1. Ability to create or reposition a whole (small) community in one go, improving NOI and cap rates
2. Fewer mechanical and structural elements to go wrong
3. One property to buy and sell, much easier
4. Easier to self-manage or cheaper to have managed for you

Sure post the spreadsheet and I'll take a look. Also what area is this in?

That sounds like a good deal. I agree, a lower cap is worth it if you're getting a $350k place for $5k (350-345).

However be aware that using the numbers you just gave ($5k down, $345k loan at 6.5%, assuming 30yr amort.) you will be making NEGATIVE cashflow using current numbers. DSCR is 0.91. If you can save 10% off expenses your DSCR increases to 1.3 which is decent considering you put almost nothing in. But you have to be absolutely, 100% positive that your numbers are correct. If you cannot save that $10k or if you get just a couple of unexpected events -- legal fees from problematic evictions; a kaput water heater; an insurance hike etc. -- you will have to find money from your own pocket to service the debt for many years until you can grow the equity by $80k to give yourself 20% for a refi.

I have to say something about this deal smells fishy to me. You say it's in a good neighborhood and yet the current owner is willing to give it away when he could make it cashflow and keep it. You didn't specify city or state but an ave. rent of $521 does not sound very impressive for most parts of the country. Are you sure you're not buying a Class D masquerading as a C or B?

Well said. I doubt a claim on equity would be valid as a chattel becomes part of real property when attached to existing real property and thus belongs to the titleholder. (IANAL.) However I would be nervous about insurance liability and code compliance. For example if the tenants fall and hurt themselves while performing the work, or are hurt as a result of their own substandard work, your insurance is very unlikely to pay out.

If you really want these tenants to continue doing the work I would ask your lawyer if there is a waiver they can sign to acknowledge that (a) they have no claim on the property and improvements, and (b) they have no claim on you in case of injury. Or if they are really good at this work why not take them on as licensed part time contractors to fix up other work for you on a paid basis?

What Lynn said. Most standard listing contracts give the broker a claim on their fee if the property is sold to someone introduced by the broker during the listing contract for up to a year after expiration. You should ask the seller to check their listing contract for this clause.

Daniel, I used my homebrew spreadsheet and came up with similar numbers to Uwe. On current numbers it's a 6.8 cap with (almost) 1.2 DSCR which would barely squeak past most lenders' requirements. But if you can save $10k in expenses you get to a 9.6 cap with 1.69 DSCR which in my opinion is very solid for a good property in a good neighborhood.

You didn't tell us about the debt details but with 20% down and a 6% note over 30yr amort. (for example) you get cashflow to equity of $3900 under current numbers and $13900 under projected numbers.

One thing you haven't told us is whether you can raise rents. If it's a badly managed property in a nice neighborhood it implies the tenant quality and and rents are below where they should be. If that's the case you should get additional forced appreciation from bringing better management.

I think this deal is solid if the hassle factor is low, the apts are reasonably low maintenance and you are very confident of your pro forma numbers. It could be excellent if you can push rents up too.

If you have not worked with a bank on this type of deal before be prepared for them to insist it cashflows with 1.2 or 1.25 DSCR on current numbers, regardless of projected numbers after repositioning. They will also likely require you to budget percentages for repairs and management even if you don't plan to use them. That's the way the banks see these things even if investors don't.

Try the time-honored practice of knocking on the door and offering the tenants $20 if they'll let you walk around for a few minutes. Usually works pretty well. However this assumes that you know what to look for and how to assess a property's condition and accurately estimate repairs/improvements. If not then stay away.

Depends on the area and tenant base. I have a nice 8 family in an appreciating area with solid tenants and rehabbed units. I paid $495k for it and the income is ~$5600/month. It's not a cash cow and it doesn't meet the 2% rule but it is easy to maintain with pleasant tenants who pay on time and treat the place with respect. On the other hand I would not even pay $300k for the same building in a crappy area where I would be evicting people every other month and expecting a gun in my face when I knocked on the door.

The best of all is if you can reposition the place. For example if you notice that the place attracts lower quality tenants than the surrounding area you can buy it for a low price, get rid of the bad tenants, perform some cosmetics, attract quality new tenants and raise the rents. I did this with another place locally and raised average rents from $565 to $695 in a year. I wish I had more deals like that one.