All Forum Posts by: Tyler J.

It's great practice to go through these analyses in order to learn the numbers, and the ins and outs of investment real estate. However, there are a lot of holes in your analysis:

1. What makes you think the seller will (or can) hold a not for $1M? (How much do they owe on the property, that will be a limiting factor). Check out https://www.biggerpockets.com/...

2. The seller is highly unlikely to take $300k below asking, let alone do that and offer $1M in seller financing. 

3. You are highly unlikely to find a commercial investment property loan at 20% down and 6% interest. Commercial financing is going to be at least a point or two higher than the prevailing rate for homeowners, and will be much more focused on the debt service coverage ratio (DSCR), which in your analysis is around 1.0. Banks don't lend on "break even" scenarios. They want a DSCR of at least 1.25. Which means with $6k in NOI, you can afford debt service of $4800/mo max. Typically, the only way to get there is to put more money down.

4. Likewise, the seller is not going to want to hold a $1M from a poorly capitalized and overleveraged buyer.

5. The lender (and common sense) will require you to have some cash reserves going in. Even if you could buy it with these numbers, you won't be bringing in any cash flow on this deal, How will you pay for a broken HVAC or other surprise repair or capex in the first year? I realize you have budgeted for maintenance and capex, but if will take time to build up those reserves - What happens if you need a $10k roof repair a week after closing? It happens. And then you'd have to choose between fixing the roof, or paying the mortgage. This is exactly what the lender seeks to avoid when underwriting the deal.

6. Closing costs are likely to be much higher than 1%, and you'd have to fund your insurance and possibly property taxes up front (either direct to the carrier, or through a mortgage escrow), which, again, requires liquid cash. 

7. You'd also have a conflict between your lenders on their mortgage position. Neither of them is going to want to take a second position lien. The bank could not, the seller likely would not.

Quote from @Tyler J.:

I am looking at this multifamily listed at 1.6m, but I can make it work with conservative numbers at 1.3m where 1m is seller-financed and the 300k is taken as a loan. I can support more than 300k with my job, but the 20% down on 300k is 60k, which I dont have much to put down. The only money Id have is if I represent myself as an agent (License with state right now) and get 2% which is about 26k of the 60k needed for 20% down on 300k.

How can I make this work. The seller originally wanted 50% carry, so thats why I dont think 100% carry would work and am looking at a loan.

Here are my numbers

 I personally think you are over your head here.  You are making multiple assumptions all in your favor.  

First, a 19% price reduction from 1.6 to 1.3MM.  

I doubt a lender is going to let you use back-side compensation to qualify for the loan up front. They will want proof of funds up front. I don't know this, but just suspect it having done 25 RE loans of my own.

Your seller is offering 50% carry, but you are assuming you can talk them into more.   

Are you really getting a 3% interest rate?  That seems somewhat suspect in todays market as well.  And 6% on you bank financing is probably at least 1.5% low in today's market as well.

Keep in mind that your property taxes will reset to your purchase price... not that buyer's current property taxes.  For instance.  If your buyer paid $400,000 for the property 5 years ago, and you are now paying $1.3MM you can anticipate your property taxes tripling over what they are today when they reset in a year (ballpark).  Our property appraiser explained it that they take the new sales price, give a 15% discount and then the millage is applied to that new number (broadly).  In your case that could be an extra $15-20,000 in taxes per year, so be sure you understand how that works and have it factored into your profitability.

I wish you the best, but suspect you are in over your head!

Randy

@Tyler J.